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1、,FlashnoteNatural Resources&energyChemicals/RefiningEquity Korea,abcGlobal ResearchKorea Refining and Chemicals,3Q12 earnings preview:superficial strength,largely drivenby one-off gains 3Q12 results should show a sequential bounce,but the maindrivers are non-recurring gains related to the bounce inc
2、rude prices,not the underlying margins Refiner earnings unlikely to be as good as the 5-year high GRMindicates;SKI likely to be disappointing compared to its peers Chemical earnings remain depressed;high valuationmultiples paid on hope of a recovery could lose grounds9 October 2012,Dennis Yoo*,CFAAn
3、alystThe Hongkong and Shanghai BankingCorporation Limited+852 2996.hkBrian Sohn*AnalystThe Hongkong and Shanghai BankingCorporation Limited,Seoul SecuritiesBranch+822 3706 Thomas C Hilboldt*,CFAAnalystThe Hongkong and Shanghai BankingCorporation Limited+852 2822.hkView HSBC Global Research at:http:/
4、*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulationsIssuer of The Hongkong andreport:Shanghai BankingCorporation LimitedDisclaimer&DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure a
5、ppendix,and with the Disclaimer,which forms part of it,3Q12 earnings to show a sequential bounce largely driven by one-off gains:Weexpect 3Q12 earnings to be higher sequentially,compared to the very weak 2Q12.Largeinventory-related losses in 2Q12 should be reversed to remarkable gains in 3Q12,after
6、acUSD16/bbl or 18%q-o-q rally in crude prices.Netting off the non-recurring inventory-relatedgains and process timing impact,we dont see any improvement in core earnings.Refining not as good as the benchmark GRM indicates:The benchmark refining margin(measured by SG-Dubai complex GRM)posted a 5-year
7、 high of USD9.1/bbl in 3Q12.However,we estimate refining company earnings are not as strong as the GRM suggests fortwo key reasons:1)increased costs and 2)lacklustre by-product margins(especially lubemargin).In particular,SK Innovations result may disappoint the market;we forecast 3Q12EBIT to be rel
8、atively weaker vs 1Q12 when we also had a crude rally(+USD16/bbl)andconsequently similar inventory gains.We think SKIs cost advantages in crude sourcing havedisappeared,as highlighted in our report Korea Refining:Dont chase the rally,13 August.Chemicals no more than positive base effects:Similar to
9、refiners,we expect chemicalsearnings to rise q-o-q in 3Q12 due to:1)inventory revaluations,and b)lead time betweenfeedstock purchase and product sales.However,the underlying chemical margins haventimproved.Core earnings remain weak,raising concerns on stretched valuations that discountan earnings re
10、covery.We believe this is unjustified unless we see a strong sign of demandreturning soon,but its not likely to happen(see GEM Chemicals:Growth math,3 October).We expect 4Q12 to be weaker than 3Q:Given limited upside to crude prices,the one-offgains in 3Q12 are unlikely to recur in 4Q12.We expect we
11、ak demand in 4Q;with negativeearnings momentum,share price performance would be sluggish,in our view.Korea refining and chemicals:3Q12 preview in aggregateKRWbn 3Q11 1Q12 2Q12 3Q12e 4Q12e Consensus YoY%F9M vs HSBC vs28 days FY 2012e ConsensusRefining 1,350 1,541(197)1,532 1,338 1,627 13%68%-6%Chemic
12、als 1,423 842 550 972 974 977-32%71%-1%Refining+Chemicals 2,773 2,383 353 2,504 2,311 2,604-10%69%-4%Source:Company data,HSBC estimates,Bloomberg.,Korea Refining and ChemicalsChemicals/Refining9 October 2012Korea refining 3Q12e EBIT forecast/core earnings vs consensus normalised quarterly EBIT(2013e
13、 quarterly avg.),abc,KRWbn,3Q11,1Q12,2Q12,3Q12e,Est.28d vs Core Consensus FY13(B)/(A)one-offs consensus Consensus%Earnings(A)quarterly avg(B),SK InnovationGS Holdings,862120,926233,-10670,773296,200-25070-100,818315,-5%-6%,548211,708285,129%135%,Source:Company data,Bloomberg,HSBC estimates3Q12e prev
