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1、,1.6,7.3,Company report,Nat Resources&EnergyChemicalsEquity Korea,abcGlobal Research,Kumho Petro Chem(011780 KS),Neutral(V),Initiate at N(V):Wheels turning,but slowly,Targetprice(KRW)Share price(KRW),130000.00123000.00,Weak pricing environment obscures attractive long-termoutlook,Forecast dividend y
2、ield(%),Potential return(%)Note:Potential return equals the percentagedifference between the current share price andthe target price,plus the forecast dividend yieldDec 2011 a 2012 e 2013 e,But positive catalysts already priced in,and we seedownside risks from a potential spike in raw material price
3、s Initiating coverage with a N(V)rating and KRW130,000 TP,HSBC EPS,17871.24 6232.05 14299.95,HSBC PE,6.9,19.7,8.6,PerformanceAbsolute(%)Relative(%),1M5.11.9,3M4.2-4.3,12M-29.3-41.0,Kumho Petrochem(KKPC),the largest synthetic rubber producer in Asia and the second-largest globally,is well positioned
4、to benefit from the long term growth potential in tyre,Note:(V)=volatile(please see disclosure appendix)3 October 2012Dennis Yoo*,CFAAnalystThe Hongkong and Shanghai BankingCorporation Limited+852 2996.hkSriharsha Pappu*,CFAAnalystHSBC Bank Middle East+971 4423 Vishwas Gupta*,demand.We believe that
5、there will be a wave of tyre replacement demand in a few yearstime following the significant rise in auto sales in recent years.However,in the near term,concerns over weak pricing,tepid end demand and rawmaterial volatility will continue to weigh on the stock.Some positives do exist,such asrising na
6、tural rubber prices,and the end of the US anti-dumping tariff on Chinese tyres however these appear to be largely priced in,in our opinion.Investor expectations of a recovery in Chinas demand for rubber in Q4 2012 are growingas the US anti-dumping tariff on Chinese tyres expires at the end of Septem
7、ber.This,coupled with intervention by SE Asian producers in the natural rubber market to eliminateexcessive inventories,has given rise to optimism about pricing support and margin growthfor synthetic rubber producers.We see some upside risk to synthetic rubber prices given that the industry has unde
8、rgone aperiod of inventory de-stocking.However,unless end demand improves significantly,webelieve there remains limited potential for synthetic rubber margin expansion.,Associate,BangaloreNaphtha cracking margins remain at fairly weak levels and this has led to production cuts,View HSBC Global Resea
9、rch at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulations,at naphtha crackers.These production cuts are impacting the supply of butadiene(BD)and create the risk of a spike in the BD price,which would in turn squeeze the margins
10、 ofrubber makers,for whom BD is the main raw material.KKPCs current valuation(19.7x 2012e PE)is pricing in a significant margin expansion,Issuer of report:,HSBC Bank Middle,in our view,and while we acknowledge the positive catalysts,we are worried about the,East LtdDisclaimer&DisclosuresThis report
11、must be readwith the disclosures and,downside risks if a margin recovery fails to appear.We initiate on Kumho Petrochem with a Neutral(V)rating and a target price ofKRW130,000.Our target price is derived from a sum-of-the-parts valuation methodology,with the core business valued at a 6.5x 2013e EV/E
12、BITDA multiple.,the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,IndexIndex levelRICBloombergSource:HSBC,KOSPI INDEX1,980011780.KS011780 KS,Enterprise value(KRWb)Free float(%)Market cap(USDm)Market cap(KRWb)Source:HSBC,4824503,3453,748,Kumho Petro C
13、hem(011780 KS)Chemicals3 October 2012Financials&valuationFinancial statements,Valuation data,abc,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Profit&loss summary(KRWb),EV/salesEV/EBITDA,0.85.0,0.89.3,0.75.4,0.64.5,RevenueEBITDADepreciation&amortisationOpera
