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1、,Old,Natural Resources&EnergyKorea Refining and ChemicalsKorea Refining andChemicals4Q12 Earnings preview between hope andreality,abcGlobal Research 4Q earnings to fall below consensus;interms of OP,chemicals and refiners todip 44%QoQ and 37%QoQ,respectively Stocks look overbought we dont seeany fun
2、damental changes;the sectorswill remain oversupplied in 2013,Summary rating and TP changesName Ticker Price Rating15-Jan New,_Target Price _New Old,_2013e EPS _New Old,Potlretn*,We downgrade SKI to UW from N(V)andKumho Petrochem to UW(V)from N(V)after earnings and TP revisions,LTCKKPCHWCLGCSKI,01117
3、0 KS011780 KS009830 KS051910 KS096770 KS,251,000 UW(V)UW(V)185,000 185,000122,000 UW(V)N(V)100,000 130,00019,600 UW UW(V)15,100 18,200316,000 OW OW(V)385,000 410,000163,000 UW N(V)150,000 170,000,17,92310,3481,11230,10217,715,18,525-25.6%14,300-16.4%2,046-20.4%35,031 23.6%20,396-6.4%,Preview summary
4、 past is past,but valuation threat will beawakening:The Korea refining and petrochemical sector is,S-Oil,010950 KS,96,800,UW UW(V)85,000 85,000,9,396,8,098-7.5%,estimated to post 37%and 44%drops in operating profit in,Source:HSBC estimatesPotential return equals the percentage difference between the
5、 current share price and the target price,includingthe prospective dividend yield.16 January 2013Dennis Yoo,CFA*AnalystThe Hongkong and Shanghai Banking Corporation Limited,4Q12 vs 3Q12,respectively,missing consensus estimates by22%and 29%.In the past two months,sentiments turnedpositive on expectat
6、ions that the worst is behind us andinvestors seem to have bet on positive earnings momentum.However,stretched valuations on 4Q12 numbers will demandstrong confidence and visibility of an industry upturn.Outlook in 1Q13 and beyond still cautious:Our cautiousview on both the refining and petrochemica
7、l sectors remainslargely unchanged.In the petrochemical sector,we estimate,+852 2996 6917,.hk,new supplies in 2013 to grow by c3.8%,outpacing the 8-years,Brian Sohn*AnalystThe Hongkong and Shanghai Banking Corporation Limited,SeoulSecurities Branch,trend demand growth of 2.2%.There has been no signi
8、ficantindustry consolidation,so latent supply in the system willrespond to any re-stocking related demand,if it happens.In the,+822 3706 8765,refining sector,we expect refining margins in Asia to be under,Sriharsha Pappu,CFA*Analyst,pressure from growing capacities and less favourable crudeprocureme
9、nt costs.Production cuts in the downstream value,HSBC Bank Middle East+97 1 4423 6924,chain suggest that aromatics margins at multi-year highs willsee a correction,to work as a negative catalyst in the near term.,Thomas C Hilboldts,CFA*,Regional Head of Oil,Gas and Petrochemical,Asia-PacificThe Hong
10、kong and Shanghai Banking Corporation Limited,Earnings and TP revisions we downgrade SKI to UW andKumho Petrochem to UW(V)from N(V):Reflecting recent,+852 2822 2922,.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
11、 HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulationsIssuer of report:The Hongkong and Shanghai BankingCorporation LimitedDisclaimer&DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix,and with theDisclaime
12、r,which forms part of it,cut the sectors 2013-14e net profit forecast by 10-11%.Targetprices of the stocks have also revised down by 6-23%,accordingly.We think the recent rally in the sector during thepast 1-2 months is overdone and downgrade SKI(096770 KS,TP KRW150,000)to UW and Kumho Petrochem(011
13、780 KS,TP KRW100,000)to UW(V)from N(V).Now we only haveLG Chem(051910 KS,TP KRW385,000)as the only OW-rated stock in our coverage based on its long term growthpotential in the IT related business.,Natural Resources Wedowngrade Kumho Petrochem to UW(V),abc,4Q12e preview and highlightsWe estimate 44%Q
