Energy & Utilities
Energy & Utilities Industry Update
Neutral
16 June 2015
Prefer downstream to upstream, with selective picks
“Neutral” rating maintained, with selective picks We maintain our “Neutral” rating on the energy sector and prefer downstream/integrated players to upstream E&P given that the low crude oil price will provide more benefit to downstream players; moreover, the tightening ethylene‐chain market with a projected high operating rate will firmly uphold PE spreads towards 2016E. We recommend applying a strategy of selective picks, with the same basket of top picks – PTT (15E TP; Bt414) and IRPC (15E TP; Bt5.1); however, we have turned more positive on PTTGC with a rating upgrade to “Outperform” (15E TP: Bt72). Good start with high GRM in 1H15, but cautious view remains
Share data (Energy & Utilities) SET index
1,501.89
Sector index
19,543.79
52‐week high
22,190.44
52‐week low
17,617.57
Market capitalization (Bt m)
2,342,352.74
% of market cap
16.62
Avg daily turnover (m shares)
391.45
We believe the rally in the market GRM has mostly played out in 1H15 with the Singapore GRM YTD averaging at US$8.28/bbl. The stronger demand pull and inventory buildup driven by low prices (gasoline in particular) as well as the tightening supply from the maintenance season in 2Q have been the main catalysts. Given the resumption of plants from the maintenance season, the end of Ramadan and the US driving season in 3Q, along with the ramp up of new refining additions, we expect the GRM to weaken in 2H15E towards 2016E. Improving aromatics spreads in 2Q15 QTD but still in downturn
Absolute
‐3.29
4.40
‐1.38
We are seeing improving spreads in 2Q15 QTD with short‐term drivers from the unplanned shutdowns of aromatics plants in China and restricted aromatics feedstock (reformate from the planned shutdowns of refineries in Asia and the growing gasoline demand in the market), but the spreads are likely to be in a downturn towards 2016E given the oversupply situation.
Relative
‐2.74
5.15
‐3.64
Firm demand backs solid polyethylene spreads
Beta
1.12
Sector Performance (%)
1M
3M
12M
Note: An executive of KT ZMICO Securities is also a member of BCP’s board.
The positive momentum from the supply losses from both the planned and unplanned shutdowns of Asian crackers in 1H15, as well as the firm demand of polyethylene (PE) from emerging markets, particularly in the case of China and India, has driven the ethylene spread (over naphtha) to US$824/ton in 2Q15 QTD (vs. US$532/ton in 1Q15). We expect the ethylene market to continue tightening in 2015‐16E, while the polyethylene market will move to equilibrium in the period, resulting in solid ethylene‐chain spreads towards 2016E. 2015‐16E earnings revisions
Patcharin Karsemarnuntana Analyst, no 17834 [email protected] 66 (0) 2695‐5837
Given the upbeat GRM in 1H15 and a tighter ethylene market continuing to strongly support PE derivatives, we raise the GRM and PE spread assumptions in 2015‐16E, resulting in 2015‐16 earnings revisions for PTTGC (+6%/+7%) and TOP (+29%/+26%), with PTTGC’s 2015E DCF‐based TP raised to Bt72/share (vs. Bt65/share previously); however, TOP’s 2015E DCF‐based TP is left unchanged at Bt58/share. We also raise PTT’s 2015‐16E earnings forecasts by +1%/+2% and the 15E SOTP‐based TP to Bt414/share (vs. Bt409 earlier) to reflect the upward revisions made to PTTGC and TOP.
