KOREAREFININGANDCHEMICALS：4Q12EARNINGSPREVIEWBETWEENHOPEANDREALITY0116

1、old natural resources in terms of op, chemicals and refiners to dip 44%qoq and 37%qoq, respectively stocks look overbought we dont see any fundamental changes; the sectors will remain oversupplied in 2013 summary rating and tp changes name ticker price rating 15-jan new _target price _ new old _2013

2、e eps _ new old potl retn* we downgrade ski to uw from n(v) and kumho petrochem to uw(v) from n(v) after earnings and tp revisions ltc kkpc hwc lgc ski 011170 ks 011780 ks 009830 ks 051910 ks 096770 ks 251,000 uw(v) uw(v) 185,000 185,000 122,000 uw(v) n(v) 100,000 130,000 19,600 uw uw(v) 15,100 18,2

3、00 316,000 ow ow(v) 385,000 410,000 163,000 uw n(v) 150,000 170,000 17,923 10,348 1,112 30,102 17,715 18,525 -25.6% 14,300 -16.4% 2,046 -20.4% 35,031 23.6% 20,396 -6.4% preview summary past is past, but valuation threat will be awakening: the korea refining and petrochemical sector is s-oil010950 ks

4、 96,800uw uw(v) 85,000 85,000 9,3968,098 -7.5% estimated to post 37% and 44% drops in operating profit in source: hsbc estimates potential return equals the percentage difference between the current share price and the target price, including the prospective dividend yield. 16 january 2013 dennis yo

5、o, cfa* analyst the hongkong and shanghai banking corporation limited 4q12 vs 3q12, respectively, missing consensus estimates by 22% and 29%. in the past two months, sentiments turned positive on expectations that the worst is behind us and investors seem to have bet on positive earnings momentum. h

6、owever, stretched valuations on 4q12 numbers will demand strong confidence and visibility of an industry upturn. outlook in 1q13 and beyond still cautious: our cautious view on both the refining and petrochemical sectors remains largely unchanged. in the petrochemical sector, we estimate +852 2996 .

7、hk new supplies in 2013 to grow by c3.8%, outpacing the 8-years brian sohn* analyst the hongkong and shanghai banking corporation limited, seoul securities branch trend demand growth of 2.2%. there has been no significant industry consolidation, so latent supply in the system will respond to any re-

8、stocking related demand, if it happens. in the +822 3706 refining sector, we expect refining margins in asia to be under sriharsha pappu, cfa* analyst pressure from growing capacities and less favourable crude procurement costs. production cuts in the downstream value hsbc bank middle east + 97 1 44

9、23 chain suggest that aromatics margins at multi-year highs will see a correction, to work as a negative catalyst in the near term. thomas c hilboldts, cfa* regional head of oil, gas and petrochemical, asia-pacific the hongkong and shanghai banking corporation limited earnings and tp revisions we do

10、wngrade ski to uw and kumho petrochem to uw(v) from n(v): reflecting recent +852 2822 .hk changes in margins and 4q12e earnings estimates as a basis, we view hsbc global research at: http:/ *employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finr

11、a regulations issuer of report: the hongkong and shanghai banking corporation limited disclaimer we downgrade kumho petrochem to uw(v) abc 4q12e preview and highlights we estimate 44% qoq drop in ebit, to miss consensus by 29% we expect the four petrochemical stocks in our coverage to post 44% qoq d

12、rop in ebit in aggregate. weak demand did not allow the pass through of the high raw material costs, squeezing margins further. our margins indicator implies that the level of chemical margins was hovering around the post-crisis low level in 4q12. (see the charts at the bottom of the next page) almo

13、st all the products remained weak, with the exception of the aromatics (a.k.a. btx, benzene, toluene and xylene). however, exposures of the chemical players to the aromatics are below 10% of their revenue, having limited impact to earnings. by company, hanwha chemical (009830 ks) is expected to turn

14、 red in 4q12 consolidated ebit, while lotte chem (011170 ks) is estimated to post a 36% qoq drop in op. lg chem (051910 ks) is likely to remain resilient, while kumho petrochem (011780 ks) is expected to make a very low profit for three quarters in a row. korea petrochemical - 4q12 earnings preview

15、(based on consolidated ebit) (krw bn)rating 4q12e consen vs sus consensus 3q12 qoq % 1q12 yoy% 2013e 2013e fy fy consensus vs 2013e fy consensus 4q12e vs 2013e fy lg chem lotte chem kkpc hanwha chem sum of the four o u/v u/v u 391 78 43 -16 496 500 122 62 17 701 -22% -36% -31% n.a. -29% 600 198 45 4