14、ting profit/EBITNet interest,6,457997-155842-131,6,038517-173344-116,6,492842-181661-103,7,232944-182762-92,EV/ICPE*P/Book valueFCF yield(%)Dividend yield(%),1.96.92.64.11.6,1.819.72.45.41.6,1.78.61.99.81.6,1.57.21.611.82.0,PBTHSBC PBTTaxationNet profitHSBC net profit,758758-215499499,278278-7219019
15、0,627627-163436436,750750-195520520,Note:*=Based on HSBC EPS(fully diluted)Price relative,Cash flow summary(KRWb),300000250000,300000250000,Cash flow from operationsCapexCash flow from investmentDividendsChange in net debtFCF equityBalance sheet summary(KRWb)Intangible fixed assets,670-293-246-23-54
16、313235,428-260-320-67-4116835,482-190-250-67-16529235,539-200-260-84-19533935,2000001500001000005000002010Kumho Petro Chem,2011Rel to KOSPI INDEX,2012,2000001500001000005000002013,Tangible fixed assets,1,957,2,044,2,053,2,072,Current assetsCash&othersTotal assetsOperating liabilitiesGross debtNet de
17、btShareholders fundsInvested capital,2,0585274,7148582,2991,7731,4482,666,1,9715354,8248622,2671,7321,5772,653,2,1075685,1008722,1351,5671,9512,755,2,3156075,4659221,9791,3722,3962,892,Source:HSBCNote:price at close of 26 Sep 2012,Ratio,growth and per share analysis,Year to,12/2011a,12/2012e,12/2013
18、e,12/2014e,Y-o-y%change,RevenueEBITDAOperating profitPBTHSBC EPS,30.338.447.556.945.2,-6.5-48.1-59.2-63.4-65.1,7.562.892.2126.0129.5,11.412.115.319.519.4,Ratios(%),Revenue/IC(x)ROICROEROAEBITDA marginOperating profit marginEBITDA/net interest(x)Net debt/equityNet debt/EBITDA(x)CF from operations/net
19、 debt,2.523.743.914.615.413.07.6113.81.837.8,2.39.612.66.38.65.74.4102.13.424.7,2.418.124.711.113.010.28.174.91.930.8,2.620.023.911.913.010.510.353.51.539.3,Per share data(KRW),EPS reported(fully diluted)HSBC EPS(fully diluted)DPSBook value,17871.2417871.242000.0047515.91,6232.056232.052000.0051747.
20、96,14299.9514299.952000.0064047.91,17076.9917076.992500.0078624.90,2,Jan-08,Jan-10,Jan-11,Jan-09,Jan-12,Kumho Petro Chem(011780 KS)Chemicals3 October 2012Wheels turning,butslowly Robust long-term outlook,but near-term pricing weakness Positive catalysts priced in,downside risks from potential spike
21、inraw material prices Initiating coverage with a N(V)rating and KRW130,000 TP,abc,Investment thesisSluggish end demand growth andweak pricing powerA weak global economy and sluggish demandfrom the tyre industry have limited the pricingpower of synthetic rubber producers.Furthermore,low utilisation r
22、ates in the upstream ethyleneindustry have constrained supply of the main rawmaterial,butadiene.Weak demand from tyre industryCurrent weak end demand from the tyre industryis attributable mainly to:slow auto sales growth,poor business sentiment and lacklustre economicBD-integrated naphtha cracker ma
23、rgin per tonne of ethyleneproduction(USD/t)1,0008006004002000,activity that have hampered replacement tyredemand.Furthermore,high tyre prices havereduced affordability and,in weak macroconditions,lengthened replacement cycles fortyres which has also had an impact on demand.We believe this situation
24、is unlikely to changeuntil the global economy becomes much morevibrant,a scenario we do not expect to materialisein the near term.Tepid auto sales growth in China and Europe hasbeen weighing on demand for Original Equipment(OE)tyres.In particular,sales figures for Chinascommercial vehicles mainly tr
25、ucks and buses,Ethylene price versus butadiene price(USD/t)5,0004,0003,0002,0001,000-,2000,2002,2004,2006,2008,2010,2012,Ethy lene(Far East Spot CFR),Naphtha based cracker marginSource:IHS Chemical,Bloomberg,Thomson Reuters DataStream,HSBC estimates,Butadiene(South Korea Spot FOB)Source:Thomson Reut