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 9
Good start with high GRM in 1H15 We believe the rally in the market GRM has mostly played out in 1H15 with the Singapore GRM YTD averaging at US$8.28/bbl. The stronger demand pull and inventory buildup driven by low prices (gasoline in particular) as well as the tightening supply from the maintenance season in 2Q have been the main catalysts. The Singapore GRM has shown increases for three consecutive quarters, resulting in a softening trend for the 2H15E outlook on the ramp up of new refining capacity. The market GRM performed well in 1Q15 with Singapore complex GRM averaging at US$8.5/bbl (excluding yield loss), thanks to 1) the better crack spread, particularly in the case of gasoline (given strong demand due to low prices) and fuel with a narrowing negative spread; 2) restocking before entering the maintenance season of Asian refineries in 2Q; and 3) the deferred startup of the new 300kbd refinery in India to 4Q15 (from early 2015). For 2Q15, the combination of sustained high gasoline crack spreads and the maintenance season has helped keep Singapore complex GRM high at the average of US$8.05/bbl QTD despite the weakening spreads of middle distillates (gasoil, jet). Continuing upbeat gasoline crack spread with strong demand as the growth catalyst The gasoline crack spread has risen to US$19.6/bbl in 2Q15 QTD, with strong demand momentum driven by low prices. This is particularly the case for China, which has seen robust gasoline demand growth of 8% YoY in 2015 YTD. We don’t expect the abnormally high crack spread to continue with the end of Ramadan and the US driving season coming in 3Q. Figure 1: Refining market A) Singapore cracking GRM
B) Refinery outage in Asia (seasonal in 2Q)
Source: Bloomberg, PTTGC, TOP, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 9
D) Chinese vehicle sales
C) Gasoline demand growth in China
Source: Bloomberg, KT ZMICO Research Cautious view remains in 2015‐16E given the larger refining additions Given the resumption of plants from the maintenance season in 2Q, the end of Ramadan and the US driving season in 3Q, the ramp up of new refining capacity totaling 0.7mbd from Saudi Arabia and UAE in 2H15, and the kickoff of a 300kbd refining addition from India in 4Q15, we expect the GRM to weaken in 2H15E. Despite our upward revision on the GRM assumption to US$5.5/bbl in 2015E (given the upbeat GRM in 1H15) and US$5.0/bbl in 2016E (vs. the earlier US$4.5/bbl in both years), we keep our cautious view on GRM in 2015‐16E given the larger refining additions of 649kbd and 550kbd (effective refining capacity based on the projects’ start‐up periods) in Asia Pacific and the Middle East, respectively, vs. 525kbd in 2014. Figure 2: Additional refining demand and supply outlook A) CDU additions and demand additions
B) Scheduled startup of new refineries
Source: Bloomberg, KT ZMICO Research Note: Adjusted CDU additions are effective capacity based on their start‐up period REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 3 of 9
Improving spreads in 2Q15 QTD but still in a downturn towards 2016E The worst for aromatics spreads is behind us in 2014 following the huge supply additions in the year and we are seeing improving spreads in 2Q15 QTD with short‐term drivers from the unplanned shutdowns of aromatics plants in China (Dragon Aromatics with 1.6mta PX capacity and 0.46mta BZ due to a fire incident in Apr‐2015) and restricted aromatics feedstock (reformate from the planned shutdowns of refineries in Asia and the growing gasoline demand in the market); nonetheless, the spreads are likely to be in a downturn towards 2016E. In our view, the main negative pressure is the oversupply situation in the aromatics market with additional capacity to outpace additional demand, particularly in the case of PX in 2015E. This is in accordance with the projected lower operating rate of 78% in 2015E for PX (vs. 80.8% in 2014) and the sustained low operating rate of 72.4% in 2015E for BZ (vs. 72.5% for 2014). Given our reaffirmed outlook on a weak aromatics market, we slightly fine‐tune our spread assumptions, with the PX spread (over condensate) at US$350/ton in 2015E and US$330/ton in 2016E (vs. US$330/ton and US$350/ton previously), and the BZ spread (over condensate) at US$220/ton in 2015E and US$280/ton in 2016E (vs. US$300/ton for both years earlier). Figure 3: Aromatics market A) Movement of PX and BZ spreads