14、iew:Korea refiningSK Innovation(096770 KS,N(V),KRW159,500,TP KRW170,000)We estimate SKI to post an EBIT of cKRW773bn,significantly higher than a quarter ago(+cKRW880bn q-o-q).cUSD16/bbl rise in crude price during the quarter is estimated to have contributedcKRW200-250bn.Core EBIT net of one-off gain
15、s are cKRW550bn only,which is disappointingcompared with the consensus normalised quarterly EBIT of cKRW650bn.For refining companies like SKI,1Q12 is a good comparable as in the first quarter,we saw a similar sizeof crude rally(+cUSD16/bbl).Despite better GRM(USD7.7/bbl vs USD9.1/bbl in 3Q)SKIs refi
16、ningsegment is not likely to post strong performance in 3Q as in 1Q(c.f.in 1Q12 realised cash refining marginfor SKI was estimated to be cUSD8/bbl)we think,because opportunities to source cheaper crude oilsbecame scarce in 3Q.(See Korea Refining:Dont chase the rally published in Aug 2012 for details
17、).Despite all the new lube capacities are coming online and fully utilised,incremental earnings contributionfrom the lube segment would be minimal.Lube base oil price hasnt been raised much during thequarter while raw material costs have increased,resulting in a margin squeeze.GS Holdings(078930 KS,
18、OW(V),KRW64,300,TP KRW75,500)We estimate GSH to achieve cKRW296bn of consolidated EBIT in 3Q12,from KRW70bn in 2Q12,onthe back of:1)increased equity method gain from GS Caltexs refining business(from-KRW44bn to+cKRW184bn)and 2)outstanding GS Retails performance.We expect GS Retail to post a continuo
19、us double-digit top-line growth as well as margin expansions on theback of aggressive expansion of the convenience store(CVS)channels.In 4Q12,we believe the elimination of one-off gains will be offset by earnings growth from GS Retail andseasonal strength of its power&utility businesses.2,Korea Refi
20、ning and ChemicalsChemicals/Refining9 October 2012Korea chemicals 3Q12e EBIT forecast/core earnings vs consensus normalised quarterly EBIT(2013e quarterly avg.),abc,KRWbn,3Q11,1Q12,2Q12,3Q12e,Est.28d vs Core Consensus FY13(B)/(A)one-offs consensus Consensus%Earnings(A)quarterly avg(B),LG ChemHonam P
21、etrochemKumho PetrochemHanwha Chem,72439721983,46022013132,503-282945,6272096373,80-100100-15020-5020-50,6202137074,1%-2%-10%-2%,537842838,67028016098,125%332%579%260%,Source:Company data,Bloomberg,HSBC estimates3Q12e preview:Korea chemicalsLG Chemical(051910 KS,OW(V),KRW329,000,TP KRW410,000)We exp
22、ect LG Chemical to post 3Q12 OP of cKRW627bn,25%higher than 2Q12 on the back ofinventory revaluation gains and stable IT material earnings.Earnings from EV battery are expected todecrease marginally due to a temporary disruption of GM Volt production.Capacity expansions completed in 3Q12 should cont
23、ribute to earnings growth in 4Q12 naphtha crackercapacity revamp(+70ktpa),acrylic acid(+160ktpa)and Super Absolvent Polymer(+72ktpa).Inparticular,acrylic acid and SAP should further benefit from Nippon Shokubais recent plant outage.However,we expect flat earnings in 4Q12 due to end-loaded employee b
24、onus and one-off costs.Honam Petrochem(011170 KS,UW(V),KRW244,500,TP KRW220,000)Honam should record the strongest q-o-q momentum among the chemical companies we cover,mainly on 1-1.5 months of lead time for naphtha sourcing while naphtha price has risen more than30%during the quarter.We forecast cKR
25、W209bn in EBIT in 3Q,with such one-off gain contributingmore than KRW100bn.Underlying chemical margins should be largely unchanged,with improved MEG margin being offsetby a fall in BD price.Downstream polyester business operated by a subsidiary KP Chem shouldremain depressed.We are concerned about a
