Chandra Asri Contagion Effect From Global Downturn

Another disappointing quarter for Chandra Asri Petrochemical (TPIA) as the company book a loss IDR13bn in 3Q11 stemmed from higher COGS (+6% q-o-q) which offsets the company’s flat top line growth (+2% q-o-q), translating to a 66% q-o-q slump on gross profit. Our previous expected bottom line earning for 2011 was way above the company’s actual 9M11 earnings which accounts for a poor 19% to FY11 forecast. Provided the industry’s sensitive nature to global downturn, poor earnings is visible to prolong in the short-term period.

The contagion effect
9M11 sales is much in line with our assumption accounting for 72% to our FY11 forecast. Unfortunately, narrowing cash margin from its ethylene business unit spreads a “contagion effect” to its further downstream businesses, resulting to a poor 9M11 net profit amounting to IDR13bn, accounting for only 19% to our FY11 forecast. The contagion effect has severly affected TPIA’s polyethylene cash margin due to its closest chain line derivative to ethylene. Furthermore, the less affected cash margin on TPIA’s propylene unit also brings a severe impact to TPIA’s bottom line earnings as it is the largest revenue contributor of the company’s whole portfolio.

Indulgent margin recovery
We expect overall margins to squeeze in 2012, before recovering in 2013. We predicted 2012 and 2013 top line to increase 4% y-o-y and 5% y-o-y respectively thanks to TPIA’s exposure to the consumer sector, however cost pressures in 2012 will negatively impact bottom line earnings to decline 2% y-o-y.

Signs of industry aid
TPIA is currently the only polypropylene supplier in Indonesia, however, its competitor Polytama will start production early 2012 after its halt since 2010. Despite rising domestic competition in the polypropylene business might be a sign of negativity, we believe this also shows a positive outlook for the industry given the domestic captive demand of polypropylene in nature.

Butadiene unit as a catalyst to ramp up earnings
Earnings pickup in 2013 has not accounted for its butadiene division yet which is expected to contribute in 1H13, thus this could be a potential catalyst to improve margins and earnings growth if the USD145m butadiene plant (100 ktpa) investment could be completed on target. This would be the 1st butadiene factory in Indonesia. Furthermore, talks regarding petrochemical companies including TPIA’s butadiene division requesting for tax holiday is an upside risk of improving margins going forward.