B) Global aromatics demand/supply growth Paraxylene
2014
2015
Demand growth (mn tons) Capacity growth (mn tons) % operating rate
1.34
2.08
4.67
3.79
80.8
78.0
Benzene
2014
2015
Demand growth (mn tons) Capacity growth (mn tons) % operating rate
1.71
1.02
0.99
1.20
72.5
72.4
Source: PTTGC, KT Zmico Research Firm demand backs solid polyethylene spreads The positive momentum from the supply losses from both the planned and unplanned shutdowns of Asian crackers in 1H15, as well as the firm demand of polyethylene (PE) from emerging markets, particularly in the case of China and India, has driven the ethylene spread (over naphtha) to US$824/ton in 2Q15 QTD (vs. US$532/ton in 1Q15). We expect the ethylene market to continue tightening in the next few years with the additional demand to exceed the additional supply. This will result in higher operating rates of over 90% towards 2016E, causing the ethylene spread (over naphtha) to stay strong in the next few years. Meanwhile, the polyethylene market will move to equilibrium in 2015‐16E REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 9
with the additional demand being nearly equal to the supply additions and the operating rate projected to be sustained at 86‐87% in the period. Based on the firm outlook of the ethylene‐chain market, we retain our solid view on PE spreads towards 2016E, with an upward revision made on the PE spread assumption (HDPE/LLDPE/LDPE) to US$700/ton in 2015E and in the range of US$650‐680/ton in 2016E (vs. US$600‐680/ton and US$600‐650/ton, respectively). Figure 4: Ethylene and polyethylene market B) Cracker outages in Asia
A) Movement of ethylene and HDPE prices and spreads
C) Ethylene demand and supply growth in Asia
D) Polyethylene demand and supply growth in Asia
Ethylene
2014
2015
Polyethylene
2014
2015
Demand growth (mn tons) Capacity growth (mn tons) % operating rate
2.89
5.59
3.62
4.38
2.90
4.70
1.96
4.55
89.4
91.0
Demand growth (mn tons) Capacity growth (mn tons) % operating rate
86.3
86.6
Source: PTTGC, KT Zmico Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 5 of 9
2015‐16E earnings revisions Given the expected sustained low crude oil price leading to cost savings from yield loss (high yield loss/high benefit) and a narrowing of the crude premium (given the structural change in oil supply following OPEC’s strategy to win back market share and the boom in US shale oil), along with accelerating demand from low prices (particularly in the case of gasoline), we raise our market GRM to US$5.5/bbl in 2015E to reflect the stronger‐than‐expected GRM in 1H15; however, we are still concerned about a weakening trend in 2H15E and expect a decline to US$5.0/bbl in 2016E (vs. the earlier US$4.5/bbl in both years). As a tighter ethylene market will continue to strongly support PE derivatives, we also raise our PE spreads (HDPE, LDPE, LLDPE) to US$700/ton in 2015E and in the range of US$650‐680/ton in 2016E (vs. the earlier forecasts of US$600‐680/ton and US$600‐650/ton, respectively). Meanwhile, we slightly fine‐tune the aromatics spreads. Given the revision on product spreads, we have made 2015‐16 earnings revisions for PTTGC (+6%/+7%) and TOP (+29%/+26%), with PTTGC’s 2015E DCF‐based TP raised to Bt72/share (vs. Bt65/share previously); however, TOP’s 2015E DCF‐based TP is left unchanged at Bt58/share with the upward revision on GRM to be offset by the downward revision on aromatics spreads (over ULG 95) and lube base spreads. We also raise PTT’s 2015‐16E earnings forecasts by +1%/+2% and the 15E SOTP‐based TP to Bt414/share (vs. Bt409 earlier) to reflect the upward revisions made to PTTGC and TOP. Meanwhile, we maintain our earnings forecasts for BCP and IRPC, with the former’s high market GRM of US$6/bbl already factored into 2015‐16E and the latter’s market GIM (gross integrated margin) previously revised up to US$11/bbl in 2015E and US$13/bbl in 2016E, with cost savings from yield loss and stronger refined product spreads as the main catalysts. Figure 5: Summary of product spreads Products spreads (US$/ton)
