Tuesday, 11 July 2017

"Lotte's Chemical Reaction"

A rather negative story about Lotte Chemical Titan from Bloomberg.

Some snippets:


Lotte Group seemed to be getting back to business after a rough year of court battles, family feuds and strained relations with China. 

Not so fast.


Believers in South Korea's fifth-largest conglomerate were hoping for a much-needed win with Lotte Chemical Titan Holding Bhd., the petrochemical unit that began trading in Malaysia Tuesday. Revival of the long-delayed 3.77 billion ringgit ($877 million) initial public offering, Malaysia's biggest since 2012, caps a period that has seen the group also take steps to settle family disputes and boost corporate debt sales.

But in the opposite of a typical IPO bump, shares of Lotte Chemical Titan fell below the opening price pretty much immediately -- and that was after the company cut the bottom of its price range to 6.50 ringgit a share, from 7.60 ringgit. By midday in Kuala Lumpur, the shares were down 2 percent.


Investors are right to bet against the newly listed company. The reason the Malaysian chemical maker cut its IPO price and trimmed the number of institutional shares has little to do with macro issues like equity demand and more to do with how Lotte missed a fundamental shift in the petrochemicals market.

While Lotte was hell-bent on getting the flotation done after taking the company private more than six years ago, it miscalculated in betting that the market would be willing to overlook the business's problems just because of a dearth of IPOs for large investors.


Back when Lotte took the unit private, the global economic recovery was driving strong demand for the raw materials used to make plastic and synthetic fibers used in everything from appliances to automobiles.

But as the years went on, Lotte Chemical did almost nothing to expand capacity -- unlike its global competitors -- despite having ample cash,  according to Smartkarma analyst Toh Zhen Zhou.


In the absence of investment, revenue growth slowed. Lower prices for inputs such as oil have helped prop up profit but as the sales outlook for products like cars weakens, demand for Lotte's offerings has waned. Meanwhile, raw material prices have declined and overcapacity in China is further pressuring the industry.


Is this really the best Bursa can do, as alleged by Bloomberg, the largest IPO since 2012?

A foreign company, again going through the "listed-delisted-relisted scenario", and with the above history?

Where are the homegrown Malaysian companies with increasing (international) revenues, juicy margins, high ROE, making unique products protected by IP (intellectual Property)?

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