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Chemical Company of Malaysia (CCM, 2879) - Not A Laggard Of The Glove Rally

We met up with the management of CCM last week and we view that the global uptrend in glove demand would only be marginally positive for its polymer division as it as a very competitive market with low barriers to entry. Hence, CCM are price takers and have only experienced a c.3-4% increase in its ASP for polymers QoQ relative to glove manufacturers which saw its ASP increasing by c.25-30%. We view that the high demand for its glove related businesses will not be enough to offset weak caustic soda ASP, which constitutes c.40% of group revenue. We expect 2QFY20 results to remain weak, with sequential improvements happening in 2HFY20. We maintain our HOLD rating on CCM with a TP of RM1.38 based on 12x FY20 EPS.

Here are some of the key takeaways from our meeting:

Caustic soda. Caustic soda ASP remains weak as global demand is still affected by the Coronavirus pandemic. We expect 2QFY20’s caustic soda contribution to come in below 1QFY20 due to weaker QoQ ASP (c.-2% QoQ) and lower sales volume as many of its clients have lowered its orders due to MCO. However, we expect CCM’s caustic soda demand to pick up in 2HFY20 due to the recovery of economic activity in Malaysia post-MCO while caustic soda ASP is expected to remain weak for the remainder of the year as its price has a very high correlation with global GDP growth.

Calcium Nitrate (CN) and Chlorine (CL). CN demand has increased by 50% from the beginning of the year from the uptick in rubber glove demand and is expected to reach full capacity by year end while CL demand has also gone up significantly. CN and CL prices have increased by c.5-10% QoQ and c.6-8% respectively. However CL and CN only contributes c.6% of group revenue.

Polymers. Sales volumes for its polymer division is expected to be unchanged despite the increased demand for polymers as the aforesaid division was already operating at full capacity in 1QFY20. Furthermore, the polymer division has only seen a minimal increase in its ASP of c.3-4% and this is because CCM are price takers as the barriers to entry for the aforementioned division is low and its products are easily substitutable

Outlook. We believe that the outlook for CCM remains muted at this juncture despite the better prospects for its chemicals/polymers supplied to glove companies. 23% of revenue is currently attributed to gloves and it is still more sensitive to the ASP and sales volume for its Caustic soda division, whose outlook is subdued at this point in time due to the global economic slowdown from coronavirus. We view that the improvement in revenue and profit from gloves would not be able to offset the weaknesses coming from the Caustic soda division.

Forecast. We maintain our forecast for FY20-22F.We expect 2QFY20 to be weaker on a YoY and QoQ basis and we foresee stronger earnings in 2HFY20, particularly driven by improved sales volume from its caustic soda division..

Maintain HOLD TP: RM1.38. We maintain our HOLD call at TP of RM1.38, based on 12x FY20 EPS. We believe that CCM is currently fairly valued and the outlook for its caustic soda division would need to improve to warrant a re-rating for our call.

Source: Hong Leong Investment Bank Research - 6 Aug 2020


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