New
Old
1Q14
2Q14
3Q14
4Q15
1Q15
2Q15 QTD
1H15 YTD
2014
2015E
2016E
2015E
2016E
Naphtha MOPJ
935
951
913
647
494
563
529
862
540
585
450
585
Ethylene – MOPJ
507
496
565
567
532
824
678
534
600
550
420
400
Propylene – MOPJ
434
328
388
385
339
366
353
384
350
380
420
420
HDPE – MOPJ
620
618
691
802
694
816
755
683
700
650
650
620
LLDPE – MOPJ
625
627
688
785
687
814
751
681
700
650
600
600
LDPE – MOPJ
705
653
688
793
698
843
771
710
700
680
680
650
Condensate
917
922
872
634
453
533
493
836
531
573
448
573
PX – Condensate
386
334
479
401
332
387
360
400
350
330
330
350
BZ – Condensate
380
370
430
320
217
259
238
375
220
280
300
300
PX – ULG95
273
221
371
252
255
255
255
279
250
260
280
300
BZ – ULG95
286
254
327
207
98
121
109
268
120
210
250
250
Olefins & PE
Aromatics
Source: PTTGC, TOP, KT ZMICO Research
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 6 of 9
Figure 6: 2015‐16E earnings forecasts of upstream and downstream players Core profit (Btmn) 2014*
2015E
% CAGR
2016
(15-16E)
NP (Btmn) 2014*
2015E
% CAGR 2016E
(15-16E)
% chg in NP from old
2015E
2016E
Downstream BCP
11
5,551
5,294
2,098
712
5,303
5,146
168.9
0%
0%
IRPC
(8,560)
5,280
7,901
nm
(5,235)
7,831
7,901
nm
0%
0%
TOP
(5,408)
10,272
10,325
nm
(4,026)
9,977
10,325
nm
29%
26%
PTTGC
16,053
31,457
32,033
41.3
15,036
30,669
32,033
46.0
6%
7%
49,341
28,176
36,936
(13.5)
21,490
30,688
36,936
31.1
0%
0%
78,845
96,633
110,217
18.2
55,795
99,236
110,217
40.5
1%
2%
Upstream PTTEP Integrated PTT
15E TP (Bt)
Rating
New
Old
New
38.5
38.5
BUY
BUY
8.8
5.1
5.1
BUY
BUY
11.1
Old
15E PER (x)
15E EV/EBITDA (x)
15E Yield (%)
15E ROE (%)
1.2
6.3
4.5
1.2
10.7
4.5
15E PBV (x)
Downstream
TOP
58
58
Underperform
Underperform
10.7
1.2
7.0
4.2
PTTGC
72
65
Outperform
Underperform
9.8
1.2
6.4
4.6
14.8 11.1 11.5 13.0
122
122
Underperform
Underperform
14.4
1.0
3.5
3.2
7.3
414
409
BUY
BUY
9.8
1.3
4.7
3.6
13.5
BCP IRPC
Upstream PTTEP Integrated PTT
Source: KT ZMICO Research Note: *low base earnings due to massive stock loss, LCM impact, and impairment losses on assets/investments
“Neutral” rating maintained, with selective picks We maintain our “Neutral” rating on the energy sector and prefer downstream/integrated players to upstream E&P given that the low crude oil price will provide more benefit to downstream players (cost savings from yield loss/high product demand from low prices) against PTTEP (with the lag time effect from low oil prices to apply negative pressure to the gas price); moreover, the tightening ethylene‐chain market with a projected high operating rate will firmly uphold PE spreads towards 2016E. Given this investment theme, we believe the 15E PBV trading range of downstream players, mostly at mean to ‐1SD, will outperform PTTEP’s level of ‐2SD. With the rally in the market GRM having mostly played out in 1H15 and the GRM to turn less upbeat in 3Q15 after the resumption of plants from the maintenance season alongside the end of Ramadan and the US driving season in 3Q, we expect some selling pressure on downstream to provide a good opportunity for accumulation, with selective picks as our strategy. Our basket of top picks still includes PTT (Buy; 15E TP Bt414) given its more defensive earnings relative to the benefit from energy reform and its affiliates, and IRPC (Buy; 15E TP Bt5.1) given the expected high cost savings from high yield loss (6% against the other downstream players at the average of 3‐4%) and the earnings base enlargement backed by the UHV project (contribution to start in 4Q15). Meanwhile, we turn more positive on high PE exposure as the spreads are likely to stay solid towards 2016E; thus, we upgrade PTTGC’s rating to “Outperform” with a newly‐revised 15E TP of Bt72 (from “Underperform” previously). REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 7 of 9
Figure 7: Energy’s share price performance
Source: Bloomberg, KT ZMICO Research Figure 8: Energy stocks at their current 2015E PBV vs. their historical PBV trading range
Source: Bloomberg, KT ZMICO Research
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 8 of 9
DISCLAIMER This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. The use of any information contained in this document shall be at the sole discretion and risk of the user.
