INVESTMENT HIGHLIGHTS

• China imposes a five-years anti-dumping duty on import of ethanolamines

• Earnings impact from anti-dumping duty negligible

• Product demand in Asia remains robust despite ample supply

• Earnings to remain resilient due to stable feedstock

• Upgrade to BUY with a revised TP of RM10.23 per share

China imposes anti-dumping duty on import of ethanolamines. China announced yesterday that it will be imposing an anti-dumping duty for five-years on imports of a specific chemical compound called ethanolamines. The anti-dumping duty which will be effective from today (Tuesday) onwards will be imposed on imports of ethanolamines from US, Saudi Arabia, Malaysia and Thailand. The duty charged will differ from one country to another with the US being slapped with the highest rate. Refer to Table 1 for the specific rates charged to each countries.

Earnings impact negligible. We opine that the imposition of the anti-dumping duty has a negligible impact on PChem’s earnings as the chemical compound ethanolamines; although very niche, is also a very specific chemical that only a few companies has the expertise of producing. Therefore, we believe that the demand for such product would not wane.

Product demand remains robust despite ample supply. Despite the anti-dumping duties, demand for petrochemical products is expected to remain firm in the coming months. In 2HFY18, ethylene and propylene demands are expected to increase as more steam crackers will undergo maintenance. The demand will also receive a boost due to the US-China trade war and India’s anticipated higher public spending ahead of its General Election next year which will boost demand for PVC.

Earnings to remain resilient due to stable feedstock. Additionally, PChem continues to enjoy the stable LNG feedstock supply at a preferential rate from its parent company Petroliam Nasional Berhad (PETRONAS). This has enabled PChem to benefit in terms of having a more favourable price spread for all its products and to benefit further in the current high crude oil price environment.

Impact on earnings. No changes to earnings estimates as we are expecting 3QFY18 earnings for PChem to come in within our expectations which is at about RM1,089m despite the heavy TA activities that is taking place this year.

Recommendation. All factors considered, we are upgrading our recommendation on PChem to BUY (from Neutral previously) with a revised target price of RM10.23 per share (from RM8.90 previously). Our target price is derived from a revised PER19 of 18.4x - which is PChem’s five-year average PER, pegged to an unchanged EPS19 of 55.6sen. We are taking this opportunity to revise our PER19 attached to PChem as we believe that the fundamentals will support the new price discovery. Our increased PER19 of 18.4x is in line with the valuation of regional petrochemical players such as: PTT Global Chemicals (PTTGC TB, NR) from Thailand and Formosa Petrochemical Corporation (6505 TT, NR) from Taiwan which have also increased in the past three years despite having lower PER when compared against PChem.

Additionally, our BUY recommendation also reflects the premium that PChem has over its peers in terms of a stable LNG feedstock supply and preferential rates received from its parent company Petroliam Nasional Berhad (PETRONAS) - which positions PChem at an advantage to benefit from the market in the current high crude oil price environment. Furthermore, its dividend yield remains stable at 2.9% FY19F.

Source: MIDF Research - 30 Oct 2018