About PChem ...

What’s NEXT! … dated March 2011

It was born after 22 companies producing a wide range of petrochemical products were brought into its stable. The consolidation gave PCG control over the whole value chain and resulted in cost saving, estimated at rm130 million a year, due to economies of scale.

And now that PCG controls the value chain, it intends to move further downstream where the big money is. It would like to see PCG’s product portfolio having more speciality chemicals because they give better returns.

Expanding its product portfolio and moving into more downstream specialized roducts are part of PCG’s mid term strategy. Currently, the contribution of speciality chemicals to PCG’s revenue is insignificant and it is believed that the strategy will enable the group to benefit from enhanced margins.

Additionally, going further downstream is a less competitive market as products are more speciliased.

PCG will need to invest in new plants and partnerships hat have the expertise to widen its product range. But funding is no concern for cash rich PCG.

The group’s cash coffers ballooned to rm7.5 billion as at end Dec 2010, after its listing in Nov 2010 raised a whopping rm3.6 billion for expansion and acquisitions over the next five years. Meanwhile, its total borrowings were only rm3.8 billion. This gave the group a lot of headway to gear up.

Given its link to Petronas, it has always been assumed that PCG would be pretty much taken care of. This includes PCG’s supply of feedstock is sourced from Petronas on long term contracts, particularly its gas, which accounts for 80% of total feedstock.

Under its feedstock policy with Petronas, PCG obtains its main feedstock, ethane via two contracts. One is on fixed price basis while the other rises by 2% annually. The price of its other gas feedstock is based on market rates.

It is interesting to note that ethane, as a feedstock, is not an exportable product. Therefore, it makes sense for PCG to get its supply from its parent company. Petronas cannot sell it to anyone else and PCS cannot buy it from anyone else.

Because PCG is a gas based producer, it is in a better position to ride the cycles than naphtha based producers.

The other 20% of its feedstock is heavy naphtha, which PCG buys at market rates close to those of Middle East producers.

PCG is one of the two gas based petrochemical players in the region. Thailand based PTT Chemical PCL is the other. The advantage of being a gas based player us that PCG is not as exposed to volatility in crude oil price as naphtha based plants. Naphtha is derived from crude oil. This is one of PCG’s good selling point.

The petrochemical industry is very much a cyclical one as demand its tied to economic growth. But while industry wide earnings took a hit the last three years (2008-2010) due to softer demand, PCG’s diversified producer portfolio helped cushion the volatility.

The group made a net profit of rm874 million for 3QFY2010, more than double its net profit of rm337 million in 3QFY2009. Fir the cumulative nine months ended Dec 31, 2010, net profit grew 57% to rm2.1 billion from rm1.3 billion in the previous corresponding period.

In the longer term, PCG intends to expand its current capacity of about 11 million tones.

Petronas is also looking at an integrated refinery and petrochemical complex which will add steeply to capacity as well.

With rm7.6 billion cash in hand, rm3.8 billion net cash and a debt to equity ratio of only 0.2 times at end 3QFY2011, PCG is likely to pay a special dividend of 63 sen given its limited capex plan.