Fundamental Analysis of Petronas Chemicals Group Berhad by L. C. Chong https://lcchong.wordpress.com/ https://www.facebook.com/groups/285121298359919/

1. PCHEM
Fundamental Analysis
Financial Year 2014 (31 Dec 2014)
At the time of writing, I owned shares of PCHEM.
5 November 2015
L. C. Chong
http://lcchong.wordpress.com
https://www.facebook.com/groups/285121298359919/

2. Changes
 4 Nov 2015 – First write up of PCHEM in PowerPoint format

3. References
 Q3 2015 Analyst Briefing
 Petronas Gas Plant Visit 2015

4. Business Profile
 An integrated chemicals producer in Malaysia and one of the largest
in South East Asia
 PCHEM operates a number of production sites, which are fully
integrated from feedstock to downstream end-products
 PCHEM is involved primarily in manufacturing, marketing and selling a
diversified range of chemical products, including olefins, polymers,
fertilisers, methanol and other basic chemicals and derivative
products.

5. Business Profile (Cont.)
Olefins and Derivatives
• Activities include manufacturing and marketing of a wide range of
olefin and polymer products, which are used as basic feedstock for
other products, to intermediate products including basic and high
performance chemicals.
Fertilisers and Methanol
• Activities include manufacturing and marketing methanol and a
range of nitrogen, phosphate and compound fertilisers.

6. Business Profile (Cont.)
 omprises 26 companies producing and marketing a wide range of
chemical products
 Operates two integrated petrochemical complexes, one in Kertih,
Terengganu and the other in Gebeng, Pahang
 Four manufacturing complexes in Gurun, Kedah; Bintulu, Sarawak;
and Federal Territory of Labuan that produce fertilisers and methanol
including a new fertilisers manufacturing complex in Sipitang, Sabah
(SAMUR Project) which will commence production in 2016.

7. Business Profile (Cont.)
Olefins,
Glycols &
Derivatives
Polymers
Aromatics and
MTBE
Methanol
Ammonia and
Fertilisers
Product Diversity

8. Business Profile (Cont.)
 Geographic Diversity
 Joint-venture partners include BASF, BP, Idemitsu Kosan, Mitsubishi
Corporation, Sasol Limited, Vopak, Dialog, NAFAS and Japan Energy
Corporation
 Kertih Integrated Petrochemical Complex, Terengganu – Ammonia, Benzene,
Butanol, Butyl, Acetate, Carbon Monoxide, Ethanolamines, Ethoxylates,
Ethylene, Ethylene Glycols, Glycol Ethers, Oxogas, Paraxylene, Polyethylene,
Propylene, Acetic Acid
 Gebeng Integrated Petrochemical Complex, Pahang - Methyl Tertiary Butyl
Ether (MTBE), N-Butane, Propylene, Acrylics, Butanediol, Oxo-alcohols

9. Business Profile (Cont.)
 Geographic Diversity
 Gurun, Kedah – Ammonia, Methanol, Urea, NPK Fertilisers
 Federal Territory of Labuan – Methanol
 Bintulu, Sarawak – Ammonia, Urea
 Pasir Gudang, Johor – Styrene Monomer.

10. Ownership Summary
CORPORATIONS (PRIVATE)
64%
INSTITUTIONS
29%
PUBLIC AND OTHER
6%
STATE OWNED SHARES
0.51%
INDIVIDUALS/INSIDERS
0.00%

11. Top 5 Shareholders
PETROLIAM NASIONAL BERHAD
75%
EMPLOYEES PROVIDENT FUND
OF MALAYSIA
13%
PERMODALAN NASIONAL
BERHAD
8%
KUMPULAN WANG PERSARAAN
3%
LEMBAGA TABUNG HAJI
1%
PCHEM is mainly owned by Petronas Nasional Berhad, and the few wide known local institutional funds. This
counter is actively traded, and its volatility and liquidity are quite high.