16、0 883 -35% -61% -5% n.a. -44% 500 155 60 -198 517 -22% -50% -29% n.a. -4% 2,693 742 362 181 3,976 2,539 929 528 304 4,300 6% -20% -31% -40% -7% 14.5% 10.5% 11.9% n.a. 12.5% source: bloomberg, hsbc estimates 2 jan-09jan-10jan-11jan-12jan-13 jul-09jul-10jul-11jul-12 jan-09jan-10jan-11jan-12 jul-09jul-

17、10jul-11jul-12 natural resources tp unchanged at krw185,000: we tweak a bit of the companys 2013-14e eps forecast by 3-6%, but the target price of krw185,000 and our uw(v) rating is unchanged. investment idea: we have an uw(v) rating on the stock. as the pure petrochemical player, the company is hig

18、hly leveraged to the tightening of the global chemical supply- demand balance. our uw(v) call on the stock is on the basis of our top-down view, the global ethylene supply-demand balance is unlikely to improve in 2013. the merger with kp chemical is dilutive as the company is more exposed to the ove

19、rsupplied downstream polyester market where endless capacity additions from the chinese continue to threaten. current p/e valuation on 2013e earnings, which assumes a 51% yoy rise in eps, is at 14x versus the 10 year average of 7.2x, which seems to us too demanding. kumho petrochem (011780 ks, uw(v)

20、, tp krw100,000) preview: we estimate kumho petrochems 4q12 operating profit at krw43bn, -5% qoq and -29% yoy. (31% below consensus) analysis: synthetic rubber margin stays at a depressed level despite moderated raw material (butadiene) price, as suppliers cant take the margins on falling orders. re

21、gional synthetic rubber suppliers are reported to have cut operating rates, but tyre inventories in the end market are expected to be at high levels, dampening buying interests. synthetic resin plants that produce ps, eps, and abs are suffering from margin squeezes on skyrocketed benzene price, have

22、 cut operating rate by c10- 20%. kumho p reduce tp from krw130,000 to krw100,000: reflecting 4q12e earnings estimate and 2013e outlook, price on reduced cracker rates put pressure on margins. in the solar business segment, on the companys cost reduction efforts and decelerated pace of fall in solar

23、panel/module helped to reduce the loss from the business. solar market: polysilicon, wafer, cell and module price trend (usd/unit) abc we revise down the companys 2013-14e eps poly siliconwafercellmodule forecast by 26-46%. we also reduce our target price of kumho petrochem from krw130,000 to krw100

24、,000 at the same time downgrading the stock to uw(v) from n(v). investment idea: the long term story is attractive enough the synthetic rubber chains supply growth will be limited in the long term, and the chinese will start replacing tyres someday. however, in the near term, weak demand and upside

25、risks of the raw material price limits rubber producers to expand margins. the share price is already pricing in a promising long term fundamentals, trading at 15x and 10 x p/e on our 2013e which already assumes 77% yoy rise in eps. hanwha chem (009830 ks, uw, tp krw15,100) preview: we estimate hanw

26、ha chem will post a 4q12 operating loss of krw16bn and a pre-tax loss of krw34bn. (compared to consensus operating profit of krw17bn and a pre-tax loss of krw2bn). the company is expected to post a quarterly loss for the third time in the last five quarters. analysis: on top of the seasonal weakness

27、 in pvc and ldpe demand, strength in ethylene source: pvinsights outlook: we expect pvc supply-demand balance in the export market to improve on the back of a housing sector revival in the us. however, the oversupplied situation in the domestic chinese market will remain unsolved, limiting import ca

28、rgos to china from increasing. ldpe margins are expected to be depressed persistently, so an earnings recovery, if it happens, will be slow. the solar business is not likely to contribute to earnings at least until 2013. earnings revision and recommendation changes cut 2013-14e eps by 24-45%; reduce

29、 tp from krw18,200 to krw15,100: reflecting 4q12e earnings estimate and 2013e outlook, we revise down the companys 2013-14e eps forecast by 24- 45%. we also reduce our target price of hanwha chemical from krw18,200 to krw15,100. investment idea: we continue to rate the company uw. the chemical produ

30、ct portfolio is less diversified and prone to suffer from the competition with low cost producers. the 5 66 natural resources therefore, we reiterate our overweight rating. (v-flag is now removed, 30 day average volatility at 35.35). potential return equals the percentage difference between the curr