KT ZMICO RESEARCH – RECOMMENDATION DEFINITIONS STOCK RECOMMENDATIONS BUY: Expecting positive total returns of 15% or more over the next 12 months OUTPERFORM: Expecting total returns between ‐10% to +15%; returns expected to exceed market return over six months period because of specific catalysts UNDERPERFORM: Expecting total returns between ‐10% to +15%; returns expected to below market return over six months period because of specific catalysts SELL: Expecting negative total returns of 10% or more over the next 12 months
SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months.
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 9 of 9
th
th
th
th
KT•ZMICO Securities Company Limited
st
8 , 15 -17 , 19 , 21 Floor, Liberty Square Bldg., 287 Silom Road, Bangrak, Bangkok 10500 Telephone: (66-2) 695-5000
Phaholyothin Branch
rd
Fax. (66-2) 631-1709
Ploenchit Branch
th
nd
2
Sindhorn Branch
3 Floor, Shinnawatra Tower II,
8 Floor, Ton Son Tower,
1291/1 Phaholyothin Road,
900 Ploenchit Road, Lumpini,
Floor, Sindhorn Tower 1, 130-132 Wireless Road, Lumpini,
Phayathai, Bangkok 10400
Pathumwan, Bangkok 10330
Pathumwan, Bangkok 10330
Telephone: (66-2) 686-1500
Telephone: (66-2) 626-6000
Telephone: (66-2) 627-3550
Fax. (66-2) 686-1666
Fax. (66-2) 626-6111
Fax. (66-2) 627-3582, 627-3600
Nakhon Pathom Branch 1156 Petchakasem Road, Sanamchan Subdistrict, Amphoe Meuang , Nakhon Pathom Province 73000 Telephone: (034) 271300 Fax: (034) 271300 #100
Chachoengsao Branch
Viphavadee Branch
Phitsanulok Branch
G Floor, Lao Peng Nguan 1 Bldg.,
Krung Thai Bank, Singhawat Branch
333 Soi Cheypuand, Viphavadee-Rangsit Road,
114 Singhawat Road,
Ladyao, Jatujak, Bangkok 10900
Muang, Phitsanulok 65000
Telephone: (66-2) 618-8500
Telephone: 083-490-2873
Fax. (66-2) 618-8569
th
Chonburi Branch
Pattaya Branch
108/34-36 Mahajakkrapad Road,
4 Floor, Forum Plaza Bldg.,
382/6-8 Moo 9, T. NongPrue,
T.Namuang, A.Muang,
870/52 Sukhumvit Road, T. Bangplasoy,
A. Banglamung, Cholburi 20260
Chachoengsao 24000
A. Muang, Cholburi 20000
Telephone: (038) 362-420-9
Telephone: (038) 813-088
Telephone: (038) 287-635
Fax. (038) 362-430
Fax. (038) 813-099
Fax. (038) 287-637
Khon Kaen Branch
5th Floor, Charoen Thani Princess Hotel,
Hat Yai Branch
Sriworajak Building Branch
200/301 Juldis Hatyai Plaza Floor 3,
1st – 2nd Floor, Sriworajak Building, 222
260 Srichan Road, T. Naimuang,
Niphat-Uthit 3 Rd,
Luang Road, Pomprab,
A. Muang, Khon Kaen 40000
Hatyai Songkhla 90110
Bankgok 10100
Telephone: (043) 389-171-193
Telephone: (074) 355-530-3
Telephone: (02) 689-3100
Fax. (043) 389-209
Fax: (074) 355-534
Fax. (02) 689-3199
Central World Branch
Chiang Mai Branch
Phuket Branch
999/9 The Offices at Central World,
422/49 Changklan Road, Changklan
22/61-63, Luang Por Wat Chalong Road,
16th Fl., Rama 1 Rd, Pathumwan,
Subdistrict, Amphoe Meuang,
Talat Yai, Mueang Phuket,
Bangkok 10330
Chiang Mai 50100
Phuket 83000
Telephone: (66-2) 673-5000,
Telephone: (053) 270-072
Tel. (076) 222-811,(076) 222-683
(66-2) 264-5888 Fax. (66-2) 264-5899
Fax: (053) 272-618
Fax. (076) 222-861
Pak Chong Branch
Cyber Branch @ North Nana
173 175, Mittapap Road,
Krung Thai Bank PCL, 2 Floor, North Nana Branch 35 Sukhumvit Rd.,Klong Toey Nua Subdistrict , Wattana District, Bangkok 10110 Telephone: 083-490-2871
