Lotte Chem Titan’s Malaysia IPO meets lukewarm investor response

SINGAPORE (ICIS)–Lotte Chemical Titan Holding Bhd (LCT) has reduced the size of its initial public offering (IPO) in Malaysia by more than a fifth to 580m shares, followed by a cut in the offer price to ringgit (M$) 6.50/share, following lukewarm response from investors.

Analysts pointed to investors’ concerns over profit margins of the Malaysia-based petrochemical producer, which is a subsidiary of South Korean conglomerate Lotte, as feedstock prices have started to rise and amid expectations of global oversupply in polyolefins.

Lotte Chemical Titan derives more than half its annual revenue from polyethylene (PE) products.

“Naphtha and oil prices have started to reverse their downtrend which started at the end of May. This may have negatively affected sentiment for the IPO because naphtha is a significant cost input for the company and the company’s financial outperformance the last three years has been largely driven by the low price of naphtha due to low oil prices,” said Toh Zhen Zhou, an analyst for investment research and analysis firm Smartkarma.

Lotte Chemical Titan was initially looking at offering 740.5m shares via the IPO, but decided early in the week, during the bookbuilding process, to reduce the number of shares on offer, and set the final IPO price lower than the initial retail offer of M$8.00/share.

The 580m IPO shares represent 25.13% of Lotte Chemical Titan’s enlarged issued share capital. The company expects to list all its 2.31bn shares on Bursa Malaysia on 11 July. In spite of the downsizing, it is still the largest IPO in the southeast Asian country since August 2012.

Lotte Chemical Titan intends to use about 75% of the M$3.77bn IPO proceeds for its planned integrated petrochemical complex in Banten province in Indonesia that will have an ethylene capacity of 1m tonnes/year. The total project cost is estimated at M$15.5bn, according to the company’s IPO prospectus.

A portion of the proceeds will also finance its TE3 project, which involves the extension on its current facilities in Malaysia, as well as its new 200,000 tonne/year polypropylene (PP) plant in Johor.

The TE3 project is expected to be completed in the second half of 2017, while the new PP plant is due for completion in the second half of 2018, according to a research note by Hong Leong Investment Bank (HLIB) dated 27 June.

“Overall, the group’s capacity would be improved by 15-20% approximately depending on market conditions. That aside, current idling OCU [olefins conversion unit] plant (which produces propylene) would be ramped up to produce feedstock for PP3 plant,” it said.

Lotte Chemical Titan is the largest polyolefin producer in Malaysia and Indonesia, with around 900,000 tonnes/year of polyethylene (PE) capacity and 400,000 tonnes/year of PP capacity. It was acquired by South Korea’s Lotte Chemical in 2010.

The company’s improved profitability since its privatisation was largely due to declines in raw material prices and not by an increase in production capacity, SmartKarma’s Toh said.

“Investors are essentially paying for the same LCT six years ago at five times the price. But, the only difference now is that there is growth in capacity underway and it is at a time when raw materials costs are close to their all-time low and valuation is the most favourable,”

Lotte Chemical Titan’s projects are among major polyolefins capacity additions expected in southeast Asia, along with those of PETRONAS Chemicals Group (PCG) in Malaysia and Siam Cement Group (SCG) in Thailand.

With major shale-based and coal-based capacity expansions also happening in the US and China, respectively, the global supply-demand gap is expected to widen next year, according to HLIB.

But Lotte Chemical Titan would be partially insulated from the global overcapacity since its target market is southeast Asia, where zero tariff applies under an intra-regional free trade agreement (FTA), while polyolefins from other sources are levied a 10% tariff.

In the next two years, the company’s earnings are expected to be boosted by new production capacities, according to Malaysian brokerage Kenanga.

In 2016, the company’s net profit more than doubled to M$1.32bn from M$613m in 2015. In 2014, it had incurred a net loss of M$19.2m in 2014 due to higher feedstock prices.

“Near-term petrochemical prices are expected to be positive given the supply and demand situation with margin spread to remain,” Kananga said, based on the assumption that international crude prices will average around $50/bbl this year and $60/bbl in 2018.

HLIB, on the other hand, is forecasting Lotte Chemical Titan’s core net profit in 2017-2019 to fall at a compounded annual rate of 4.8% amid stiff competition and narrowing of product spreads.

“We believe petrochemical product margins for LCT appear to have peaked and the risk of margins reverting to lower levels is high at this level given the expectation of capacity expansion in regional and global market,” it said.

Lotte Chemical Titan can expect a major earnings boost in 2023, when its integrated complex in Indonesia starts commercial operations and begin catering to other major markets, according to Kenanga.

“Key developing regions such as India, Indonesia, southeast Asia, China still have relatively low consumption per capita for polyolefins as compared to developed nation such as Japan, western Europe and US,” Kenanga said.

“As such the new integrated petrochemical facility in Indonesia is the right geographical location to cater for the potentially huge consumption demand,” it said.

Focus article by Nurluqman Suratman

Photo: Petronas Twin Towers in Malaysia (JTB Photo\UIG/REX/Shutterstock)

Additional reporting by Pearl Bantillo