31、ent share price and the target price, including the prospective dividend yield. key downside risk is a sharp fall in the crude oil and petrochemical product prices that might cause an inventory write-off. lg chemical sum-of-the-parts valuation (krw bn) lotte chem we use pb-roe valuation methodology

32、to value lotte chem. we apply 0.9x target p/b multiple on the companys 2013e bvps, considering 2013e roe of 9%. from this we derived a target price of krw185,000 (unchanged). under our research model, for stocks with a volatility indicator, the neutral band is 10ppts above and below the hurdle rate

33、for korean stocks of 10.5%. our target price implies a potential return of -25.6%, including the prospective dividend yield, which is below the neutral band; therefore, we reiterate our uw(v) rating. potential return equals the percentage difference between the current share price and the target pri

34、ce, including the prospective dividend yield. key upside risk is an unexpected supply disruptions in the regional petrochemical market that may cause a spike in a particular chemical product(s) margins. kumho petrochem we use sum-of-the-parts valuation methodology to value kumho petrochem. we apply

35、6.5x target ev/ebitda multiple (unchanged) on the companys consolidated normalised (2013-2014e) ebitda. we applied 2.0 x and 0.7x p/b multiple on its affiliates kumho polychem and kumho mitsui chem, and other invested assets are valued at market price. from this we derived target price of krw100,000

36、. abc normalised (2013-14e) ebitdatarget ev/ebitda (x)valuation chemicals it (i therefore, we rate the stock uw(v). potential return equals the percentage difference between the current share price and the target price, including the prospective dividend yield. key upside risk is a stronger than exp

37、ected demand for synthetic rubber. hanwha chemical we use pb valuation to value hanwha chemical. previously, we applied the sum-of-the-parts valuation methodology to value the companys bio- similar business, but as the contract is cancelled, we 100,000 we apply 0.5x target p/b multiple on the compan

38、ys 2013e bvps, considering the roe estimate of 3-5% in 2013-14e. from this we derived the target price of krw15,100. under our research model, for stocks without volatility indicator, the neutral band is 5ppts above and below the hurdle rate for korean stocks of 10.5%. our target price implies a pot

39、ential return of - 20.4%, including the prospective dividend yield, which is below the neutral band; therefore, we rate the stock uw. (v-flag is now removed, 30 day average volatility at 32.49). potential return equals the percentage difference between the current share price and the target price, i

40、ncluding the prospective dividend yield. key upside risk is a policy-led stronger than expected demand in the solar industry. no longer use the sotp methodology but value the company as a whole. 7 natural resources fall in aromatics margins will be a negative catalyst in the near term we downgrade s

41、ki to uw from n(v), reduced tp from krw170,000 to krw 150,000 abc 4q12e preview and highlights we expect disappointing 4q12 results in the korea refining sector. in the refining business, despite cold winter season refining margins particularly fuel oil margins have contracted sharply, making a sequ

42、ential drop in most companies refining earnings sharply. a moderate drop in crude oil price and krw appreciation caused inventory revaluation losses to the operating profit, although the latter works as a positive as a whole due to larger fx translation gains (non-operating profit). korea refining -

43、 4q12 earnings preview (based on consolidated ebit) in addition, higher crude procurement costs, as represented by saudi aramcos consecutive hike in osp (official selling price) were another dragging factor, although the market does not highlight this so much. in the lubricant segment, lube base oil

44、 margin continued to contract on weak end demand and ample supply. only the aromatics margins, which have skyrocketed to multi-year highs, performed well, but not enough to offset the weakness in other business segments. (krw bn) rating 4q12e consensusvs 3q12qoq % 1q12yoy% 2013e fy 2013e fy vs 2013e

45、 fy 4q12e vs consensusconsensus consensus2013e fy ski s-oil sum of the two u u 399 336 735 558 390 948 -28% -14% -22% 649 518 1167 -38% -35% -37% 323 376 699 24% -11% 5% 2,200 1,367 3,567 2,656 1,632 4,288 -17% -16% -17% 18.2% 24.5% 20.6% source: bloomberg, hsbc estimates 8 2005200620072010201120122

46、0032004200820092013 jan-06jan-07jan-08jan-09jan-10jan-11jan-12jan-13 (mbbl/d) natural resources reduce tp from krw170,000 to krw150,000: reflecting 4q12e investment idea: we downgrade ski from n(v) to uw after reflecting weaker than expected earnings outlook. on top of our initial expectation of wea

47、k refining margins, poor lube margin is another drag in 2013 earnings we think. we also concerned about deteriorating earnings and cash flow generation from the e no change to tp: reflecting 4q12e investment idea: we have an uw rating on s-oil. the company is likely to be a victim of tight middle ea

