Maintain NEUTRAL. Half of the stock coverages came within our expectation except SLP, SCGM and TOMYPAK for which 3QCY21 results underperformed. Plastic players have increased their ASPs in tandem with the surge in resin prices since July 2021 due to the global freight issue and electricity crisis in China. Moving forward, we expect 4QCY21 results to be better due to: (i) resumption of 100% workforce which will increase output, (ii) elevated ASPs, and (iii) better product mix. We remain neutral on the sector premised on robust market demand and resin capacity expansion helping to moderate rising resin prices.

3QCY21 results mostly within expectation. For 3QCY21 results, SLP, SCGMand TOMYPAK were below our expectations, while other players’ results came within expectations. The revenue of the plastic players were adversely impacted by: (i) limited 60% workforce capacity due to MCO restrictions, and (ii) production disruption due to Covid19 outbreaks and shortage of containers. Margins were impacted by: (i) lower sales volume which impacted production efficiencies, and (ii) higher raw material cost.

The uptrend in resin prices. Beginning July 2021, there was a reversal of trend after prices broke out through the lower boundary in June 2021. Resin prices have continued to rise, by 7-15% across the board compared to 2-10% as projected in our 4QCY21 Strategy report. Howeve, our channel checks suggest that the significant increase in resin prices will not hurt plastic players’ margins due to the cost-plus mechanism. Logistic disruptions and the electricity crisis in China were the main reasons which drove resin prices sharply higher for the period tightening resin supply. Moving forward, despite continued global logistic disruption, we expect resin prices to soften and gradually stabilize in 2QCY22, as we understand that new resin capacity will come onstream by the petrochemical players. For CY22, we continue to maintain our resin price assumption of USD1,100/MT to USD1,200/MT, marginally below the YTD average of USD1,100/MT to USD 1,500/MT.

Elevated ASPs. As resin prices rose significantly, we understand that plastic players have adjusted their ASPs across products, passing through the higher cost to customers. We therefore expect an increase in ASPs which will allow plastic players to sustain their margins. Notably, premium products will continue to hold on at elevated ASPs while ASPs for commoditised products will mirror the resin price fluctuations.

Strong growth outlook. After the resumption of normal operations without MCO restrictions, plastic players indicated that their utilization rate ran at an average rate of 65% to 75% to fulfil backlog orders. Moreover, plastic players like TGUAN, BPPLAS and SLP guided stronger demand from their Japanese customers due to power cut disruptions in China which diverted orders to Malaysia while some of the plastic players have orders up to 1QCY22.

4QCY21 results expectations. We expect better earnings across the board for 4QCY21 compared to 3QCY21 on the back of: (i) normalisation of operations with 100% workforce capacity, (ii) elevated ASPs, and (iii) resilient demand. We estimate that plastic players operate at a utilization rate of 65-75% in 4QCY21 (vs. 55-60% in 3QCY21).

Maintain NEUTRAL on the sector as upside potential from better product mix is negated by the downside risk of global freight issue and labour shortages. We remain bullish on TGUAN (OP; RM3.68) on resilient demand and longterm capacity expansion, especially for its premium products. For BPPLAS, we maintain OP with FD ex-all TP of RM2.22 (from TP of RM3.34) based on a FD FY22E EPS of 18.8 sen and an unchaged ascribed PER of 11.8x post accounting for the bonus issue and full conversion of warrants.

Risks to our call include: (i) lower-than-expected demand for plastic products, (ii) higher-than-expected resin prices, (iii) labour shortage and (iv) foreign currency risk.

Source: Kenanga Research - 30 Dec 2021