2Q20 core loss of -RM0.7m (QoQ: RM2.8m, YoY: RM3.2m) and 1H20 core profit of RM2.5m (-71.5% YoY) was below expectations, constituting 13% of our forecast due to softer chemical margins as a result of lower ASP for chlor-alkali products and lower utilisation for its caustic soda plants. We cut FY20 earnings by 5% and lower our TP from RM1.38 to RM1.30 in view of continued weaknesses coming from low caustic soda prices despite our expectations of increased sales volume from PGW1. Maintain HOLD with lower TP of RM1.30 (12x FY20 EPS) from RM1.38.

Below expectations. CCM reported 2Q20 core loss of -RM0.7m (QoQ: RM2.8m, YoY: RM3.2m) and 1H20 core profit of RM2.5m (-71.5% YoY) accounting for 13% of our FY20 estimates. The results were below expectations due to softer margins from the chemical division and losses at its associate level amounting to RM1.4m due to MCO stop work orders during the period under review. No dividend was declared during the quarter, we expect a total of 5sen/share to be declared for FY20 (FY19: 5sen/share). Exceptional items used to derived core profit were less than RM0.02m.

QoQ. Revenue of RM103.9m (+7.5% QoQ) was up due to higher sales volumes from its chemical division while its caustic soda ASP remained flat (-0.6% QoQ). Chemical segment LBT of -RM1.5m was primarily attributable to lower ASP for its chlor-alkali products and lower utilization of its caustic soda plants due to MCO. However the weakness in its chemical division was offset by commendable polymer sector performance despite PBT coming in lower at RM5.5m (-10.2% QoQ). Consequently, CCM recorded a core loss of -RM0.7m (QoQ: RM2.8m).

YoY. Revenue increased by -7.5% YoY (from RM92.8m) from the same reasons mentioned above. Benchmark caustic soda prices declined by -25% YoY from an average of about USD397/DMT in 2Q19 to an average of about USD296/DMT in 2Q20. The resulting margin squeeze saw CCM recording a LBT for its chemical segment amounting to -RM1.5m (YoY: RM5.1m). However, weak chemical segment results were offset by stronger YoY polymer segment performance. The polymer segment saw its PBT increasing by 23.3% YoY (from RM4.4m). Consequently, CCM recorded a core loss of -RM0.7m (YoY: RM3.2m).

YTD. Core profit of RM2.5m (-71.5% YoY) was primarily attributable to weaker chemical segment performance, mitigated by improved polymer segment contribution.

Outlook. We expect to see higher sales volumes in 2H20 from higher utilization and sales volumes from PGW1 plant. We believe that its PGW1 reactivation would offset continued weaknesses in ASP for its caustic soda segment. We also expect the performance of its polymer division to improve in 2H20. However, we do not foresee an exponential increase in its earnings based on its polymer division alone as its polymer division is very competitive with minimal product differentiation and low barriers to entry. Its polymer division ASP has only increased by an average of about c.5-7% in 2Q20 as compared to its glove counterparts, which saw its OEM ASPs increasing by c.5-8% MoM since April.

Forecast. We trim our FY20 numbers by 5% as we factor lower earnings contribution from its chemical segment

Mantain HOLD TP: RM1.30. We maintain our HOLD call for CCM at TP of RM1.30 (from RM1.38) based on 12x FY20 EPS as we believe that caustic soda ASP (40% of group revenue) would need to improve for us to warrant a re-rating on our call.

Source: Hong Leong Investment Bank Research - 25 Aug 2020