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 2015 (31 December 2015)
14 March 2016
L. C. Chong (http://lcchong.wordpress.com and https://goo.gl/jjkq4P)

2. DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided
here is to be interpreted as a suggestion to buy or sell securities.
You and I may have different opinion, but I respect your opinion.
All figures in MYR and in '000s, except per share data
2

3. DECLARATION OF INTEREST
• At the time of writing, my family member owned shares of PCHEM.

4. SCOPE
• Figures and ratios are based on the figures reported in Annual Report or the latest
Q4 Quarterly Report (QR)
• Unless there is a need, this analysis will not include financial figures reported in Q1,
Q2 and Q3
• I will provide QR result highlights in my blog
• Valuation is not covered in this analysis
• I will provide valuation in my blog.

5. CHANGES
• 13 Feb 2015 – FY15 results
• 4 Nov 2015 – First write up of PCHEM in PowerPoint format.

6. REFERENCES
• Q4 2015 Analyst Briefing
• Petronas Gas Plant Visit 2015

7. BUSINESS PROFILE

8. 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.

9. 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.

10. BUSINESS PROFILE (CONT.)
• Comprises 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.

11. BUSINESS PROFILE (CONT.)
Olefins, Glycols &
Derivatives
Polymers Aromatics and MTBE
Methanol Ammonia and
Fertilisers
Product Diversity

12. 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

13. 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.

14. OWNERSHIP SUMMARY
CORPORATIONS (PRIVATE)
64%
INSTITUTIONS
29%
PUBLIC AND OTHER
7%
STATE OWNED SHARES
0.51%
INDIVIDUALS/INSIDERS
0.00%
Position Date: 25 Feb 2016

15. TOP 5 SHAREHOLDERS
Holder Common Stock Held As At Date
% of Total Shares
Outstanding
PETROLIAM NASIONAL BERHAD 5,148,000,000 10-Feb-2015 64.4%
EMPLOYEES PROVIDENT FUND OF MALAYSIA 809,959,400 25-Feb-2016 10.1%
PERMODALAN NASIONAL BERHAD 524,182,800 10-Feb-2015 6.6%
KUMPULAN WANG PERSARAAN 239,449,800 10-Feb-2015 3.0%
LEMBAGA TABUNG HAJI 106,419,400 10-Feb-2015 1.3%
Position Date: 25 Feb 2016

16. OWNERSHIP ANALYSIS
• 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.

17. ECONOMIC MOATS

18. ECONOMIC MOATS
• Cost Advantage (Narrow)
• Using Moody’s benchmark, PCHEM’s EBITDA margin is rated as A (below Aaa and Aa).
Good, but not great.
42.1%
34.6%
37.0%
33.0%
37.8%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
EBITDA Margin %

19. ECONOMIC MOATS (CONT.)
• Switching Costs (Wide)
• 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.

20. ECONOMIC MOATS (CONT.)
• Network Effect (Wide)
• 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 (Wide)
• Strong political linked
• Efficient Scale (Wide)
• Dominant domestic player
• Support from Petronas.

21. ECONOMIC MOATS (CONT.)
19.5%
21.8%
20.7%
14.8% 14.3%
27.5%
28.9%
21.5%
12.7%
8.6%
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
ROIC and CROIC
Avg. Capex Avg. Invested Capital ROIC % CROIC %

22. ECONOMIC MOATS (CONT.)
• ROIC of PCHEM declined drastically from 21.8% (FY12) to 14.3% (FY15). This is due
to couple of reasons:
• Invested capital in new assets (plants) increased 7% (CAGR) yearly from 13,555 mln
(FY11) to 19,047 mln (FY15)
• Slow down in revenue due to maintenance of plants and unfavorable selling price of
products.

23. ECONOMIC MOATS (CONT.)
• CROIC of PCHEM also declined from 28.9% to 8.6% because of the following
reasons:
• Invested capital in new assets (plants) increased 7% (CAGR) yearly from 13,555 mln
(FY11) to 19,047 mln (FY15)
• Net capital expenditure increased 46% (CAGR) from 424 mln (FY11) to 2,855 mln (FY15).