12. Economic Moats
 Cost Advantage
 EBITDA Margin has been declining since 2012 due to high cost of material and
high operating expenses, especially maintenance on plantation
 Using Moody’s benchmark, PCHEM’s EBITDA margin is rated as A (below Aaa
and Aa). Good, but not great.
38.5%
42.1%
34.6%
37.0%
33.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2011-03-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31
EBITDA Margin %

13. Economic Moats (Cont.)
 Switching Costs
 PCHEM is the leading integrated chemicals producer in Malaysia and one of
the largest in Southeast Asia
 It operates a number of world-class production sites, which are fully vertically
integrated from feedstock to downstream end-products
 With a total combined production capacity of over 10 million mtpa, it is
involved primarily in manufacturing, marketing and selling a diversified range
of chemical products, including olefins, polymers, fertilisers, methanol and
other basic chemicals and derivative products.

14. Economic Moats (Cont.)
 Network Effect
 PCHEM is the leading integrated chemicals producer in Malaysia and one of
the largest in Southeast Asia
 It operates a number of world-class production sites, which are fully vertically
integrated from feedstock to downstream end-products
 Intangible Assets
 Strong political linked
 Efficient Scale
 Dominant domestic player
 Support from Petronas.

15. Economic Moats (Cont.)
17.5%
19.5%
21.8%
20.7%
14.8%
6.6%
27.5%
28.9%
21.5%
12.7%
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2011-03-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31
ROIC and CROIC
Avg. Capex Avg. Invested Capital ROIC % CROIC %

16. Economic Moats (Cont.)
 ROIC of PCHEM declined drastically from 21.8% (FY12) to 14.8%
(FY14). This is due to couple of reasons:
 Invested capital in new assets (plants) increased 2.5% (CAGR) yearly from
14,907 mln (FY11) to 16,171 mln (FY14), and 9.25% from 14,742 mln (FY13) to
16,171 mln (FY14)
 Slow down in revenue due to maintenance of plants and unfavorable selling
price of products
 High cost of material and high operating costs

17. Economic Moats (Cont.)
 CROIC of PCHEM also declined from 28.9% to 12.7% because of the
following reasons:
 Invested capital in new assets (plants) increased 2.5% (CAGR) from 14,907
mln (FY11) to 16,171 mln (FY14), and 9.25% from 14,742 mln (FY13) to 16,171
mln (FY14)
 Net capital expenditure increased 192% (CAGR) from 964 mln (FY12) to 2,815
mln (FY14), and 64% from 1,716 mln (FY13) to 2,815 mln (FY14)
 Although both ratios declined in the past 2 years, this doesn’t mean
PCHEM lost its moats. PCHEM was mainly dragged down by
maintenance CapEx (for existing plants) and operational CapEx (new
plants). I believe that this is a short term issue, and PCHEM will
recover its profitability soon.

18. Scale
38.5%
42.1%
34.6%
37.0%
33.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
2011-03-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31
EBITDA Revenue EBITDA Margin %
Using Moody’s benchmark, PCHEM’s EBITDA margin is rated as A (below Aaa and Aa).

19. Scale (Cont.)
 EBITDA Margin has been declining since 2012 due to:
 The weak operating condition was exacerbated by mix product prices. The
generally weaker prices have caused profit spreads to narrow
 Polymer prices rose whereas ethylene glycols and aromatics prices fell
 Management expects softening olefins and derivatives prices on weakening crude and
naphtha values as well as bearish downstream demand
 Product prices for ethylene, polymers, MEG and aromatics are expected to be weak
 Lower plants utilization because of maintenance
 High cost of material
 High operating expenses, especially maintenance on plantation.

20. Scale (Cont.)
11,205 8,804 11,958 11,222 10,510
3,314 3,054 4,598 3,941 4,046
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
31/3/2011 31/12/2011 31/12/2012 31/12/2013 12/31/2014
Revenue by Operating Segment
Olefins and Derivatives Fertilisers and Methanol Others

21. Scale (Cont.)
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
2011-03-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31
Net Capex.
Net Capex.
Net capital expenditure increased 192% (CAGR) from 964 mln
(FY12) to 2,815 mln (FY14), and 64% from 1,716 mln (FY13) to
2,815 mln (FY14). This is mainly for new plants and
maintenance of existing plants.