Nong Sarai, Pak Chong, Nakhon Ratchasima 30130 Tel. (044) 279-511 Fax. (044) 279-574
Nakhon Ratchasima Branch
Bangkhae Branch
6th Floor The Mall Group Building Bangkhae 275 Moo 1 Petchkasem Road, North Bangkhae, Bangkhae, Bangkok 10160 Tel. (66-2) 454-9979 Fax. (66-2) 454-9970
624/9 Changphuek Road, . Naimaung, A.Maung, Nakhon Ratchasima 30000 Telephone: (044) 247222 Fax: (044) 247171 Information herein was obtained from sources believed to be reliable, but its completeness and accuracy are not guaranteed. All opinions expressed constitute our views on that date and are not intended as an offer or solicitation to sell or buy any securities. Investors should exercise care when making a decision to invest in securities. No one may modify or distribute any part of this report unless written permission is first received from Seamico Securities Plc. If any modifications are made, quotes or references taken from the report and the report date must be clearly mentioned and must not cause misunderstanding or damage to the company.
Neutral
16 June 2015
Prefer downstream to upstream, with selective picks
“Neutral” rating maintained, with selective picks We maintain our “Neutral” rating on the energy sector and prefer downstream/integrated players to upstream E&P given that the low crude oil price will provide more benefit to downstream players; moreover, the tightening ethylene‐chain market with a projected high operating rate will firmly uphold PE spreads towards 2016E. We recommend applying a strategy of selective picks, with the same basket of top picks – PTT (15E TP; Bt414) and IRPC (15E TP; Bt5.1); however, we have turned more positive on PTTGC with a rating upgrade to “Outperform” (15E TP: Bt72). Good start with high GRM in 1H15, but cautious view remains
Share data (Energy & Utilities) SET index
1,501.89
Sector index
19,543.79
52‐week high
22,190.44
52‐week low
17,617.57
Market capitalization (Bt m)
2,342,352.74
% of market cap
16.62
Avg daily turnover (m shares)
391.45
We believe the rally in the market GRM has mostly played out in 1H15 with the Singapore GRM YTD averaging at US$8.28/bbl. The stronger demand pull and inventory buildup driven by low prices (gasoline in particular) as well as the tightening supply from the maintenance season in 2Q have been the main catalysts. Given the resumption of plants from the maintenance season, the end of Ramadan and the US driving season in 3Q, along with the ramp up of new refining additions, we expect the GRM to weaken in 2H15E towards 2016E. Improving aromatics spreads in 2Q15 QTD but still in downturn
Absolute
‐3.29
4.40
‐1.38
We are seeing improving spreads in 2Q15 QTD with short‐term drivers from the unplanned shutdowns of aromatics plants in China and restricted aromatics feedstock (reformate from the planned shutdowns of refineries in Asia and the growing gasoline demand in the market), but the spreads are likely to be in a downturn towards 2016E given the oversupply situation.
Relative
‐2.74
5.15
‐3.64
Firm demand backs solid polyethylene spreads
Beta
1.12
Sector Performance (%)
1M
3M
12M
Note: An executive of KT ZMICO Securities is also a member of BCP’s board.
