Mainstream
Lotte Chemical needs to be more transparent
Lim Cian Yai 
Lee had claimed the company did not know the water disruption would have such a big impact
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Lotte Chemical Titan Holding Bhd has been hogging the limelight for the wrong reasons. Even before its listing in July, the integrated petrochemical producer drew unwanted attention when it had to reprice its initial public offering (IPO) and slash the IPO size by one-fifth mainly due to tepid investor response.

Then in September, the company suffered a fire incident at its plant in Johor. More recently on Oct 1, it received a stop-work order from the Department of Environment for part of its TE3 project at its integrated facility in Pasir Gudang, Johor.

Investors are concerned whether the commissioning of the TE3 project will be affected or delayed. Commercial operation is expected in the fourth quarter.

However, Lotte Chemical has assured that the stop-work order was not expected to have a material effect on its earnings, net assets and gearing for the financial year ending Dec 31.

But investors were not convinced, sending the counter 5% lower to close at RM4.98 on Oct 1. It has since rebounded to close at RM5.07 on Oct 4.

Naturally, the string of unfortunate events at Lotte Chemical has raised concerns about the company’s accountability and credibility. Some investors are worried the management might not be transparent enough to provide a clearer picture on these incidents.

“Trust takes years to build but only seconds to break. It will be tough for Lotte Chemical to regain credibility and trust,” a fund manager says.

The US$317.5 mil (RM1.34 bil) TE3 project is pivotal to Lotte Chemical considering it will enhance the cost competitiveness of its plants in Malaysia by increasing product yield. It will also be able to deliver a greater volume of ethylene as feedstock to its plants in Indonesia.

Before the stop-work order was issued, fire broke out at the same site as well. The fire razed part of the plant on Sept 20. It was put out in 18 minutes.

The company said no one was injured in the incident and that its other plants at the Pasir Gudang site were not affected.

Investors were also disappointed when Lotte Chemical posted poorer results in the second quarter ended June 30. Its net profit plunged to RM113.62 mil in the quarter from RM404.03 mil a year ago while revenue decreased by 11.2% to RM1.78 bil from RM2 bil.

Consequently, Lotte Chemical’s shares fell to RM4.14, their lowest since listing.

Lotte Chemical blamed water disruption in Johor in April as the cause of its weaker performance. Its president and CEO Lee Dong Woo said the company did not know the water disruption would have such an impact on its bottom line and only gained knowledge of the full impact in mid-July, after going public on July 11.

However, shareholders may not be convinced by Lee’s claims as they contrasted with what Lotte Chemical had disclosed in its prospectus. The company had stated then that one of its plants restarted operations within two days of its shutdown during the water disruption, followed by other plants on a staggered basis.

In total, the shutdown caused a decrease in production volume of some 75,000 metric tonnes. The decrease of 2.77% was considered marginal when compared to the company’s total production volume of 2.7 million tonnes last year.

Lotte Chemical has 11 plants in Johor – three polyethylene, two polypropylene, two naphtha cracker, and one plant each for butadiene, aromatic, metathesis and tertiary butyl alcohol. It is the fourth-largest producer of polyolefins in Southeast Asia.

CIMB Research believes the damage caused by the unplanned water disruption during the second quarter would not recur because the company plans to expand its water storage capacity from one day currently to two days by the end of fiscal 2018.

“The company has decided to start plant operations only when it is confident that there will be sufficient and consistent water supply,” it says.

 

Longer wait for investors

Shareholders who subscribed to Lotte Chemical’s IPO shares would probably have to wait longer to recoup their investment. The counter made a weak debut on July 11, closing lower than the IPO price at RM6.38.

Lotte Chemical’s IPO price was lowered to RM6.50 from RM8 initially due to lukewarm response. The size of the IPO was also reduced to 580 million shares from 740.5 million.

The counter has not moved past the RM6 mark since it announced a surprising slump in its Q2FY17 results on July 31. In the past two months, the stock has been trading at between RM4.50 and RM5.50. 

Analysts are generally positive on the outlook for the company. Those polled by Bloomberg had four buy calls, and one each for add, overweight and outperform.

CIMB Research is the most bullish, with a target price of RM8.50 as it believes Lotte Chemical’s net profit will recover in Q3 after a disappointing Q2.

It notes the average utilisation rate of Lotte Chemical’s plants is projected to reach 80% in Q3. “This is higher than the 70% in Q2 due to water shortage and 60% in Q1 due to the 53-day planned shutdown of a naphtha cracker,” it adds.



This article first appeared in Focus Malaysia Issue 253.