24. ECONOMIC MOATS (CONT.)
• 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).

25. KEY OPERATING DRIVERS

26. KEY OPERATING DRIVERS
Source: Q4 2015 Analyst Briefing
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.

27. KEY OPERATING DRIVERS (CONT.)
• 85% plant utilization – 2015
record operational performance
since listing
• 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
• However, this utilisation rate will
exclude the SAMUR fertiliser
plant that is scheduled to be
commissioned in 2Q16.
Source: Q4 2015 Analyst Briefing

28. KEY OPERATING DRIVERS (CONT.)
Source: Maybank, 10 Mar 2016
• PCHEM’s YTD ASP of
MYR2,790/tonne is 5.2% higher YoY.
This is largely related to the weaker
MYR/USD as petrochemical products
are sold in USD
• Things were exceptionally
challenging in the early part of 2015
as customers have gone on a
destocking of their inventories and
purchased petrochemical on a spot
consignment basis.
• Petrochemical producers have also
carried zero inventories in order to
de-risk their books. Things however
recovered strongly after the CNY.

29. FINANCIAL PERFORMANCE

30. SCALE
42.1%
34.6%
37.0%
33.0%
37.8%
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
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
EBITDA Revenue EBITDA Margin %

31. SCALE (CONT.)
• Using Moody’s benchmark, PCHEM’s EBITDA margin is rated as A (below Aaa and
Aa)
• EBITDA Margin increased from 33% (FY14) to 37.8% (FY15) due to
• Lower cost of material – Decreased -11.4% YoY (FY15: 8,989 mln; FY14: 10,150 mln)
• Reduction of operating expenses (FY15: 391 mln; FY14: 471 mln).

32. SCALE (CONT.)
8,804 11,958 11,222 10,510 9,507
3,054 4,598 3,941 4,046 4,187
0%
20%
40%
60%
80%
100%
31/12/2011 31/12/2012 31/12/2013 12/31/2014 12/31/2015
Revenue by Operating Segment
Olefins and Derivatives Fertilisers and Methanol Others

33. 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 2015-12-31
Net Capex.
Net Capex.
Net capital expenditure increased 46% (CAGR) from 424
mln (FY11) to 2,855 mln (FY15).

34. 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.
Awaiting for Annual Report 2015 for more details

35. LIQUIDITY
16
15
1
-6
-9
0
20
40
60
80
100
120
-10
-5
0
5
10
15
20
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
Cash Conversion Cycle
Days In Inventory Days In Receivables Days Payable Outstanding Cash Conversion Cycle

36. LIQUIDITY (CONT.)
• 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.

37. 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
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
FREE CASH FLOW TO FIRM

38. LIQUIDITY (CONT.)
• As for FCF, PCHEM’s FCF declined since FY12 because:
• Net capital expenditure increased 46% (CAGR) from 424 mln (FY11) to 2,855 mln (FY15).

39. GROWTH DRIVERS

40. 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).

41. GROWTH DRIVERS (CONT.)
PCHEM’s Participation in RAPID Petrochemical Projects

42. 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

43. 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%

44. 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.

45. ISSUES/RISKS/CHALLENGES

46. ISSUES/RISKS/CHALLENGES
• 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

47. ISSUES/RISKS/CHALLENGES (CONT.)
Olefins & Derivatives
• Declining ethylene prices driven by
weak upstream values
• Softening polymer prices on the back
of ample supply amidst slow demand
• Stabilising MEG prices supported by
limited supply availability
• Declining aromatics prices in view of
weaker downstream markets
Fertilisers & Methanol
• Softening urea prices with lackluster
demand
• Declining ammonia prices due to weak
demand for industrial application
• Declining methanol prices as supply
outstrips demand
Source: Q4 2015 Analyst Briefing

48. ISSUES/RISKS/CHALLENGES (CONT.)
Olefins & Derivatives Fertilisers & Methanol
Source: Q4 2015 Analyst Briefing

49. SEASONAL OR CYCLICAL FACTORS
• 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.

50. SEASONAL OR CYCLICAL FACTORS
(CONT.)
• 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.

51. GOING FORWARD

52. SHAREHOLDER RETURN
Time
Frame
Date Bought at Original
Value
Dividend
Received
Unrealized
Gain/Loss
Current
Return
CAGR %
3-Y 14 Mar
2013
6.37 6,370 680 380 7,430 5.3%
5-Y 14 Mar
2011
6.75 6,750 1,110 0 7,860 3.1%
Assumptions:
1. Commission paid is ignored in this simulation
2. The current price is 6.81 (as of 14 Mar 2016)
3. Unit purchased is 1,000.

53. SHAREHOLDER RETURN (CONT.)
0.0000
0.0500
0.1000
0.1500
0.2000
0.2500
2011-03-31 2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
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.

54. 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.