The positive momentum from the supply losses from both the planned and unplanned shutdowns of Asian crackers in 1H15, as well as the firm demand of polyethylene (PE) from emerging markets, particularly in the case of China and India, has driven the ethylene spread (over naphtha) to US$824/ton in 2Q15 QTD (vs. US$532/ton in 1Q15). We expect the ethylene market to continue tightening in 2015‐16E, while the polyethylene market will move to equilibrium in the period, resulting in solid ethylene‐chain spreads towards 2016E. 2015‐16E earnings revisions
Patcharin Karsemarnuntana Analyst, no 17834 [email protected] 66 (0) 2695‐5837
Given the upbeat GRM in 1H15 and a tighter ethylene market continuing to strongly support PE derivatives, we raise the GRM and PE spread assumptions in 2015‐16E, resulting in 2015‐16 earnings revisions for PTTGC (+6%/+7%) and TOP (+29%/+26%), with PTTGC’s 2015E DCF‐based TP raised to Bt72/share (vs. Bt65/share previously); however, TOP’s 2015E DCF‐based TP is left unchanged at Bt58/share. We also raise PTT’s 2015‐16E earnings forecasts by +1%/+2% and the 15E SOTP‐based TP to Bt414/share (vs. Bt409 earlier) to reflect the upward revisions made to PTTGC and TOP.
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 9
Good start with high GRM in 1H15 We believe the rally in the market GRM has mostly played out in 1H15 with the Singapore GRM YTD averaging at US$8.28/bbl. The stronger demand pull and inventory buildup driven by low prices (gasoline in particular) as well as the tightening supply from the maintenance season in 2Q have been the main catalysts. The Singapore GRM has shown increases for three consecutive quarters, resulting in a softening trend for the 2H15E outlook on the ramp up of new refining capacity. The market GRM performed well in 1Q15 with Singapore complex GRM averaging at US$8.5/bbl (excluding yield loss), thanks to 1) the better crack spread, particularly in the case of gasoline (given strong demand due to low prices) and fuel with a narrowing negative spread; 2) restocking before entering the maintenance season of Asian refineries in 2Q; and 3) the deferred startup of the new 300kbd refinery in India to 4Q15 (from early 2015). For 2Q15, the combination of sustained high gasoline crack spreads and the maintenance season has helped keep Singapore complex GRM high at the average of US$8.05/bbl QTD despite the weakening spreads of middle distillates (gasoil, jet). Continuing upbeat gasoline crack spread with strong demand as the growth catalyst The gasoline crack spread has risen to US$19.6/bbl in 2Q15 QTD, with strong demand momentum driven by low prices. This is particularly the case for China, which has seen robust gasoline demand growth of 8% YoY in 2015 YTD. We don’t expect the abnormally high crack spread to continue with the end of Ramadan and the US driving season coming in 3Q. Figure 1: Refining market A) Singapore cracking GRM
B) Refinery outage in Asia (seasonal in 2Q)
Source: Bloomberg, PTTGC, TOP, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 9
D) Chinese vehicle sales
C) Gasoline demand growth in China
Source: Bloomberg, KT ZMICO Research Cautious view remains in 2015‐16E given the larger refining additions Given the resumption of plants from the maintenance season in 2Q, the end of Ramadan and the US driving season in 3Q, the ramp up of new refining capacity totaling 0.7mbd from Saudi Arabia and UAE in 2H15, and the kickoff of a 300kbd refining addition from India in 4Q15, we expect the GRM to weaken in 2H15E. Despite our upward revision on the GRM assumption to US$5.5/bbl in 2015E (given the upbeat GRM in 1H15) and US$5.0/bbl in 2016E (vs. the earlier US$4.5/bbl in both years), we keep our cautious view on GRM in 2015‐16E given the larger refining additions of 649kbd and 550kbd (effective refining capacity based on the projects’ start‐up periods) in Asia Pacific and the Middle East, respectively, vs. 525kbd in 2014. Figure 2: Additional refining demand and supply outlook A) CDU additions and demand additions
B) Scheduled startup of new refineries
Source: Bloomberg, KT ZMICO Research Note: Adjusted CDU additions are effective capacity based on their start‐up period REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 3 of 9
