Financial Analysis of Lotte Chemical Titan: A Comprehensive Review

Broker Name: Maybank Investment Bank Berhad

Date of Report: November 7, 2024

Introduction

In this report, we delve into the financial performance and outlook of Lotte Chemical Titan (LCTITAN), a key player in the petrochemical and polymer industry. Our analysis covers various aspects, including revenue trends, profitability, and future projections, providing a comprehensive view of the company’s financial health.

Lotte Chemical Titan (TTNP MK)

3Q24 Performance: Below Expectations

Lotte Chemical Titan’s (LCTITAN) 3Q24 results fell slightly below expectations, prompting us to widen our FY24-26E core net loss forecast to -MYR856m, -MYR258m, and -MYR603m, respectively. This adjustment accounts for lower operating rate assumptions of 55%, 55%, and 60% (from 65%, 60%, and 70%), lower PE price assumptions of USD1050, and a lower USD/MYR FX forecast of 4.4 (from 4.5). We maintain a SELL rating with a lower target price (TP) of MYR0.91, based on a rolled-over FY25E PBV multiple of 0.15x, reflecting below-trough multiples as heavy losses are likely to persist through to FY26E.

Continued Losses in 3Q24

LCTITAN’s 3Q24 core net loss of -MYR224m (2Q24: -MYR200m) brought 9M24 cumulative core net losses to -MYR626m (9M23: -MYR738m). The losses were adjusted for MYR38.6m forex losses, MYR0.3m inventories written off, MYR1.2m PPE written off, MYR1.1m gain on disposal of PPE, MYR1.8m reversal of allowance on trade receivables, and MYR9.8m inventories written down to NRV. The losses were wider than expected, compared to our and consensus FY24E core net loss forecasts of -MYR770m and -MYR781m, respectively, mainly due to larger-than-expected associate losses as its 40% associate, LC USA, underwent planned maintenance for its cracker plant.

Heavy Losses Expected in 4Q24E

Despite a slight easing of input naphtha prices (based on the Naphtha Japan Index) by 3% from mid-August to early November 2024, polymer prices have remained relatively flattish. As a result, we anticipate that LCTITAN will continue to register heavy losses in 4Q24E. The company is unlikely to return to profitability anytime soon, as HDPE-naphtha spreads are still significantly below the USD350/tonne range.

Avoid the Petrochemical Sector

Our analysis indicates that LCTITAN’s net profit breakeven HDPE-naphtha spreads need to exceed USD550/MT. Currently, LCTITAN is incurring gross losses per unit of sales. The company faces a double whammy: we do not foresee an improvement in polymer prices anytime soon, and there is a margin squeeze from sustained elevated naphtha prices. Therefore, we maintain a SELL rating.

Share Price and Company Description

The share price of LCTITAN stands at MYR0.96, with a 12-month price target of MYR0.91, reflecting a 5% decrease from the previous price target of MYR0.94. Lotte Chemical Titan manufactures and sells petrochemicals and polymers. The company has a market capitalization of MYR2.2B (USD504M) and issued shares amounting to 2,312 million. Major shareholders include Lotte Chemical Corp. (74.7%), Permodalan Nasional Bhd. (2.6%), and Lotte Chemical Titan Holding Bhd. (1.5%).

Price Performance

The company’s price performance over the past year has shown a decline, with absolute and relative returns of -5%, 1%, and -16% over 1-month, 3-month, and 12-month periods, respectively. Relative to the index, the returns were -4%, -2%, and -24% for the same periods.