14、oQ drop in EBIT,to miss consensus by 29%We expect the four petrochemical stocks in ourcoverage to post 44%QoQ drop in EBIT inaggregate.Weak demand did not allow the passthrough of the high raw material costs,squeezingmargins further.Our margins indicator impliesthat the level of chemical margins was
15、 hoveringaround the post-crisis low level in 4Q12.(See thecharts at the bottom of the next page),Almost all the products remained weak,with theexception of the Aromatics(a.k.a.BTX,Benzene,Toluene and Xylene).However,exposures of thechemical players to the aromatics are below 10%oftheir revenue,havin
16、g limited impact to earnings.By company,Hanwha Chemical(009830 KS)isexpected to turn red in 4Q12 consolidated EBIT,while Lotte Chem(011170 KS)is estimated topost a 36%QoQ drop in OP.LG Chem(051910KS)is likely to remain resilient,while KumhoPetrochem(011780 KS)is expected to make a,very low profit fo
17、r three quarters in a row.Korea Petrochemical-4Q12 earnings preview(based on consolidated EBIT),(KRW bn),Rating 4Q12e consen vssus consensus,3Q12,QoQ%,1Q12 YoY%2013e 2013e FYFY Consensus,vs 2013e FYconsensus,4Q12e vs2013e FY,LG ChemLotte ChemKKPCHanwha ChemSum of the four,OU/VU/VU,3917843-16496,5001
18、226217701,-22%-36%-31%n.a.-29%,6001984540883,-35%-61%-5%n.a.-44%,50015560-198517,-22%-50%-29%n.a.-4%,2,6937423621813,976,2,5399295283044,300,6%-20%-31%-40%-7%,14.5%10.5%11.9%n.a.12.5%,Source:Bloomberg,HSBC estimates2,Jan-09,Jan-10,Jan-11,Jan-12,Jan-13,Jul-09,Jul-10,Jul-11,Jul-12,Jan-09,Jan-10,Jan-11
19、,Jan-12,Jul-09,Jul-10,Jul-11,Jul-12,Natural Resources&EnergyKorea Refining and Chemicals16 January 2013Earnings outlookRising supply to push margins downand to temper optimismOur cautious view on the petrochemical sector islargely unchanged.Despite the downcycle in2011-2012e,global ethylene capacity
20、 is expectedto grow by 3.8%YoY in 2013,outpacing theaverage demand growth of 2.2%during 2005-2012e.There is also enough latent capacity in thesystem,which has been cutting production duringthe last several quarters because of poor margins.When we consider these new and existing latentsupplies,it is
21、unlikely to see the operating ratesand margins get tighter.Inventory re-stocking demand,which the marketis expecting to see,will be offset by the supplyside responses before long,we believe.This is already happening,in our view,withevidence that Asian producers are raisingutilisation recently on bet
22、ter economics.A newcracker in SG,mechanically completed a year agoand having waited for a good timing for start-up,was just switched on.Chinas apparent naphthaconsumption has increased to over 13%YoY inOct-Nov from 3-5%YoY a few months earlier,indicating chemical output to rise soon.This together wi
23、ll put pressure on margins,anddampen the optimistic sentiments on thepetrochemical sector,we believe.Chemical business wtd average spread LG Chem(USD/t)800700600500400300Source:Datastream,Bloomberg,IHS Chemicals,HSBC estimates,Company highlightsLG Chemical(051910 KS,OW,TPKRW385,000)Preview:We expect
24、 LG Chemical to post4Q12 EBIT at KRW391bn,35%lower than aquarter ago and 22%than a year ago.(22%below consensus)Analysis:Our revisions are due to:1)weakchemical margins,2)off-seasonal demand bothfor petrochemical and IT materials segmentsand 3)one off costs such as year-end bonus andinventory re-val
25、uation losses etc.Outlook:We expect a better outlook in the ITmaterial business in 2013 thanks to LGElectronics strong sales in high-end TV.Chemical business is expected to be stable on abetter portfolio mix and the volume impact fromthe new downstream plants added recently.Earnings revision and rec