26、n expected weaker 4Q12 earnings,when gains related to naphtha sourcingfades.Consensus quarterly average EBIT for 2013e is cKRW280bn vs core earnings at cKRW84bn in3Q12.We anticipate consensus forecasts to be cut over 4Q12 and valuation will lose ground as a result.Kumho Petrochem(011780 KS,N(V),KRW1
27、16,500,TP KRW130,000)We estimate 3Q12 earnings to be more than double sequentially(cKRW63bn,+115%q-o-q)from avery low base in 2Q12.EBIT from the synthetic rubber division is estimated to be less thanKRW20bn,only about 10%of what the company earned in 1Q11 and 2Q11.We expect low synthetic rubber marg
28、ins to improve,but the low operating rate of upstream naphthacracker would pose an upside risk to the raw material(BD)price,limiting rubber margin expansion.New capacities(SBR 110ktpa and SSBR 60ktpa)are scheduled to be operational in 4Q12,but itremains to be seen whether the new volumes can find bu
29、yers given the depressed end demand.3,Korea Refining and ChemicalsChemicals/Refining9 October 2012Hanwha Chemical(009830 KS,UW(V),KRW20,450,TP KRW18,200)Core chemical operations should improve marginally,but not significantly,mainly on inventory valuationgains.We estimate 3Q12 EBIT to be around cKRW
30、73bn,KRW28bn higher than a quarter ago.Spot-to-spot margins are estimated to decrease,but earnings from the 50%-owned affiliate YeochonNCC(YNCC)should have improved on the reversal of one-off impairments in 2Q12.Solar businessshould improve with a smaller q-o-q loss on cost control,but we expect los
31、ses to last until end-2013,at the earliest.Increasing ethylene cost is a burden for Hanwha Chemical in 4Q12,as we think the ability to passthrough rising feedstock costs is limited.Therefore,we expect sequential weakness in 4Q12e earnings.Valuation and risks SK Innovation:We apply a 9x forward PE mu
32、ltiple,higher than the sectors historical average of8.3x considering the long-term growth potential,on next 12 months earnings.From this,we deriveour target price of KRW170,000.Under our research model,for stocks with a volatility indicator,theNeutral band is 10ppts above and below the hurdle rate f
33、or Korean stocks of 10.5%.Our target priceimplies a potential return of 8.2%,including the prospective dividend yield,which is within theNeutral band;therefore,we reiterate our Neutral(V)rating.Potential return equals the percentagedifference between the current share price and the target price,incl
34、uding the prospective dividend yield.Key upside risk is lube margin expansion,and key downside risk is a sharp fall in the crude oilprice that might cause an inventory write-off.GS Holdings:We use forward PE multiple to value GSH.We applied a 7.5x PE multiple on next 12-months earnings,which is a 10
35、%discount to the sectors historical average,considering the holdingscompany structure.Under our research model,for stocks with a volatility indicator,the Neutral bandis 10ppts above and below the hurdle rate for Korean stocks of 10.5%.At the time we set our targetprice,it implied a potential return
36、that was above the Neutral band;therefore,we rate the sharesOverweight(V).Potential return equals the percentage difference between the current share price andthe target price,including the prospective dividend yield.Key downside risk is a sharp fall in thecrude oil price that might cause an invento
37、ry write-off.LG Chemical:We use a sum-of-the-parts valuation methodology to value LG Chem.We apply a6.5x EV/EBITDA target multiple(the mid-cycle average of the industry)to value the chemicalbusiness and for the I therefore,we rate the stock Overweight(V).Potential return equals thepercentage differe
38、nce between the current share price and the target price,including the prospectivedividend yield.Key downside risk is a further delay in the start-up of the new IT businesses.4,abc,Korea Refining and ChemicalsChemicals/Refining,abc,9 October 2012 Honam Petrochem:We use forward PB multiple methodolog