22. Leverage & Coverage
 PCHEM is a debt-free company. They paid some finance costs for
unwinding of discount factor for other long term liabilities and
provisions. You can refer to Note 16.2 and 20 in 2014 Annual Report.

23. Liquidity
15 16
15
1
-6
0
20
40
60
80
100
120
-10
-5
0
5
10
15
20
2011-03-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31
Cash Conversion Cycle
Days In Inventory Days In Receivables Days Payable Outstanding Cash Conversion Cycle
PCHEM’s “Days Payable Outstanding” was double of “Days In Receivables”, and its “Days In Inventory” was quite
consistent at level 44 days. In layman’s term, PCHEM using other people’s money to do business.

24. Liquidity (Cont.)
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
2011-03-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31
FREE CASH FLOW TO FIRM

25. Liquidity (Cont.)
 As for FCF, PCHEM’s FCF declined since FY12 because:
 Net capital expenditure increased 192% (CAGR) from 964 mln (FY12) to 2,815
mln (FY14), and 64% from 1,716 mln (FY13) to 2,815 mln (FY14).
 Profit before tax reduced from 4,550 mln (FY12) to 3,551 mln (FY14).

26. Growth Drivers
 4 Nov 2015 - National oil company Petroliam Nasional Bhd (Petronas)
is injecting three companies that are currently undertaking
petrochemical works at its RM60 billion Refinery and Petrochemical
Integrated Development (Rapid) project in Johor, into Petronas
Chemicals Group Bhd (PetChem) for RM13,000
 The three companies — PRPC Glycols Sdn Bhd, PRPC Polymers Sdn Bhd and
PRPC Elastomers Sdn Bhd — are currently working on petrochemical projects
at Rapid with a future total investment cost of about US$3.9 billion, with a
combined total capacity of approximately 2.7 million tonnes per annum
(mtpa).

27. Growth Drivers (Cont.)
PCHEM’s Participation in RAPID Petrochemical Projects

28. Growth Drivers (Cont.)
 22 Jul 2015 - PCHEM and Germany’s BASF will jointly build a new
world-scale production plant in Kuantan for highly-reactive
polyisobutene (HR-PIB)
 The new plant, which will have an annual capacity of 50,000 tonnes of HR-PIB,
will be at the site of their existing joint venture, BASF Petronas Chemicals Sdn
Bhd
 19 Mar 2015 - PCHEM is expecting to start up its Sabah Ammonia and
Urea (SAMUR) project early next year, about six months behind
schedule

29. Growth Drivers (Cont.)
 13 Apr 2015 - PCHEM has set aside RM3 billion for capital
expenditure (capex) this year. The bulk of the capex will be channelled
to its Sabah Ammonia Urea (SAMUR) project and aroma and specialty
chemical complex in Gebeng, Pahang
 The total installed capacity is 1.2 million metric tonne per annum, which will
effectively raise PCHEM’s total installed capacity by 10.4%
 Construction of the plant is in the final stages of completion and the bulk of
the workforce has already been mobilised for plant commissioning
 5 Nov 2015 – SAMUR could potentially deliver MYR300-500m of additional
revenues in 2016 based on the current urea market prices of USD253/ton,
and assuming a utilisation rate of 50-75%

30. Growth Drivers (Cont.)
 7 Jan 2015 - Petronas Chemicals historically has benefited from a
stronger dollar, and we estimate that every 1% appreciation of the
dollar against the ringgit will enhance its earnings by 1.6% to 1.7% as
the group exports 60% of its products, with the remaining 40% sold
domestically tied to dollar-denominated benchmark prices. The risk
of further margin pressure outweighs possible upside from a stronger
dollar and better spreads
 10 Aug 2015 - For every 10.0 sen of depreciation in MYR against the USD,
group's EBITDA could improve by 6% assuming other cost structure and PU
remain unchanged.

