Global Chemicals:The polyester trade;EM stocks driven by DM capacity

PET capacity expansions likely to disrupt North American market.

    M&G Chemical (not listed) plans to start up its Corpus Christi plant in the US laterthis year, adding annual capacity of 1.1mn tons of PET and 1.3mn tons of PTA,representing increments of c25% and 28% respectively to the existing capacity base– in a market that grows demand at c2-3%. Growth of that scale has the potential tobe very negative for operating rates and for margins in North America. Potential startupdelays, import substitution and potential capacity closures are all likely to mitigateany negative impact from the plant, but it still represents a lot of volume and willimpact prices. We expect eventual import parity pricing, a potential downside ofcUSD50-60/ton from current levels.

    Impact on the emerging market (EM) listed polyester names.

    Of the listed EM names, Alpek and Indorama are among the largest global PET/PTAproducers with a very strong North American footprint, with M&G being the thirdlargest major player. IVL derived 46% of its 2016 EBITDA from North America, whileAlpek derived about 58% of its 2016 EBITDA from North American polyester. Wequantify the impact of a USD50/ton decline in PET spreads as being equal to 16% ofEBITDA for Alpek and 22% for IVL.

    IVL is more integrated, but the valuation spread is unwarranted.

    Despite broadly similar risks from new supply, Alpek and Indorama’s stockperformance has been widely divergent over the past year. Valuation spreads havewidened since 2Q16 and have not corrected – with IVL trading at 2.7 turns aboveAlpek’s 12M FWD EV/EBITDA. IVL is more integrated than Alpek in North America,but we see this valuation premium as unwarranted.

    We prefer Alpek (ALPEKA.MX, CP MXN22.17, Buy, TP MXN32) over IVL (IVL.BK,CP THB39, Reduce, TP THB29, up from THB26 on higher earnings estimates).

    With a similar North American footprint, we think that Alpek’s discount to both itshistorical average and to IVL, its closest global peer, fails to take into account severalpositive catalysts. Alpek delivers a higher 2018e FCF yield (5.8% vs 3.0%), ROIC(12.0% vs 8.2%) and dividend yield (5.2% vs 1.9%), all while offering both growth(through acquisitions) and partial integration.