Financial Metrics

For the fiscal years ending in December, the revenue, EBITDA, and core net profit for FY22A, FY23A, FY24E, FY25E, and FY26E are as follows:

• Revenue: MYR10,019m (FY22A), MYR7,646m (FY23A), MYR6,302m (FY24E), MYR6,107m (FY25E), MYR11,889m (FY26E)
• EBITDA: -MYR457m (FY22A), -MYR357m (FY23A), -MYR382m (FY24E), MYR424m (FY25E), MYR314m (FY26E)
• Core Net Profit: -MYR616m (FY22A), -MYR892m (FY23A), -MYR856m (FY24E), -MYR258m (FY25E), -MYR603m (FY26E)

Margins and Ratios

The margins and ratios for 3Q24 compared to 3Q23 and 2Q24 are as follows:

• Gross Profit Margin: -7.7% (3Q24), 1.1% (3Q23), -11.9% (2Q24)
• EBIT Margin: -11.8% (3Q24), -1.4% (3Q23), -16.1% (2Q24)
• PBT Margin: -19.4% (3Q24), -3.4% (3Q23), -18.7% (2Q24)
• PAT Margin: -12.6% (3Q24), -2.9% (3Q23), -14.7% (2Q24)
• Core Net Profit Margin: -11.5% (3Q24), -12.1% (3Q23), -11.3% (2Q24)
• Effective Tax Rate: 35.2% (3Q24), 16.8% (3Q23), 21.2% (2Q24)

Operational Data

The operational data for 3Q24 compared to 3Q23 and 2Q24 are as follows:

• Production Volume: 525 KT (3Q24), 590 KT (3Q23), 418 KT (2Q24)
• Sales Volume: 404 KT (3Q24), 436 KT (3Q23), 351 KT (2Q24)
• Average Utilization Rate: 58% (3Q24), 66% (3Q23), 47% (2Q24)

ASP Trends

The ASP trends for 3Q24 compared to 3Q23 and 2Q24 are as follows:

• Ethylene: USD946 (3Q24), USD816 (3Q23), USD976 (2Q24)
• HDPE: USD970 (3Q24), USD1,006 (3Q23), USD1,004 (2Q24)
• LDPE: USD1,203 (3Q24), USD995 (3Q23), USD1,149 (2Q24)
• PP: USD1,020 (3Q24), USD996 (3Q23), USD1,051 (2Q24)

Valuation

The 12-month forward PBV stands at:

• +2SD: 0.67x
• +1SD: 0.51x
• Mean: 0.35x
• -1SD: 0.18x

Risk Statement

Key risks that may impact our earnings estimates, target price, and SELL rating for LCTITAN include a faster-than-expected recovery in polymer/monomer prices and a sudden decline in crude oil/naphtha prices.

Key Metrics

The key metrics for FY22A, FY23A, FY24E, FY25E, and FY26E are as follows:

• P/E (reported): nm
• Core P/E: nm
• P/BV: 0.2
• P/NTA: 0.2
• Net dividend yield: 9.8% (FY22A), 0.0% (FY23A, FY24E, FY25E, FY26E)
• FCF yield: nm
• EV/EBITDA: nm (FY22A, FY23A, FY24E), 38.6 (FY25E), 53.2 (FY26E)
• EV/EBIT: nm

Income Statement

The income statement for FY22A, FY23A, FY24E, FY25E, and FY26E is as follows:

• Revenue: MYR10,019m (FY22A), MYR7,646m (FY23A), MYR6,302m (FY24E), MYR6,107m (FY25E), MYR11,889m (FY26E)
• EBITDA: -MYR457m (FY22A), -MYR357m (FY23A), -MYR382m (FY24E), MYR424m (FY25E), MYR314m (FY26E)
• Depreciation: MYR584m (FY22A), MYR511m (FY23A, FY24E, FY25E), MYR1,411m (FY26E)
• EBIT: -MYR1,042m (FY22A), -MYR868m (FY23A), -MYR893m (FY24E), -MYR87m (FY25E), -MYR1,097m (FY26E)
• Net interest income/(expense): MYR32m (FY22A), -MYR14m (FY23A), -MYR41m (FY24E), -MYR107m (FY25E), -MYR468m (FY26E)
• Associates & JV: MYR8m (FY22A), -MYR117m (FY23A), -MYR200m (FY24E), -MYR150m (FY25E, FY26E)
• Pretax profit: -MYR1,002m (FY22A), -MYR1,000m (FY23A), -MYR1,134m (FY24E), -MYR344m (FY25E), -MYR1,715m (FY26E)
• Income tax: MYR257m (FY22A), MYR187m (FY23A), MYR272m (FY24E), MYR83m (FY25E), MYR412m (FY26E)
• Minorities: MYR14m (FY22A), MYR32m (FY23A), MYR5m (FY24E), MYR4m (FY25E), MYR700m (FY26E)
• Reported net profit: -MYR731m (FY22A), -MYR780m (FY23A), -MYR856m (FY24E), -MYR258m (FY25E), -MYR603m (FY26E)
• Core net profit: -MYR616m (FY22A), -MYR892m (FY23A), -MYR856m (FY24E), -MYR258m (FY25E), -MYR603m (FY26E)

