Reasons investing in Titan

I start accumulating the share of Titan Chemical since early 2007. The average cost per share is about RM1.60. In this article, I will list down the reasons I decided to invest in this company.

1. Simple (Single) Business

The main business of Titan Chemical is production of polyethylene (PE) and polypropylene (PP). These products are what we generally call 'plastics'. Basically, it takes the raw materials e.g. naphtha and natural gas, breaks them into small unit of monomer, then combine those monomer become polymer substance.

During its expansion, Titan Chemical always stick to its core business. Last year, Titan acquired an Indonesian company named PT. Petrokimia Nusantara Interindo, which is then renamed to PT. TITAN Petrokimia Nusantara. PT. Petrokimia was the largest PE producer in Indonesia.

2. Leader in polyolefins industry

When Titan start its operation around 1990, its was the pioneer in petrochemical industry of Malaysia. Then it became the largest polyolefins manufacturer in our country. In recent years, Titan has gain about 50% share of our domestic PE and PP market.

Its newly acquired subsidiary, PT TITAN now holds about 20% of the domestic PE market share in Indonesia. After the acquisition of this subsidiary in 2006, Titan has now become the largest polyolefins producer in South East Asia (in terms of production capacity). With its economical scale, Titan can keep a low cost without compromise to quality.

3. Good Management Team

The founder of Titan, Datuk T.T. Chao, a Taiwanese, is a pioneer in the global petrochemical industry. He has built several successful business across continents of Asia and America in his 50-years entrepreneur-life. Let's have a look at his 'resume':

• In the mid-1950s, Chao was a co-founder of Taiwan's first polyvinyl chloride (PVC) business.
• In 1960's, he established China General Plastics Group, which included a number of the premier publicly-held petrochemical and plastics manufacturers in Asia.
• in 1980's, he entered the North American petrochemical industry with the acquisition of a polyethylene plant in Sulphur, Louisiana, and the creation of Westlake Polymers Corporation. (now listed on New York Stock Exchange)
• in late 1980s, he founded the Titan Group in Malaysia by building the country's first and largest integrated petrochemical complex in the state of Johor.
• in 1990's, he founded a joint-venture company consisting of a PVC resin plant and downstream calendering plant near Suzhou - Suzhou Huasu Plastics CO., Ltd.(SHPC)

Due to his outstanding contributions to the petrochemical community, he received the Petrochemical Heritage Award from the Chemical Heritage Foundation in 2005.
(press released: http://www.chemheritage.org/press/pr2005/pr_05_jan_17.htm)

Today, Titan Group is led by Mr. James Y. Chao (son of TT Chao). He has more than 30 years experience in petrochemical industry, and has assisted Datuk TT Chao in the founding of Westlake Goup, Titan Group and SHPC. Besides acting as the executive chairman in Titan, he is also the chairman of Westlake Group and Suzhou Huasu Plastics Corp.

Titan's former managing director, Mr. Donald Marion Condon, was named the American Express-Business Times "Malaysia CEO of the year" in 2005. He's re-designated as a director of Titan last year. Titan's present MD (appointed last year), Mr. Thomas Patrick Grehl also has 25-years experience in chemicals industry.

4. Profitability & Growing Potential

Despite the escalating oil price since 2004, Titan's profit keep growing during the same period. The raw material of polyolefins (naphtha) is a refined product from crude oil. Thus, the price of naphtha normally moves in conjunction with crude oil's price. The selling price of polymers will normally following the same trend, but a few months lagged behind. Hence, though the profit margin may become lower when the oil price is in a uptrend, it will be improved later.

More than half of Titan's production is for exportation. Among its customers, China is the biggest market, accountable for about 20% of its revenue. This is big positive sign for me. Firstly, being the fastest growing economic entity in the world, the demand for plastics in China is increasing in a higher rate than other countries; and Titan already enter into this market. The more important point is, Titan's production cost is lower than the China's local manufacturers. Thus, its selling price is competitive while having a sustainable profitability.

(This sounds impossible, but it's true. Besides its economic scale, one reason that Titan has a lower cost is because it is a pioneer in this industry. Titan's start-up cost is much cheaper because its plants are constructed 20 years ago. The new competitors today facing a much higher construction cost due to the high steel price.)

Currently, Titan's has a butadiene extraction plant and a propylene plant under construction, and is going to be completed soon. These two new plants is scheduled to test-run in Dec-2007, and their capacity is able to raise Titan's revenue by about RM1 billion (20%) next year. On the other hand, Titan's business in Indonesia is improving. I believe that its subsidiary (PT Titan) is going to turnaround soon, and begin to make positive contribution to Titan. And, Indonesia's market will provide a great growing potential for Titan in long term.

So, although the oil price is likely to keep rising, I believe that Titan will keep making bigger profit with the continuous expansions, coupled with its great operation and procurement strategy.

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I think Titan is undervalued at a share price of RM1.60. I decided to buy its share at this price due to the following considerations:

• The price is lower than its net asset value. (RM1.90 per share)
• The P.E. is lower than 7.0, based on its earning per share FY-2006 of 24 sen. (excluding the profit in the acquisition of PT Petrokimia)
• Its profit after tax will grow with a rate of 10 ~ 20% p.a. in the next few years, if the crude oil price is stabilized. (the grow rate will be higher if the oil price fall).

when the oil price fall back to a normal level, Titan's profit and its share price will rise dramatically . (I don't know when it will happen, but i really don't think the high oil price is sustainable). My own estimation, my investment in this counter will be three to five years.