26、ommendationchanges Maintain OW,cut 2013-14e EPS by 7-12%and reduce target price to KRW 385,000from KRW410,000:Reflecting 4Q12eestimates,we cut our 2012-2014e EPSforecast by 7-12%.We lowered our sum-of-the-parts based target price fromKRW410,000 to KRW385,000,but maintainour OW rating on the stock.Ch
27、emicals wtd average spread Lotte Chem(USD/t)550500450400350300250Source:Datastream,Bloomberg,IHS Chemicals,HSBC estimates,abc3,Natural Resources&EnergyKorea Refining and Chemicals16 January 2013 Investment idea:We maintain our OWrating on the stock,based on its long termgrowth potential in the IT ma
28、terial businessand leading position in the regionalpetrochemical market.As the global numberone IT material supplier,LG Chemical willbenefit from:1)LG Groups strategy ofvertical integration and 2)adoption of LGstechnology in the global display panels.TheChemical business is the major headwind,butwit
29、h the presence of captive customers(LGgroup companies)and better product mix,LGChemical will continue to achieve the stablegrowth of the segment.Lotte Chem(011170 KS,UW(V),TPKRW185,000)Preview:We expect Lotte Chem to post4Q12 EBIT at KRW78bn,-61%QoQ and-50%YoY.(36%below consensus)Analysis:Core earni
30、ngs(ex one-offs)werelargely unchanged,but the elimination of thehuge inventory gain is expected to haveaffected adversely 4Q12e earnings vs 3Q12.Weak BD margins are largely offset bystronger BTX and MEG margins.Non-integrated subsidiaries KP Chemical andTitan are expected to post negative EBIT dueto
31、 continued oversupply in the downstreampolyester industry(KP Chemical)and weakolefin margins(Titan).Outlook:We expect earnings in 2013 willrecover,gradually not as dramatically as pricedin the stock price.We believe structuraltightness in BD supply remains intact,as aresult of global feedstock shift
32、,and we are alsopositive on MEG outlook.However,a majorityof the companys portfolio(c50%is poly-olefins and c30%is downstream polyesterchain)will be under pressure from the intensecompetition,in our view,limiting earningsfrom improving significantly.,Earnings revision and recommendationchanges Maint
33、ain UW(V),cut 2013-14e EPS by 3-6%;TP unchanged at KRW185,000:Wetweak a bit of the companys 2013-14e EPSforecast by 3-6%,but the target price ofKRW185,000 and our UW(V)ratingis unchanged.Investment idea:We have an UW(V)ratingon the stock.As the pure petrochemicalplayer,the company is highly leverage
34、d to thetightening of the global chemical supply-demand balance.Our UW(V)call on thestock is on the basis of our top-down view,the global ethylene supply-demand balance isunlikely to improve in 2013.The merger withKP Chemical is dilutive as the company ismore exposed to the oversupplieddownstream po
35、lyester market where endlesscapacity additions from the Chinese continueto threaten.Current P/E valuation on 2013eearnings,which assumes a 51%YoY rise inEPS,is at 14x versus the 10 year average of7.2x,which seems to us too demanding.Kumho Petrochem(011780 KS,UW(V),TP KRW100,000)Preview:We estimate K
36、umho Petrochems4Q12 operating profit at KRW43bn,-5%QoQ and-29%YoY.(31%below consensus)Analysis:Synthetic rubber margin stays at adepressed level despite moderated raw material(butadiene)price,as suppliers cant take themargins on falling orders.Regional syntheticrubber suppliers are reported to have
37、cutoperating rates,but tyre inventories in the endmarket are expected to be at high levels,dampening buying interests.Synthetic resinplants that produce PS,EPS,and ABS aresuffering from margin squeezes on skyrocketedbenzene price,have cut operating rate by c10-20%.Kumho P&B,a subsidiary of KKPC ises
38、timated to post a negative OP as margins ofthe phenol and phenol derivatives are at,abc,historical low levels since 2006.4,Dec-10,Dec-11,Mar-11,Mar-12,Sep-11,Jun-11,Jun-12,3.0,2.5,2.0,1.5,1.0,0.5,0.0,Natural Resources reduce TP fromKRW130,000 to KRW100,000:Reflecting4Q12e earnings estimate and 2013e
