SEVEN years after buying out Titan Chemicals Corp in Malaysia, South Korean conglomerate Lotte is bringing that asset back to the Malaysian market at a value six times more from then.
The Lotte group bought Titan Chemicals Corp for US$1.25bil in 2010, which based on the exchange rate then, amounted to an estimated RM3bil.
Post-listing of Lotte Chemical Titan Holding Bhd (Lotte Chemical), the company will have a market capitalisation of RM19.7bil, at the retail price of RM8 per initial public offering (IPO) share.
So how has Lotte Chemical grown during the years as a private entity?
For one, huge investments have been poured into the Malaysian operations to increase production capacity and the breath of chemical products.
With its parent company and controlling shareholder Lotte Chemical Corp (LCC) at the helm, Lotte Chemical has benefited from its operational expertise and industrial know-how.
Speaking at the prospectus launch on Friday, Lotte Chemical president and CEO Lee Dong Woo says Lotte Chemical’s recent investments in the Tanjung Langsat and Pasir Gudang plants have effectively made Lotte Chemical one of the LCC’s largest manufacturing concerns outside of South Korea.
“On the back of steady growing demand in the Southeast Asian region that supports the increase in capacity, Lotte Chemical is pursuing opportunistic investments to expand and diversify our product portfolio and optimise our existing operations.
“We also feel that our dominant position enhances our competitiveness vis-a-vis other producers in the region,” says Lee.
For example, since its delisting from the main market of Bursa Malaysia, Lotte Chemical has constructed a tertiary butyl alcohol (TBA) plant located in Pasir Gudang, Johor, for RM59.5mil in 2012, which commenced operations since 2013.
Essentially, Lotte Chemical produces petrochemicals polyolefins and olefins used in consumer and industrial products, which are sold domestically and via exports.
Later in 2016, Lotte Chemical bought into a US shale gas project to build downstream petrochemical plants there.
And now, Lotte Chemical’s plan to list via the issuance of new shares to raise RM5.9bil marks a new growth chapter in the group.
The bulk of the proceeds, RM4.9bil will be going to build a new petrochemical facility in Indonesia.
Monies will also be used to expand their Malaysian facilities.
This investment theme seems attractive to investors.
Lotte Chemical has successfully secured five cornerstone investors.
These are Permodalan Nasional Bhd (PNB), Maybank Asset Management Sdn Bhd, Maybank Islamic Asset Management Sdn Bhd, Eastspring Investments Bhd, and Great Eastern Life Assurance (Malaysia) Bhd, who have agreed to acquire around 136 million IPO shares, representing 18.4% of the base offering of the IPO.
According to Lotte Chemical’s prospectus, the company is valuing itself at historical price earnings (PE) multiple of 14.2 times earnings, which falls just above the range of PE multiples of selected comparable companies, that trade at between 4.7 times to 13.7 times.
“Our enterprise value over earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) multiple of 5.19 times falls with the range of comparable companies of between 2.88 and 12.91 times,” it said.
The prospectus stated that while Lotte Chemical’s PE ratio is higher than the comparable companies’ average figure, its EV/Ebitda is lower than the group’s average of 6.49 times.
In Malaysia, Lotte Chemical’s operating profits jumped from a mere RM58mil in 2014 to RM1.7bil on the back of a revenue of RM8.1bil for the financial year ended December 31, 2016.
Its price-to-book ratio stands at 1.44 times and is benchmarked against domestic and regional players in Southeast Asia.
On Lotte Chemical’s choice of listing in Malaysia, an investment banker explains that the move was only natural, considering its main operations are in Malaysia.
The banker adds that the list of Malaysian cornerstone investors further validates company’s decision to list in Malaysia.
On top of that, bulk of Lotte Chemical’s businesses are derived from the Malaysian and Indonesian markets, which contribute some 70% to the company’s revenue.
Lotte Chemical chief financial officer David Tan Gek Seng says the company decided to raise funds from the equity market in order to maintain its healthy balance sheet.
“Lotte Chemical has zero gearing and cash amounting to RM400mil, as of March 2017.
“We would like to maintain that kind of strong balance sheet moving forward.
“Hence, listing on the Malaysian market was a better option as compared to raising funds through bonds or private equity,” says Tan.
With the total RM5.9bil raised from the IPO, this makes Lotte Chemical the largest IPO since Felda Global Ventures Holdings Bhd and IHH Healthcare Bhd back in 2012, with funds raised amounting to RM10bil and RM6bil, respectively.
Proceeds from the IPO will be utilised over the next 12 to 36 months to finance the company’s expansion in Malaysia and Indonesia, with 83.2% of gross proceeds to partially fund the development of an RM15.5bil integrated petrochemical facility in Indonesia to increase its ethylene production by up to 1,000 kilotonne per annum (KTA).
Meanwhile, 10.5% of the proceeds will go to the construction of a new polypropylene plant in Johor to increase production by 200 KTA, and 3.7% of the proceeds will be used to upgrade the group’s existing naphtha cracker to increase production capacity.
Lotte Chemical is expanding its existing operations in Indonesia as the market is a large net importer of polyolefins, which will contribute significantly to the company, moving forward.
Lotte Chemical corporate planning senior vice president Philip Kong says the company has three unintegrated polyethylene plants in Indonesia with a total capacity of 450 KTA.
In Malaysia, Lotte Chemical owns two naptha cracker plants with a combined capacity of 700 KTA.
“The plan is to build a naptha cracker plant in Indonesia with a 1,000,000 KTA capacity, that will more than double our revenue.
“Going forward, LCC has clearly identified themselves to be the major player in North Asia and Lotte Chemical to be the major player in South-East Asia,” says Kong.
Lotte Chemical is currently wholly-owned by LCC, but will see LCC’s stake reduce to 70% post-listing.
Kong explains that the current number one petrochemical player in Southeast Asia is Siam Cement Public Co Ltd, followed by PTT Global Chemical Public Co Ltd and Exxon Mobil Corp.
“With our expansion plans going forward and the key one being the integrated petrochemical plant in Indonesia, we will then overtake Siam Cement as the number one player in South-East Asia, capacity-wise,” says Kong.
According to Lotte Chemical’s press release, independent market researcher Nexant Asia Ltd forecasts total polyolefins consumption in South-East Asia to grow at a compound annual growth rate of 4.4% over 2017 to 2027, with demand growth highest in developing regions, which provide significant consumption growth potential for material substitution.
Lotte Chemical is scheduled to be listed on the main market of Bursa Securities on July 11, 2017.
Maybank Investment Bank Bhd is the principal adviser, joint global coordinator, joint bookrunner, managing underwriter and joint underwriter for Lotte Chemical’s listing exercise.