48、stern crude supply and higher crude procurement costs. we think oil export from the region will become less available to asian refiners, due to rising oil production in the us and corresponding supply response in the me. we also see significant refining capacity expansions in the middle east that wi

49、ll require internal allocation of the crude oil in the me while putting pressure on the oil product prices in asia. px capacity expansions are accelerating, and the margins will moderate in the next 1-2 years, in our view. lacking growth momentum in the foreseeable future, we think the valuation pre

50、mium paid to the company will diminish. valuation therefore, we rate the stock uw. (v-flag is now removed, 30 day average volatility at 32.81). potential return equals the percentage difference between the current share price and the target price, including the prospective dividend yield. key upside

51、 risk is unexpected spike in crude oil price that may cause an inventory-related gain. s-oil we use forward earnings based valuation methodology, as the book value is largely affected by the level of crude price and fx rates. we apply 9.1x pe multiple on next 12 months earnings to value s-oil. from

52、this, we derive a target price of krw85,000. (unchanged) 12 under our research model, for stocks without a volatility indicator, the neutral band is 5ppts above and below the hurdle rate for korean stocks of 10.5%. our target price implies a potential return of -7.5%, including the prospective divid

53、end yield, which is below the neutral band; therefore, we rate the stock uw. (v-flag is now removed, 30 day average volatility at 29.75). potential return equals the percentage difference between the current share price and the target price, including the prospective dividend yield. key upside risk

54、is stronger than expected polyester demand and px margins. abc 13 earnings revision table oldnewchange%bloomberg consensus 011170.ks revenue ebit/op pbt net profit lotte chem krw bn krw bn krw bn krw bn 2012e 15,841 472 507 380 2013e 14,388 768 803 635 2014e 14,915 961 996 784 2012e 15,963 472 507 3

55、79 2013e 14,128 742 777 614 2014e 14,235 902 937 737 2012e 1% 0% 0% 0% 2013e -2% -3% -3% -3% 2014e -5% -6% -6% -6% 2012e 15,884 534 560 415 2013e 16,386 929 961 696 oldnewchange%bloomberg consensus 011780.ks revenue ebit/op pbt net profit kumho petrochem krw bn krw bn krw bn krw bn 2012e 6,038 344 2

56、78 190 2013e 6,492 661 627 436 2014e 7,232 762 750 520 2012e 6,004 249 210 152 2013e 5,619 362 353 264 2014e 6,611 479 490 383 2012e -1% -28% -24% -20% 2013e -13% -45% -44% -40% 2014e -9% -37% -35% -26% 2012e 6,087 274 259 200 2013e 6,832 528 522 384 oldnewchange%bloomberg consensus 009830.ks revenu

57、e ebit/op pbt net profit hanwha chem krw bn krw bn krw bn krw bn 2012e 6,610 198 99 103 2013e 6,800 377 378 287 2014e 6,717 414 397 293 2012e 6,456 101 (7) 44 2013e 7,183 181 154 157 2014e 7,902 266 263 224 2012e -2% -49% -107% -57% 2013e 6% -52% -59% -45% 2014e 18% -36% -34% -24% 2012e 7,027 159 78

58、 78 2013e 7,509 304 249 210 oldnewchange%bloomberg consensus 051910.ks revenue ebit/op pbt net profit lg chemical krw bn krw bn krw bn krw bn 2012e 24,203 2,229 2,160 1,650 2013e 27,716 3,100 3,060 2,309 2014e 30,417 3,505 3,442 2,601 2012e 24,232 1,966 1,897 1,477 2013e 25,243 2,693 2,650 2,026 201

59、4e 28,347 3,213 3,152 2,410 2012e 0% -12% -12% -11% 2013e -9% -13% -13% -12% 2014e -7% -8% -8% -7% 2012e 23,480 2,056 2,026 1,584 2013e 24,967 2,539 2,539 1,962 oldnewchange%bloomberg consensus 096770.ks revenue ebit/op pbt net profit sk innovation krw bn krw bn krw bn krw bn 2012e 69,627 2,119 2,258 1,517 2013e 56,088 2,486 2,541 1,886 2014e 59,143 2,579 2,570 1,929 2012e 71,736 1,866 2,010 1,336 2013e 53,650 2,200 2,209 1,641 2014e 55,791 2,346 2,323 1,725 2012e 3% -12% -11% -12% 2013e -4% -12% -13% -13% 2014e -6% -9% -10% -11% 2012e 74,710 2,090 1,975 1,445 2013e 74,583 2,656 2,548 1,918