Balance Sheet

The balance sheet for FY22A, FY23A, FY24E, FY25E, and FY26E is as follows:

• Cash & Short Term Investments: MYR1,305m (FY22A), MYR761m (FY23A), MYR2,437m (FY24E), MYR4,469m (FY25E), MYR2,171m (FY26E)
• Accounts receivable: MYR920m (FY22A), MYR938m (FY23A), MYR773m (FY24E), MYR749m (FY25E), MYR1,458m (FY26E)
• Inventory: MYR1,462m (FY22A), MYR1,445m (FY23A), MYR1,191m (FY24E), MYR1,154m (FY25E), MYR2,247m (FY26E)
• Property, Plant & Equipment (net): MYR9,599m (FY22A), MYR16,477m (FY23A), MYR18,966m (FY24E), MYR21,455m (FY25E), MYR20,344m (FY26E)
• Investment in Associates & JVs: MYR2,514m (FY22A), MYR2,500m (FY23A), MYR2,300m (FY24E), MYR2,150m (FY25E), MYR2,000m (FY26E)
• Total assets: MYR16,772m (FY22A), MYR23,122m (FY23A), MYR26,669m (FY24E), MYR30,979m (FY25E), MYR29,222m (FY26E)
• ST interest bearing debt: MYR0m (FY22A), MYR407m (FY23A), MYR1,407m (FY24E), MYR2,407m (FY25E), MYR2,207m (FY26E)
• Accounts payable: MYR1,166m (FY22A), MYR1,093m (FY23A), MYR901m (FY24E), MYR873m (FY25E), MYR1,699m (FY26E)
• LT interest bearing debt: MYR0m (FY22A), MYR5,537m (FY23A), MYR9,137m (FY24E), MYR12,737m (FY25E), MYR11,657m (FY26E)
• Total Liabilities: MYR2,248m (FY22A), MYR8,112m (FY23A), MYR12,519m (FY24E), MYR17,092m (FY25E), MYR16,638m (FY26E)
• Shareholders Equity: MYR11,758m (FY22A), MYR11,499m (FY23A), MYR10,643m (FY24E), MYR10,385m (FY25E), MYR9,782m (FY26E)
• Minority Interest: MYR2,766m (FY22A), MYR3,512m (FY23A), MYR3,506m (FY24E), MYR3,503m (FY25E), MYR2,802m (FY26E)

Cash Flow

The cash flow for FY22A, FY23A, FY24E, FY25E, and FY26E is as follows:

• Pretax profit: -MYR1,002m (FY22A), -MYR1,000m (FY23A), -MYR1,134m (FY24E), -MYR344m (FY25E), -MYR1,715m (FY26E)
• Depreciation & amortization: MYR584m (FY22A), MYR511m (FY23A, FY24E, FY25E), MYR1,411m (FY26E)
• Change in working capital: MYR12m (FY22A), -MYR131m (FY23A), MYR227m (FY24E), MYR33m (FY25E), -MYR976m (FY26E)
• Cash taxes paid: -MYR102m (FY22A), -MYR11m (FY23A), MYR272m (FY24E), MYR83m (FY25E), MYR412m (FY26E)
• Other operating cash flow: MYR198m (FY22A), MYR13m (FY23A), MYR200m (FY24E, FY25E, FY26E)
• Cash flow from operations: -MYR349m (FY22A), -MYR625m (FY23A), MYR76m (FY24