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Lotte Chemical under scrutiny of SC, Bursa
Lim Cian Yai 
Some market observers are not buying Lee’s explanation
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The Securities Commission (SC) and Bursa Malaysia are scrutinising developments in recently listed Lotte Chemical Titan Holding Bhd, whose share price plunged after posting a sharp drop in profit, to determine if it had made the necessary timely disclosures.

The regulators said they are “closely monitoring developments in the company”, including reviewing whether appropriate and timely disclosures have been made to enable investors to make informed decisions.

“We will ensure a fair and orderly market and that all securities laws and listing rules are complied with,” SC and Bursa Malaysia said in response to queries from FocusM.

The petrochemical producer’s initial public offering (IPO) was heralded as the most anticipated listing of the year, but turned out to be a damp squib instead.

Just when the market was recovering from its IPO price revision, Lotte Chemical shook it on July 31 with a 72% plunge in net profit to RM113.62 mil for Q2 ended June 30. Revenue fell 11.2% year-on-year to RM1.77 bil from RM2 bil.

The company blamed high inventory cost carried forward from a scheduled plant turnaround in February, and an unexpected water disruption in Johor three months ago.

Clearly, the market did not anticipate this, sending Lotte Chemical’s share price spiralling down in the two trading days after the announcement, to as low as RM4.14 from its IPO price of RM6.50. It staged a rebound on the third day (Aug 2) to close at RM4.42. That still meant the shares had fallen 32% in the two-and-a-half weeks since its debut on the bourse.

Lotte Chemical president, executive director and CEO Lee Dong Woo clarified in a media report that the company “did not know the water disruption would have such an impact” on its bottom line. He said it gained knowledge of the full impact only in mid-July, after the company was listed.

To be fair, the company had disclosed the shutdown of its Johor plants in its prospectus. It said it suffered a shutdown of between two and 11 days in April caused by water supply interruption.

However, some market observers found Lee’s explanation unconvincing. One pointed out that the fall in production of 75,000 metric tonnes was marginal compared to the overall production volume.

For 2016, Lotte Chemical produced 2.7 million metric tonnes of olefins, polyolefins, crackers and derivatives. The decrease was 2.77% of its production volume for the year.

“As it is, I can’t comprehend in what way the 3% fall in production volume translated into a sharp 72% drop in profit,” an observer says.

Of the 11 plants in Johor, three produce polyethylene, two polypropylene, two naphtha cracker, and one each for butadiene, aromatic, metathesis and tertiary butyl alcohol.

Some investors questioned if the management knew about the financial impact of the water disruption prior to listing, thus leading to a revision of the IPO price. The listing was supposed to be the biggest IPO since Astro Malaysia Holdings Bhd made its debut in 2012, raising RM4.55 bil.

Lotte Chemical, a unit of Lotte Chemical Corp of South Korea, cut its offer price to RM6.50 from RM8 each. The IPO eventually raised RM3.77 bil with 580 million shares. The issue size and proceeds were far lower than the 684.7 million shares and RM5.92 bil expected previously.

The company has also bought back 34.8 million shares for RM226.25 mil from 4,125 shareholders. A banker believes competition among banks was to be partially blamed for the twist of events.

“I think banks were initially trying to outdo one another by promising the client they can sell the stock at sky-high valuations. Then out of the blue, management painted a different picture and earnings plummeted by over 70%,” he says.

Some analysts and bankers expect Lotte Chemical’s share price to hover between RM4 and RM5.

This article first appeared in Focus Malaysia Issue 244.