Formulating the right chemistry for success

Cyclical uptrend and business diversification give industry a new lease on life

Last year was a bonanza for shareholders of several listed companies in the chemicals and plastics sector, thanks to a cyclical uptrend in the petrochemical industry and high oil prices.

Local petrochemical companies saw their product prices plunge sharply due to humble demand in 2000. In addition, many firms in the sector were bogged down in debt or corporate restructuring. The situation resulted in lacklustre performances in terms of total shareholder returns over the past three years.

During the period, the chemicals and plastics sector's average return was -3.28%. Half of the 12 companies generated losses for their shareholders _ Vinythai Plc, The Aromatics (Thailand) Plc, Thai Plastic and Chemicals Plc, Yong Thai, Thai Central Chemical Plc, and National Fertilizer Plc.

But over the past year, the sector's average return bounced back strongly to 77.34% and only two companies _ Yong Thai and National Fertilizer _ continued to post negative returns.

Last year, Thai petrochemical firms emerged from a price slump. Prices of petrochemical products, such as ethylene and propylene, which are used in plastic production, have risen since last year, after a year or two in the doldrums.

Industry analysts believe the petrochemical product prices bottomed out in 2001 and will rise continually to their projected peaks in 2004 and 2005.

Analysts say manufacturing growth in Asia, especially in China, and maintenance closures at Japanese and Korean petrochemical plants bolstered demand for Thai products. Rising oil prices were also another key factor.

A chemicals analyst at Merrill Lynch Phatra Securities said the petrochemicals business would sustain the uptrend this year, which would translate into higher returns to investors.

Vinythai, Thailand's second-largest polyvinyl chloride (PVC) manufacturer, is the best performer in terms of total shareholder return, at a whopping 209.29% on a one-year basis. But the company, with a market capitalisation of 8.71 billion baht, provided a return of -6.74% to investors for a three-year investment.

A company executive said that Vinythai recorded sales of about six billion baht last year, compared with 5.6 billion in the previous year, largely driven by rising PVC sales volume and prices. In addition, the company's caustic soda sales volume rose significantly despite some price declines. Overall, the company's margin widened considerably by more than 30% last year, as construction and product prices began to gain ground. He projected the company's revenue to grow by at least 6% this year.

Trailing Vinythai was Univentures Plc (UV), capitalised at the 705 million baht. The manufacturer and distributor of zinc oxide returned 202.75% last year, largely due to its diversification into the rebounding property sector.

The company entered a joint venture with Sansiri Plc and LPN Development to form Plus Property Partners Co to buy debt-ridden property projects worth 1.4 billion baht for development.

Ornsuedi Jearaditharporn, managing director, said the company's stock had low liquidity, with only 35.5 million shares floated on the stock market.

To expand the company's market capitalisation, the company raised its registered capital to 931 million baht from 354 million baht last year and had a plan to increase registered capital each year over the next three years.

She said the zinc oxide business was expected to contribute 40% of total revenue this year, down from 80% last year. The balance would be offset by gains from more lucrative projects.

``We always fine-tune our strategy the way a financial investor does so that our shareholders could enjoy capital gain in addition to dividend,'' she said.

Meanwhile, an executive of National Petrochemical Plc (NPC), which gave shareholders a 54.23% return last year, said the high return was attributed to higher prices of the company's products, especially ethylene, for which the price rose to US$600 a tonne from $450 a year earlier.

In addition, the company made investments in other businesses that offered more consistent revenue than the petrochemical business, particularly the power business, which accounted for 12% of the firm's total revenue of 12.86 billion baht last year.

But business was not so brisk for Yong Thai, manufacturer of sulphur acid and zirconium silicate. The company encountered hardships last year due to an oversupply of sulphuric acid and the dumping of imported zirconium silicate as a result of a tax cut to 1%. The tough market conditions resulted in a -38.10% return for its stock.

_ Busrin Treerapongpichit

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