39、y to value Honam Petrochem.Weapply target PB multiple of 1.2x on 12 months forward BVPS considering the medium-term(2012-14e)weighted average return on equity forecast of 10.6%and the structural tightness of the keyproduct,butadiene.From this,we derive a TP of KRW220,000.Under our research model,for
40、 stockswith a volatility indicator,the Neutral band is 10ppts above and below the hurdle rate for Koreanstocks of 10.5%.Our target price implies a potential return including dividend yield of-9.2%,belowthe Neutral band;therefore,we reiterate our Underweight(V)rating.Potential return equals thepercen
41、tage difference between the current share price and the target price,including the prospectivedividend yield.Key upside risk is a spike in butadiene price.Kumho Petrochem:We use a sum-of-the-parts valuation methodology to value Kumho Petrochem.We apply the sector historical average EV/EBITDA multipl
42、e of 6.5x to the core chemical businessnormalised(2012-14e)EBITDA,and the affiliate companies are valued at 2.0 x(Kumho Polychem)and 0.7x(Kumho Mitsui Chem)PB,respectively.Holding securities are valued at market value.From this,we derive our target price of KRW130,000.Under our research model,for st
43、ocks with avolatility indicator,the Neutral band is 10ppts above and below the hurdle rate for Korean stocks of10.5%.Our target price implies a potential return including dividend yield of 13.3%,within theNeutral band;therefore,we reiterate our Neutral(V)rating.Potential return equals the percentage
44、difference between the current share price and the target price,including the prospective dividendyield.Key upside risk is stronger-than-expected demand,and key downside risk is a spike in rawmaterial(butadiene)price.Hanwha Chemical:We use a sum-of-the-parts methodology to value Hanwha Chem.For theb
45、iosimilars business,we assign a value of cKRW650bn based on a DCF,incorporating a WACC of8.5%(unchanged).For the non-bio business,we continue to use a target PB multiple of 0.5x on2013e BVPS,30%lower than the historical average of 0.72x reflecting the 2012-13e average ROE ofc4%versus the long-term a
46、verage of 6.0%.We deduct KRW311bn from this as we continue tobelieve the ongoing capex for the polysilicon plant will be value-destructive.From this,we derive ourtarget price of KRW18,200.Under our research model,for stocks with a volatility indicator,theNeutral band is 10ppts above and below the hu
47、rdle rate for Korean stocks of 10.5%.Our target priceimplies a potential return including dividend yield of-8.8%,below the Neutral band;therefore,werate the stock Underweight(V).Potential return equals the percentage difference between the currentshare price and the target price,including the prospe
48、ctive dividend yield.Key upside risk is anunexpected policy-driven recovery in solar demand.5,3Q12e,Jul12,1Q05,3Q05,1Q06,3Q06,1Q07,3Q07,1Q08,3Q08,1Q09,3Q09,1Q10,3Q10,1Q11,3Q11,1Q12,3Q12,Jan-08,Jan-09,Jan-10,Jan-11,Jan-12,Jan09,Jan10,Jan11,Jan12,Jul09,Jul10,Jul11,4Q12e,1Q11,2Q11,3Q11,4Q11,1Q12,2Q12,K
49、orea Refining and ChemicalsChemicals/Refining9 October 2012Korea refining:1Q11-4Q12e Quarterly OP vs consensus,Korea chemicals:1Q11-4Q12e Quarterly OP vs consensus,abc,2000150010005000-500,LG ChemKumho Petrochem,2013e consensus quarterly av gHonam PetrochemHanw ha Chem,Source:Bloomberg,HSBC estimate
50、sPeriod-end Dubai crude spot price(USD/bbl)and q-o-q%change,Source:Bloomberg,HSBC estimatesSG-Dubai complex GRM(USD/bbl),150100500,Dubai crude spot,60%40%20%0%-20%-40%-60%-80%QoQ%chg(RHS),14121086420,2004 2005 2006 2007 2008 2009 2010 2011 2012 2013,Source:Bloomberg,HSBCBD-integrated naphtha cracker
