Review

• Lotte Chemical Titan Holding Bhd’s (LCTITAN) 9MFY24 results registered a broader core net loss of RM623.1mn, against ours and consensus’s fullyear net loss estimates of RM653.0mn and RM759.0mn, respectively. The underperformance was largely underpinned by lower sales volume and poorer-than-expected product spreads.

• QoQ: 3QFY24 revenue increased by 9.4%, primarily attributed to higher sales volume (+15.1% YoY) as the average plant utilisation was recorded higher at 58% (2QFY24: 47%). The increase in revenue was partially mitigated by decrease in ASP (average price of polymer: -0.3% YoY) and the weakening of USD against Ringgit. LBT increased from RM331.7mn in 2QFY24 to RM378.4mn in 3QFY24 due to decrease in net deferred tax liabilities as a result of the weakening of USD against Ringgit.

• YoY: 3QFY24 revenue dropped 0.8% due to lower sales volume (-7.3% YoY) as the average plant utilisation was recorded lower at 58% (3QFY23: 66%) while partially mitigated by higher ASP (average price of polymer: +6.5% YoY). LBT increased from RM67.5mn in 3QFY23 to RM378.4mn in 3QFY24, mainly due changes in write down of inventories to its net realizable value, increased losses from foreign exchange and higher share of losses from associate company, Lotte Chemical USA Corp due to maintenance shutdown.

Impact

• We have trimmed our FY24/FY25/FY26 average utilisation rate assumption from 66%/70%/75% to 60%/63%/73%, respectively, and lower down our product ASP by 3-5%. Following these, we slash our earnings forecasts to - RM825.4mn/-RM389.5mn/RM142.1mn from -RM653.0mn/- RM213.6mn/RM213.9mn.

Outlook

• We anticipate a modest reduction in losses for 4QFY24 compared to 3QFY24, driven by an improvement in product spreads for LDPE and LLDPE. ASP for these polymers is expected to see a slight uptick in 4QFY24, bolstered by seasonal demand for flexible consumer packaging in line with year-end holiday sales. Nevertheless, LCTITAN is likely to remain in a lossmaking position over the next few quarters, as product spreads are not expected to improve substantially amid a supply overhang from significant capacity expansions, primarily in China, outpacing demand growth.

• With the YTD utilisation rate currently at 57%, management has revised its 2024 full-year utilisation rate guidance down from approximately 65-70% to 55-60%, reflecting softer demand—a view we share. Consequently, we anticipate an overall decline in revenue.

• Recap that the construction of LINE project in Indonesia is expected to be completed in 1H2025. However, due to the challenging outlook, we believe management may defer the commercial operation of the plants as the product spreads may remain unfavourable.

Valuation

• Corresponding to our change in earnings, we have trimmed down our TP to RM1.02/share (previous: RM1.06/share) pegged to 0.22x CY25 P/B ratio and an ESG premium of 3%. Maintain Sell.

Source: TA Research - 7 Nov 2024