Chandra Asri Petrochemical Company background (June 2011)

Chandra Asri Petrochemical (TPIA) is an integrated petrochemical company as a result from a vertical merger of two affiliated petrochemical companies, PT. Chandra Asri and Tri Polyta, which are subsidiaries of Barito Pacific. The merger was effective on 1 January 2011. Embodied with its strong position of possessing the only naptha cracker in Indonesia, TPIA is simply the largest integrated olefins and polyolefins producer in Indonesia.

This puts TPIA in a dominant position as the leader in the petrochemical industry with 55% market supply share of ethylene, 40% for polyethylene and is the only producer of styrene monomer in Indonesia. The current ownership structure is as follow: Barito Pacific (66.4%), Apleton Investment (22.9%) and Marigold Resources (5.5%) while the rest is Public (5.3%).

Merge to achieve further downstream integration. The merger would bring several benefits to TPIA such as 1) Further down-stream integration to the polypropylene business which has a positive demand outlook going forward, 2) Integrated operations, hence would increase cost efficiencies such as bulk procurement savings, process integration and consolidated senior management, 3) expand customer base.

The merger puts TPIA in a significant operational scale with nameplate capacity of 2,560 kilo tonnes per annum (KTPA), as the polypropylene business contributes 19% of Indonesia’s olefins and polymers production capacity, enhancing its market share to 51%. It is worth noting, the polypropylene business has the largest sales contribution of 30% in 2010.

Industry outlook is positive
The petrochemical industry remains favorable in Indonesia on the back of: 1) Strong GDP growth forecast (more than 6%), 2) Increasing population, 3) Ongoing substitutions of basic materials such as wood, glass, metals, paper and card, 4) limited competition from domestic producers.

Stable and broad client base
TPIA has been able to establish long-term relationships with its key customers. From its top 10 customers out of 295, holding 37% of net sales, TPIA has been able to maintain 15 years relationship to 4 customers.

De-bottlenecking and capacity expansion projects
TPIA’s current polyethylene business produces roughly 320 KTPA and is expected to increase to 536 KTPA in 2014. This is supported by debottle-necking process in the Ethylene cracker which would increase production to 1000 KTPA from the current 600 KTPA.

Risks statement
a) The global petrochemical industry is cyclical. Historically, the international petrochemical markets have experienced alternating periods of limited supply, which have caused prices and profit margins to increase, followed by expansion of production capacity, which has resulted in oversupply and reduced prices and profit margins. b) Execution risk regarding the planned capacity expansion c) Its major shareholder Barito Pacific (BRPT IJ) had been associated with poor corporate governance practice in the past.

VALUATION
P/E method is currently not a suitable method for TPIA as the merger results in a bottom line loss. Before merger plan, TPIA (previously only focused on polypropylene) was able to make a net profit in 2010 amounting to USD43m. However, after merger, TPIA made a net loss of USD51m. Thus, we perceive P/BV would be the appropriate valuation for this company given the strong injection of asset.

Before merger, TPIA’s total asset was worth USD329m, whereas post-merger, its consolidated asset increased to USD1,486m. 2010 post-merger equity value is derived at USD795m. Taken account to the current shares outstanding of 3bn and share price of IDR4,475, we derive 2010 P/BV of 1.9x, which is a 30% discount compared to its peers.