12 Jan 2021

Oil and Gas

Catching Downstream Strength
■ Maintain Overweight the Oil & Gas sector with top picks focused on down-midstream
companies namely Petronas Chemical (Buy, TP: RM8.72) and MISC (Buy, TP:
RM9.09).

■ Despite ongoing concerns of further lockdowns in multiple countries around the globe,
petrochemical product prices have defied general market expectations and continued
to break beyond US$1000/mt levels.

■ According to Argus, LDPE prices have recovered significantly since August 2020 as
overseas-origin (outside of ASEAN region) and rising freight rates due to container
Equity | Malaysia | Oil and Gas

shortages in Asia have propped up LDPE prices.

■ Demand for LDPE in the region remained robust due to sustained need for
Flashnote

packaging solutions amid increasing volume of express delivery services in the region
due to COVID-19 effect.

■ That aside, shifts to Ethylene-vinyl acetate (EVA) products due to firm demand
have encouraged LDPE/ EVA swing plants in Asia to increase mix of EVA
produced, subsequently leading to lower overall LDPE produced, indicating tight LDPE
supply in Asia.

■ To note, EVA products are the copolymer of ethylene and vinyl acetate while possessing
the properties of rubber or of plasticized polyvinyl chloride, which also implies that the
materials are good for operating under low temperature conditions and are tough.

■ One of the major applications of EVA includes biomedical engineering applications as

drug delivery device component (which might see sustained growth in demand as
COVID-19 vaccine distribution ramps up globally)

■ That aside, EVA is also used in photovoltaic module manufacturing (mainly for solar
panel lamination), which leads us to our view that EVA/LDPE swing plants are likely to
continue their focus on EVA production in 2021, which bodes well for LDPE prices as
well.

■ On the other hand, LLDPE, HDPE and propylene prices have recovered strongly since
August 2020 due to a confluence of several factors: -

(i) planned and unplanned outages in Japan namely Kawasaki plant owned by
Eneos with larger cracker shutdown in late 2020.

(ii) LG Chem’s unplanned cracker outage located in Yeosu in early November

2020 expected to restart by January 2021.

(iii) Eneos no. 1 fluid catalytic cracking (FCC) unit in Negishi might see delay in
its scheduled start-up following turnaround,d in contrast to earlier planned
operation restarts in Nov 2020 (according to ICIS)

(iv) Higher cost of product transportation from US capacities driven by low

production activity and increasing freight cost amid pandemic.

■ With multiple major countries still under targeted lockdowns amid resurgence of COVID-
19 virus cases, we reckon that overall petrochemical supply would remain tight at least
through 1H21 (particularly in 1Q21 leading up to Chinese New Year festive season in
February 2021 (pent up demand from China)).

■ Growth in China’s capacity in PE and PP is likely to be significant in 2021 but this does
not seem to affect the positive trajectory of product prices despite scheduled start-ups
by end 2020 (ref Exhibits 1 & 2) largely due transport constraints and US disruption.
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■ In the near term we are of the view that petrochemical prices would be sustained in
1H21 while 2H20 price outlook hinges on the recovery of overall global demand post
COVID impact as supply dynamics of the global petrochemical industry normalize.

■ Nevertheless, demand for global petrochemical products in 2H21 should still has the
possibility of rebounding more strongly than expected in view of further development
and distribution of COVID-19 vaccine, which could provide further lift to product prices
even in the face of higher Chinese additional capacities.

■ We prefer ethane-based petrochemical producers like Petronas Chemical for our

cyclical top pick over naphtha based Lotte Chemical Titan (Buy, TP: RM2.93) due to
higher operating leverage expected in FY21 on the back of strong YoY ASP.

■ While in the near term we concur that Lotte Chemical Titan will likely enjoy strong PE-
naphtha spreads of up to US$700/mt, we believe throughout 2021 cost pressures of
higher naphtha price trend (driven by positive bias in crude, in our view) would leading
to weaker product spreads as petrochemical prices’ positive trajectory in 2021 is likely
to flatten (compared to 2H20) due to capacity additions in China.

Exhibit 1: PE plant expansions in China were significant at end 2020 but product prices continue to recover

Source: Argus

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Exhibit 2: PP plant expansion in China were significant at end 2020 but product prices continue to recover

Source: Argus

Exhibit 3: Polyolefin HDPE and LLDPE prices recovered significantly

US$/mt

2000

1800

1600

1400

1200

1000

800

600
12/1/2007 12/1/2008 12/1/2009 12/1/2010 12/1/2011 12/1/2012 12/1/2013 12/1/2014 12/1/2015 12/1/2016 12/1/2017 12/1/2018 12/1/2019 12/1/2020

HDPE MERSETH2 Index LLDPE MERSELL2 Index

Source: Bloomberg

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 700
900
1100
1300
1500
1700
1900

US$/MT

Source: Bloomberg
Source: Bloomberg

800
1000
1200
1400
1600
1800
2000
Oil and Gas

US$/MT

1/12/2007 14/1/2011
7/12/2007

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14/7/2011
1/12/2008

7/12/2008
14/1/2012
1/12/2009 14/7/2012
7/12/2009
14/1/2013
1/12/2010

7/12/2010 14/7/2013
1/12/2011 14/1/2014
7/12/2011
14/7/2014
1/12/2012

7/12/2012 14/1/2015
1/12/2013 14/7/2015
Exhibit 4: LDPE prices trajectory exhibited sharper recovery trend

LDPE

7/12/2013
14/1/2016
1/12/2014

Polypropylene
7/12/2014 14/7/2016
1/12/2015
14/1/2017
7/12/2015

1/12/2016
14/7/2017
7/12/2016 14/1/2018
1/12/2017
14/7/2018
7/12/2017

1/12/2018 14/1/2019
7/12/2018 14/7/2019
1/12/2019
14/1/2020
7/12/2019

1/12/2020 14/7/2020
Exhibit 5: Polypropylene prices show significant recovery trend due to sustained demand and lower-than-expected supply

7/12/2020

4
Oil and Gas

Exhibit 6: Major Asian EVA/LDPE swing plants

Source: ICIS

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Oil and Gas

Disclosure Appendix

Recommendation structure
Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price and only reflects capital
appreciation. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%.

Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be
interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months.

Market or sector view: This view is the responsibility of the strategy team and a relative call on the performance of the market/sector relative to the region. Overweight/Underweight implies
upside/downside of 10% or more and Neutral implies less than 10% upside/downside.

Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this
change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not
fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value.

Disclaimer
This report has been prepared solely for the information of clients of KAF Group of companies. It is meant for private circulation only, and shall not be reproduced, distributed or published either
in part or otherwise without the prior written consent of KAF Equities Sdn Bhd.

The information and opinions contained in this report have been compiled and arrived at based on information obtained from sources believed to be reliable and made in good faith. Such
information has not been independently verified and no guarantee, representation or warranty, express or implied, is made by KAF Equities Sdn Bhd as to the accuracy, completeness or
correctness of such information and opinion.

Any recommendations referred to herein may involve significant risk and may not be suitable for all investors, who are expected to make their own investment decisions at their own risk.
Descriptions of any company or companies or their securities are not intended to be complete and this report is not, and should not, be construed as an offer, or a solicitation of an offer, to buy
or sell any securities or any other financial instruments. KAF Equities Sdn Bhd, their Directors, Representatives or Officers may have positions or an interest in any of the securities or any other
financial instruments mentioned in this report. All opinions are solely of the author, and subject to change without notice.

Dato' Ahmad Bin Kadis

Managing Director
KAF Equities Sdn Bhd (Reg No. 198501002182)

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