PCHEM anticipates stronger polyethylene (PE) prices in 2HCY24 as demand for food and packaging improves. Stable urea prices are projected for 2024 due to stabilized feedstock costs, while the methanol market outlook remains weak with additional capacity and sluggish demand in China. We maintain our forecasts, TP of RM6.74 and MARKET PERFORM call.

We came away from PCHEM’s virtual call feeling neutral on its prospects. The key takeaways are as follows:

1. Slightly firmer PE price outlook. PCHEM anticipates a strengthening of PE prices in 2HCY24, driven by an expected improvement in the general economy during that period. Additionally, a slight uptick in the food and packaging segment is foreseen. The oversupply situation is projected to ease somewhat as older, less efficient PE plants in China are retired. PCHEM's outlook suggests that PE prices for 2024 will range between USD1,000-1,100/MT compared to USD1,012/MT average in 2023.

2. Urea prices to remain stable. The company anticipates stability in urea prices, attributing it to the expectation of stable feedstock costs, particularly natural gas. China's stringent urea export policy is projected to persist until mid-2024, and any potential relaxation of export restrictions could introduce additional supply to the market. India, being the largest demand driver for urea, plans to boost domestic production to reduce reliance on urea imports. The forecast for urea prices in 2024 is an average ranging between USD350-400/MT. In 2023, urea prices averaged at USD350/MT.

3. Methanol market to remain tepid. The company foresees a continued rise in methanol capacity in 2024, with significant contributions from Asia, the Middle East, and the US. China's decarbonization policy is anticipated to dampen the demand growth for methanol in 2024, leading to a redirection of capacities to Southeast Asia. PCHEM expects the average methanol prices to hover around USD300/MT in 2024 compared to the average of USD320/MT in 2023.

Forecasts. Maintained as the guidance of the product prices is largely in line with our assumptions.

Valuations. Consequently, we maintain our TP of RM6.74 pegged to unchanged 15x FY24F PER, in line with the valuations of Asian peers (e.g. PTT Chem, LG Chem, Formosa, LCTITAN). There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like the company due to: (i) signs of bottoming of polyolefin prices supported by crude prices, (ii) the gradual recovery at its specialty chemicals division, and (iii) its superior margins vs. peers due to a favourable cost structure. However, the upside to its earnings and hence share price is capped by the limited upside of its product prices amidst a tepid global economic outlook. Maintain MARKET PERFORM.

Risks to our call include: (i) worse-than-expected economic growth globally leading to weaker petrochemical prices, (ii) PIC costs exceeding estimates due to operational issues, and (iii) worse-thanexpected oversupply in specialty chemicals particularly in European region

Source: Kenanga Research - 26 Jan 2024