39、 outlook,price on reduced cracker rates put pressure onmargins.In the solar business segment,on thecompanys cost reduction efforts anddecelerated pace of fall in solar panel/modulehelped to reduce the loss from the business.Solar market:Polysilicon,Wafer,Cell and Module price trend(USD/unit),abc,we
40、revise down the companys 2013-14e EPS,Poly silicon,Wafer,Cell,Module,forecast by 26-46%.We also reduce our targetprice of Kumho Petrochem from KRW130,000to KRW100,000 at the same time downgradingthe stock to UW(V)from N(V).Investment idea:The long term story isattractive enough the synthetic rubberc
41、hains supply growth will be limited in thelong term,and the Chinese will start replacingtyres someday.However,in the near term,weak demand and upside risks of the rawmaterial price limits rubber producers toexpand margins.The share price is alreadypricing in a promising long termfundamentals,trading
42、 at 15x and 10 x P/E onour 2013e which already assumes 77%YoYrise in EPS.Hanwha Chem(009830 KS,UW,TPKRW15,100)Preview:We estimate Hanwha Chem willpost a 4Q12 operating loss of KRW16bn anda pre-tax loss of KRW34bn.(compared toconsensus operating profit of KRW17bn anda pre-tax loss of KRW2bn).The comp
43、any isexpected to post a quarterly loss for the thirdtime in the last five quarters.Analysis:On top of the seasonal weakness inPVC and LDPE demand,strength in ethylene,Source:PVInsights Outlook:We expect PVC supply-demandbalance in the export market to improve onthe back of a housing sector revival
44、in the US.However,the oversupplied situation in thedomestic Chinese market will remainunsolved,limiting import cargos to Chinafrom increasing.LDPE margins are expectedto be depressed persistently,so an earningsrecovery,if it happens,will be slow.Thesolar business is not likely to contribute toearnin
45、gs at least until 2013.Earnings revision and recommendationchanges Cut 2013-14e EPS by 24-45%;reduce TPfrom KRW18,200 to KRW15,100:Reflecting 4Q12e earnings estimate and2013e outlook,we revise down thecompanys 2013-14e EPS forecast by 24-45%.We also reduce our target price ofHanwha Chemical from KRW
46、18,200 toKRW15,100.Investment idea:We continue to rate thecompany UW.The chemical product portfoliois less diversified and prone to suffer from thecompetition with low cost producers.The,5,66,Natural Resources therefore,wereiterate our Overweight rating.(V-flag is nowremoved,30 day average volatilit
47、y at 35.35).Potential return equals the percentage differencebetween the current share price and the target price,including the prospective dividend yield.Key downside risk is a sharp fall in the crude oiland petrochemical product prices that might causean inventory write-off.LG Chemical sum-of-the-
48、parts valuation(KRW bn),Lotte ChemWe use PB-ROE valuation methodology to valueLotte Chem.We apply 0.9x target P/B multiple onthe companys 2013e BVPS,considering 2013eROE of 9%.From this we derived a target price ofKRW185,000(unchanged).Under our research model,for stocks with avolatility indicator,t
49、he Neutral band is 10pptsabove and below the hurdle rate for Korean stocksof 10.5%.Our target price implies a potentialreturn of-25.6%,including the prospectivedividend yield,which is below the Neutral band;therefore,we reiterate our UW(V)rating.Potential return equals the percentage differencebetwe
50、en the current share price and the targetprice,including the prospective dividend yield.Key upside risk is an unexpected supplydisruptions in the regional petrochemical marketthat may cause a spike in a particular chemicalproduct(s)margins.Kumho PetrochemWe use Sum-of-the-parts valuation methodology
