PTTGC – 2Q23F: weak performance expected

Bearish sentiment toward the petrochemical industry has sent PTTGC’s share price down 22% YTD vs. the SET’s -9% and SETPETRO’s -18%. We expect a poor showing in 2Q23F with net loss of >Bt5bn as two drivers in 1Q23, oil refinery and aromatics, slipped QoQ with much weaker olefins and polymer businesses than historical average on low gas supply from PTT, and the chemical segment is pressured by the global economic slowdown. We see more downside risk to our 2023F and TP of Bt52, though we see the current share as largely reflecting this earnings weakness. Maintain Neutral.

2Q23F in the red. 2Q23F (Aug. 9) was weak as key drivers in 1Q23 (oil refinery and aromatics) weakened QoQ and other businesses were feeble. We estimate a net loss of Bt5.3bn (Bt1.17/share), down from a slim profit of Bt82mn in 1Q23 due to lower core earnings and FX loss. Core operating earnings will also plunge to a Bt3.1bn loss in 2Q23 from a loss of Bt240mn in 1Q23 due to lower oil refining market GRM and weaker aromatics product-to-feed margin, eroded by lower byproduct margin (condensate residue, naphtha and LPG). Olefins and polymer stayed weak in 2Q23 as the proportion of ethane feedstock (36% of total in 1Q23) remained lower than normal (>50%) due to gas production delays from Block G1/61 (Erawan). Higher production from Erawan in late June will help from 3Q23 onwards.

Subdued contribution from intermediates and performance chemicals. Sluggish demand for durable goods and slow construction activities continued to depress demand for performance chemicals, mainly allnex (coating resins and additives). We expect flat contribution from allnex in 2Q23 QoQ as sales volume recovery was slowed by bearish market sentiment in Europe. Note that PTTGC initially expected allnex to contribute adjusted EBITDA at >EUR400mn p.a. but Europe’s economic slowdown in 2022-1H23 hurt sales volume of this high-value business, though the adjusted EBITDA margin was maintained. We expect allnex’s adjusted EBITDA 1H23 at >EUR100mn. Performance of Vencorex (isocyanates used in coatings and adhesives polyurethanes) was mute on slower European demand.

Challenging 2H23 ahead. Although we hope olefins and polymers will drive 2H23 on more gas supply from PTT, this is uncertain. PTTGC expects the proportion of ethane feedstock in 2H23 to rise to 37-40% from 36% in 1H23 but the problem lies in slower demand and a supply imbalance in the petrochemical market. Refinery market GRM will recover to US$5-6/bbl in 2H23 due to better diesel and jet fuel cracker spread from seasonal demand but remains unexciting against >US$10/bbl in 1Q23. We still see downside risk to our earnings forecast for 2023F unless more stimulus from China can boost market sentiment in 2H23, which is iffy.

Key risk factors: 1) Volatile crude oil price and product spread for oil refining and petrochemicals, 2) higher feedstock cost due to lower gas feedstock, 3) asset impairment, 4) regulatory change on GHG emissions and single-use plastics (<3% of capacity), and 5) change in government policy in allocating domestic gas supply to petrochemical business.