INVESTMENT HIGHLIGHTS

• Trade war between U.S. and China to benefit regional chemical producers

• Additional tariff to be imposed on 106 items from U.S.

• 44 of 106 listed items are industrial and chemical raw materials

• Positive impact on Petronas Chemicals

• Maintain BUY with unchanged TP of RM8.72 per share

Escalating trader war. The escalating trade war between the United States of America and China could potentially benefit regional chemical producers. China on 4th April 2018 has announced a list of products from U.S. that could be subjected to additional tariff increase by 25% - more than 40 of which constitute chemical-based products or chemical raw materials.

Regional chemical producers to benefit. Malaysia’s chemical and chemical products are the third major export (approximately 8%) for the Malaysia, after electrical and electronic products and petroleum products. In particular, exports of chemical and chemical products constitute between 15-20% of total exports to China alone.

Opportunity of Petronas Chemicals. The additional tariff on U.S. chemical and chemical products is positive for Petronas Chemicals. This trade war could potentially: (i) cause a price increase in a broad range of chemical and chemical products; (ii) provide opportunities for Petronas Chemicals to increase product exports to China; (iii) provide opportunities for Petronas Chemicals to produce new products for the Chinese market.

Impact on earnings. No change to earnings estimates at this juncture.

Remain sanguine on company. Moving forward, the O&D segment is expected to sustain its upbeat momentum owing to limited product supply, regional turnarounds, healthy demand and higher feedstock prices. The F&M segment is also expected to coast on an uptrend as fertiliser supply from Middle East is expected to be limited, strong demand in Asia, healthy downstream demand and tight supply of methanol in China. As the product prices are expecting to remain stable and firm in the near term coupled with stronger PUR moving forward, we remain sanguine on the company whilst expecting FY18 to perform on par or exceed that of FY17.

Commendable PUR despite turnaround activities. Management guided that FY18 will be another year with heavy turnaround activities. Despite this, the average PUR for the group is expected to remain above 90%. The bulk of the heavy turnaround will happen in 2HFY18 where PUR is expected to be below 90% while PUR for 1HFY18 is expected to remain high.

Recommendation. We are maintaining our BUY recommendation on PChem with an unchanged target price of

RM8.72 per share. Our target price is derived from PER18 of 16x pegged to EPS18 of 54.5sen. We revised our target PER from 15x to 16x, reflecting PChem’s average PER over two years.

Source: MIDF Research - 5 Apr 2018