26、ers DataStream,Bloomberg,HSBC,3,Mar-07,Sep-07,Mar-08,Sep-08,Mar-09,Sep-09,Mar-11,Sep-06,Mar-10,Sep-10,Sep-11,Mar-12,Jan-06,Jan-07,Jan-08,Jan-09,Jan-10,Jan-12,Jan-11,2003,2004,2005,2006,2007,2008,2009,2010,2011,2012,2013,Kumho Petro Chem(011780 KS)Chemicals3 October 2012Chinas monthly commercial vehi
27、cle sales(units),Eurozone Economic sentiment versus passenger car RE tyredemand,abc,500,000400,000300,000200,000100,000,200%150%100%50%0%-50%,30%20%10%0%-10%-20%-30%,12011010090807060,Europe Passenger Car RE ty re demand YoY%,China commercial v ehicle sales,YoY%(RHS),Eurozone Economic sentiment inde
28、x(RHS),Source:CEIC,HSBCwhich have more,and bigger,tyres requiringmore rubber have been quite weak,recording a9%y-o-y decline through August this year.HSBCs Auto&Auto Components research teamprojects global tyre sales growth(in terms ofnumber of units)of 0.8%and 3.5%y-o-y,respectively,in 2012-13e ver
29、sus 5.0-13.7%in2010-11.Slow economic activity and high fuel costs meanthat consumers cut back on use of groundtransportation,and consequently tyres are worndown less quickly.Also,tyre replacement is usuallydiscretionary and subdued economic sentimentmeans car owners put off replacing tyres for longe
30、r.,Source:Bloomberg,Michellin,HSBCThe high price of tyres,despite the sharp fall in thecost for rubbers(both natural and synthetic),alsodeters consumers from purchasing replacements.Inour Auto teams view it will be some time beforethere will be a recovery in tyre demand.Volatile raw material costs l
31、imitmargin gainsThe volatile cost of the raw material,butadiene,isanother concern for synthetic rubber producers.BD supply comes mainly from oil-based naphthacrackers as a bi-product of ethylene production.As highlighted in our report Global Chemicals:The butadiene roller coaster(March 2012),theemer
32、gence of gas-based ethylene crackers,Synthetic rubber price versus natural rubber price(USD/t):divergence when price rises,convergence when demand is weak6,000,5,000,conv ergence when demand is weak,4,0003,0002,0001,000-Natural rubber(TSR20,spot SE As ia)PBR(Spot Asia Pacific)Source:IHS Chemical,HSB
33、C4,Oct-06,Apr-07,Oct-07,Apr-08,Oct-08,Apr-09,Oct-09,Apr-10,Oct-10,Apr-11,Oct-11,Oct-12,Apr-06,Apr-12,Kumho Petro Chem(011780 KS)Chemicals3 October 2012Global rubber production versus consumption(ktpa)12,00011,00010,0009,0008,0007,000,Global rubber production vs consumption growth(3MMAy-o-y%)30%20%10
34、%0%-10%-20%-30%,abc,2005,2007,2009,2011,Production,Consumption,Production,consumption,Source:IHS Chemical,HSBCadvantaged by cheap feedstock has pusheddown the margin of oil based crackers for the lastcouple of years.This has resulted in loweroperating rates for oil based players,reducing thesupply o
35、f butadiene.To avoid a cost-driven squeeze on syntheticrubber margins,operating rates for upstream oil-based ethylene producers need to be consistentlyhigher than they are now.And for that to happen,the broader chemical market needs to improve,supported by stronger demand.Therefore,so long as naphth
36、a cracker marginsremain low,the risk of a supply-driven BD pricespike remains high,in our view.In terms of whatthis means for stock performance,we believeKumho shares will only start to perform after thediversified chemical names that have upstreamexposure start to do so.Positive catalysts are price
37、d inThe two positive catalysts driving investorexpectations of a recovery in the synthetic rubberindustry are a)intervention from natural rubberproducing countries to eliminate excessinventories and support pricing and b)theexpiration in October 2012 of anti-dumping duties,Source:IHS Chemical,HSBCIn
38、tervention from natural rubber producingcountriesOversupply in the natural rubber industry hasbeen another overhang on synthetic rubber prices.According to IHS Chemical,the global naturalrubber market will be oversupplied by about450ktpa in 2012.Although not perfect,naturalrubber is a substitute goo
