This article first appeared in The Edge Malaysia Weekly on November 18, 2024 - November 24, 2024
PLAGUED by an oversupply glut, Lotte Chemical Titan Holding Bhd (LC Titan) (KL:LCTITAN) is facing its toughest challenge since relisting on Bursa Malaysia in July 2017. Analysts are of the view that “noting much can be done for the time being, except to wait for polymer prices to rebound”.
Alternatively, a white knight could help the olefin and polyolefin producer ride through the current challenging landscape, which has led to the deterioration of its balance sheet.
However, it may not be easy to find a strategic partner in view of LC Titan’s depressed share price, though its South Korean parent company Lotte Chemical Corp (LC Corp) has been contemplating various “strategic measures” for LC Titan, including a potential stake sale.
When asked for comments, LC Titan’s spokesperson tells The Edge that there has been no update on the matter since its March 7 announcement on LC Corp seeking “strategic measures”, adding that the company had already addressed issues related to its business operations when releasing its latest quarterly results recently.
LC Corp owns 75.86% of LC Titan. Other shareholders include Amanah Saham Bumiputera (0.92%) and Kumpulan Wang Persaraan (Diperbadankan) (0.74%).
Looking at the petrochemical industry as a whole, there are no signs of recovery either. Thailand’s industrial conglomerate Siam Cement Group has just halted commercial operations at its US$5.4 billion (RM24.2 billion) Long Son Petrochemicals complex in the southern province of Ba Ria-Vung Tau in Vietnam, according to a Reuters’ report early this month. Siam Cement said the resumption of its plan would depend on global dynamic demand.
LC Titan’s profitability relies on the polymer-naphtha spread, while naphtha feedstock prices are highly correlated to crude oil prices.
The high-density polyethylene (HDPE)-naphtha spread, an indication of the margin level, has been between US$200 and US$300 a tonne since mid-2023. The most recent peak of US$600 a tonne was in March 2021, sending LC Titan’s profitability to a record high of RM441.28 million in the quarter ended March 31, 2021.
“Because of the poorer-than-expected product spread, they are having a negative margin on the products. So, the more they produce, the more they lose. Right now, the average selling price for polymers is about US$1,000 per tonne. It should be US$1,400 per tonne for it to be profitable. At the moment, there are no signs of recovery,” an analyst who covers LC Titan tells The Edge.
In an Oct 25 note, S&P Global says prices for Asian naphtha will likely continue to benefit from robust buying interest and volatile crude prices.
Having been in the red for 10 quarters in a row, LC Titan’s net loss ballooned to RM246.42 million for the July-September 2024 quarter from RM55.58 million in the same quarter a year ago, on the back of inventory write-downs, higher losses from its 40%-owned associate Lotte Chemical USA Corp due to a maintenance shutdown, and increased foreign exchange losses.
Quarter on quarter, the net loss was slightly lower than the RM248.89 million in the April-June 2024 quarter. For the first nine months of the year, its net loss expanded to RM673.33 million from RM593.81 million in the same period a year ago.
In a financial statement accompanying the release of its latest results, LC Titan says in ensuring business resilience, the management is vigilantly monitoring operations and carefully managing financial liquidity to achieve greater efficiency and maintain high product quality.
The Southeast Asian market accounted for 87% of its revenue for the first nine months of 2024, with Malaysia and Indonesia being the two largest contributors.
TA Securities foresees LC Titan remaining in a loss-making position over the next few quarters, as product spreads are not expected to improve substantially amid a supply overhang from significant capacity expansion, primarily in China.
“We anticipate a modest reduction in losses for 4QFY2024 compared with 3QFY2024, driven by an improvement in product spreads for LDPE (low-density polyethylene) and LLDPE (linear low-density polyethylene). Average selling prices for these polymers are expected to see a slight uptick in 4QFY2024, bolstered by seasonal demand for flexible consumer packaging in line with year-end holiday sales,” the research outfit says in a Nov 6 note.
Another analyst points out that despite China’s stimulus measures to boost its economy, the industry outlook remains cloudy with no certainty on the rebound in market demand.
He says LC Titan could consider selling some of its assets such as its stake in a US entity, so that the company could have some liquidity to weather the current challenging environment.
LC Titan has a 40% stake in Lotte Chemical USA Corp (LC USA), which incurred higher losses due to a plant shutdown during the quarter under review. The balance 60% stake in LC USA is held by LC Corp.
On Nov 8, LC Titan said in a stock exchange filing that following a corporate restructuring exercise, LC USA’s stake in Lotte Chemical Louisiana LLC has been reduced to 60% from 100% previously.
If the tough conditions persist, the analyst does not rule out a delay in the commissioning of the Lotte Chemical Indonesia New Ethylene (LINE) project in Indonesia, which is slated for completion next year. With the capability of adding 65% to the overall production capacity, the project is a key growth expansion driver for LC Titan to become a top-tier petrochemical firm in the region.
As at end-September 2024, LC Titan had RM7.84 billion in loans and borrowings and RM461.09 million in cash, putting it in a net debt position of RM7.37 billion.
Shares in LC Titan touched an all-time low of 70 sen last week, having tumbled more than 40% year to date to close at 77.5 sen last Thursday for a market capitalisation of RM1.77 billion.
Although it represents a significant discount of 82% to its net tangible assets per share of RM4.25 as at end-September 2024, CGS International says in its Nov 6 note that the carrying value of its plants is questionable and could be impaired.
Compared with its initial public offering price of RM6.50, LC Titan’s market value has reduced by a whopping 88%.
Of the five analysts covering the stock, three have “sell” recommendations, with one “hold” and one “trading buy” call. The consensus target price is RM1.05, suggesting an upside potential of 35.5%.
It is worth noting that the share price of LC Titan’s peer, Petronas Chemicals Group Bhd (KL:PCHEM), was bashed down to a 4½-year low lately, in anticipation of a weak set of financial results. At last Thursday’s closing price of RM4.54, more than a third of its market value had been slashed since the beginning of the year.
Nevertheless, the impact on Petronas Chemicals has been relatively manageable given that it is a more integrated entity, with Petroliam Nasional Bhd (Petronas) backing it.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's App Store and Android's Google Play.