31. Growth Drivers (Cont.)
Source: Maybank, 5 Nov 2015
The group has invested greatly during 2013-14 to optimise
and enhance factory and supply chain reliability. These
initiatives have delivered positive outcomes in 2015 and
should be sustainable into 2016.

32. Growth Drivers (Cont.)
• 2015 has been a relatively trouble
free year in terms of factory
downtime as there are only a few
maintenance shutdowns planned
for the year
• Management guides that the
number of scheduled turnarounds
in 2016 are similar to that of 2015,
but expect operations to improve
with plant utilisation rates hitting
their target of 90% vs 9M15’s
85.3%
• However, this utilisation rate will
exclude the SAMUR fertiliser plant
that is scheduled to be
commissioned in 2Q16.
Source: Maybank, 5 Nov 2015

33. Issues/Risks/Challenges
 7 Jan 2015 - The lower naphtha price should weaken the price
advantage of the company's gas-based business unit and pressure the
profit margins of its ethane- and propane-based products, given that
the cost of ethane is fixed
 Crude oil prices are expected to remain volatile in the near term,
tapering volatility in 2016, but this will still be negative for
petrochemicals
 Many of the petrochemical product prices are invariably influenced by crude
oil price movements

34. Issues/Risks/Challenges (Cont.)
Source: Maybank, 5 Nov 2015
The downside risk to PCHEM’s
earnings is lower prices for its
products, which are subject to
supply and demand dynamics.
A global oversupply of
polyethylene products, its
main earnings driver, could
pose a risk to earnings.

35. Issues/Risks/Challenges (Cont.)
Source: MIDF, 4 Nov 2015
Expected Product Price Movements in 4Q15

36. Issues/Risks/Challenges (Cont.)
 Seasonality
 The prices of petrochemical products and their underlying feedstock are
subject to significant fluctuations as they are influenced both by global supply
and demand as well as movements in the prices of key commodities such as
crude oil and natural gas. Consequently, margins have historically been
cyclical and are sensitive to supply and demand imbalances both domestically
and internationally. Supply is affected by significant capacity expansions by
producers, and if such additions are not matched by corresponding growth in
demand, which is generally linked to the level of economic activity, average
industry operating margins will face downward pressures. As a result, the
petrochemical cycle is characterised by years of tight supply, leading to high
capacity utilisation rates and margins, followed by years of oversupply,
primarily resulting from significant capacity additions, leading to reduced
capacity utilisation rates and margins.

37. Shareholder Return
Time Frame Date Bought at Original
Value
Dividend
Received
Unrealized
Gain/Loss
Current
Return
CAGR %
3-Y 5 Nov 2012 6.45 6,450 580 110 7,041 3.0%
5-Y 26 Nov
2010
5.31 5,310 1,010 1,250 7,570 7.4%
Assumptions:
1. Commission paid is ignored in this simulation
2. The current price is 6.56 (as of the time of writing)
3. Unit purchased is 1,000.

38. Shareholder Return (Cont.)
0.0000
0.0500
0.1000
0.1500
0.2000
0.2500
0.3000
0.3500
2011-03-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31
DPS
DPS Linear (DPS)
• 5 Nov 2015 – There are
concerns that the higher capex
– MYR2.0b guidance in 2016
versus MYR1.5b in 2015 - may
reduce PCHEM’s ability to pay
dividends
• Management shrugs this off
and states that the 50%
payout ratio will remain.
PCHEM has a net cash position
of MYR9.5b and strong
cashflow of MYR3-4b per year,
and is very comfortable in
delivering its dividend
projection.

39. Going Forward
 In the next 1-2 years, I think PCHEM earnings may be inconsistent
because ASPs are weakening in tandem with the drop in global crude
oil prices as demand remains volatile due to the uncertainties
surrounding the broader economy
 I will continue to accumulate this counter for my family member.