39、d for synthetic rubber.Tyre makers can change their formulae to changethe proportion of synthetic and natural rubbermaterials by up to 2.5-5%without significantlyaffecting the performance of the output.Assubstitute goods,the price of each type of rubbermaterial affects the other,particularly whendem
40、and is weak(see the chart at the bottom of theprevious page).Weak tyre demand has also negatively affectedthe natural rubber industry.However,in early September,three Asiancountries Thailand,Indonesia and Malaysia that together represent about 70%of globalnatural rubber output agreed to remove a tot
41、al of300,000 tonnes(or 2.7%of annual global supply)of natural rubber from the market,including100,000 tonnes already purchased by the Thaigovernment since May.,on Chinese tyres imposed by the US government.5,Feb-11,Feb-10,Feb-04,Feb-07,Feb-05,Feb-08,Feb-09,Jul-11,Jan-12,May-11,Nov-11,May-12,Sep-12,S
42、ep-11,Mar-12,Jul-12,2003,2004,2005,2006,2007,2008,2010,2012,2009,2011,Feb-12,Feb-03,Feb-06,2013,100%,50%,0%,-50%,3,500,3,000,2,000,6,000,5,000,4,000,3,000,2,000,1,000,-,Kumho Petro Chem(011780 KS)Chemicals3 October 2012They also agreed to accelerate the cutting of agingtrees in order to lower export
43、s by another 150,000,Tyre production in China versus synthetic rubber apparentconsumption y-o-y%,abc,tonnes,with a target of boosting the natural rubberprice by c15-20%.Thanks to this effort,thenatural rubber price has risen by about USD330/tfrom its low since August 2012,but we believefurther upsid
44、e from these levels will be limitedunless end demand starts to recover.TSR20 Thailand natural rubber futures price(USD/t)T yre production YoY%,5,0004,500,Synthetic rubber apprent c onsumption YoY%Source:CEIC,HSBC,4,000exports from elsewhere,hurting the margins ofother tyre manufacturers and limiting
45、 rubber,2,500Source:Bloomberg,HSBCExpiration in October of anti-dumping duty onChinese tyres imposed by the US governmentThe US governments anti-dumping duty on tyresmanufactured in China will expire at the end ofSeptember.The US is the major exportdestination for Chinese tyres,accounting forc23%of
46、total tyre exports from China.ICIS newshas reported that Chinese local producers havehad difficulties due to shrinking export markets,and the lifting of the US anti dumping tariff(35%currently)would help to boost tyre exports and,inturn,rubber demand in China.,producers ability to raise prices.Above
47、 all,the current PE multiple of c20 x 2012eEPS appears to be already pricing in anormalisation of margins and a rebound inearnings.While we acknowledge the positivecatalysts,we are worried about the downside risksshould a margin recovery fail to appear.Tyre price versus rubber cost(USD/t)Korea FOB e
48、x port price-Passenger car Radial Ty re,Wtd Av g Raw material(rubber)costWe also highlight that the synthetic rubber,industry in China has undergone a period of de-stocking since the end of last year,and a rise inexport volumes may lead to some re-stockingdemand from that country.However,we do not e
49、xpect the effect on thesynthetic rubber price to be substantial,as thedemand pie overall is not growing.An increase inChinese tyre exports would likely simply replace6,Source:IHS Chemical,KITA,HSBC,2007,2008,2009,2010,2011,2012,2004,2005,2003,2006,1985,1987,1989,1991,1993,1995,1997,1999,2001,2003,20
50、05,2007,2009,2011,2013,2015,71.3,11.23,800,58%,462,Kumho Petro Chem(011780 KS)Chemicals3 October 2012Robust long-term outlookThe synthetic rubber industry offersan attractive long-term storyDemand growth potential from Chinasreplacement tyre demandDespite near-term concerns,we believe thatKKPC will