Improving spreads in 2Q15 QTD but still in a downturn towards 2016E The worst for aromatics spreads is behind us in 2014 following the huge supply additions in the year and we are seeing improving spreads in 2Q15 QTD with short‐term drivers from the unplanned shutdowns of aromatics plants in China (Dragon Aromatics with 1.6mta PX capacity and 0.46mta BZ due to a fire incident in Apr‐2015) and restricted aromatics feedstock (reformate from the planned shutdowns of refineries in Asia and the growing gasoline demand in the market); nonetheless, the spreads are likely to be in a downturn towards 2016E. In our view, the main negative pressure is the oversupply situation in the aromatics market with additional capacity to outpace additional demand, particularly in the case of PX in 2015E. This is in accordance with the projected lower operating rate of 78% in 2015E for PX (vs. 80.8% in 2014) and the sustained low operating rate of 72.4% in 2015E for BZ (vs. 72.5% for 2014). Given our reaffirmed outlook on a weak aromatics market, we slightly fine‐tune our spread assumptions, with the PX spread (over condensate) at US$350/ton in 2015E and US$330/ton in 2016E (vs. US$330/ton and US$350/ton previously), and the BZ spread (over condensate) at US$220/ton in 2015E and US$280/ton in 2016E (vs. US$300/ton for both years earlier). Figure 3: Aromatics market A) Movement of PX and BZ spreads
B) Global aromatics demand/supply growth Paraxylene
2014
2015
Demand growth (mn tons) Capacity growth (mn tons) % operating rate
1.34
2.08
4.67
3.79
80.8
78.0
Benzene
2014
2015
Demand growth (mn tons) Capacity growth (mn tons) % operating rate
1.71
1.02
0.99
1.20
72.5
72.4
Source: PTTGC, KT Zmico Research Firm demand backs solid polyethylene spreads The positive momentum from the supply losses from both the planned and unplanned shutdowns of Asian crackers in 1H15, as well as the firm demand of polyethylene (PE) from emerging markets, particularly in the case of China and India, has driven the ethylene spread (over naphtha) to US$824/ton in 2Q15 QTD (vs. US$532/ton in 1Q15). We expect the ethylene market to continue tightening in the next few years with the additional demand to exceed the additional supply. This will result in higher operating rates of over 90% towards 2016E, causing the ethylene spread (over naphtha) to stay strong in the next few years. Meanwhile, the polyethylene market will move to equilibrium in 2015‐16E REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 9
with the additional demand being nearly equal to the supply additions and the operating rate projected to be sustained at 86‐87% in the period. Based on the firm outlook of the ethylene‐chain market, we retain our solid view on PE spreads towards 2016E, with an upward revision made on the PE spread assumption (HDPE/LLDPE/LDPE) to US$700/ton in 2015E and in the range of US$650‐680/ton in 2016E (vs. US$600‐680/ton and US$600‐650/ton, respectively). Figure 4: Ethylene and polyethylene market B) Cracker outages in Asia
A) Movement of ethylene and HDPE prices and spreads
C) Ethylene demand and supply growth in Asia
D) Polyethylene demand and supply growth in Asia
Ethylene
2014
2015
Polyethylene
2014
2015
Demand growth (mn tons) Capacity growth (mn tons) % operating rate
2.89
5.59
3.62
4.38
2.90
4.70
1.96
4.55
89.4
91.0
Demand growth (mn tons) Capacity growth (mn tons) % operating rate
86.3
86.6
Source: PTTGC, KT Zmico Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 5 of 9
2015‐16E earnings revisions Given the expected sustained low crude oil price leading to cost savings from yield loss (high yield loss/high benefit) and a narrowing of the crude premium (given the structural change in oil supply following OPEC’s strategy to win back market share and the boom in US shale oil), along with accelerating demand from low prices (particularly in the case of gasoline), we raise our market GRM to US$5.5/bbl in 2015E to reflect the stronger‐than‐expected GRM in 1H15; however, we are still concerned about a weakening trend in 2H15E and expect a decline to US$5.0/bbl in 2016E (vs. the earlier US$4.5/bbl in both years). As a tighter ethylene market will continue to strongly support PE derivatives, we also raise our PE spreads (HDPE, LDPE, LLDPE) to US$700/ton in 2015E and in the range of US$650‐680/ton in 2016E (vs. the earlier forecasts of US$600‐680/ton and US$600‐650/ton, respectively). Meanwhile, we slightly fine‐tune the aromatics spreads. Given the revision on product spreads, we have made 2015‐16 earnings revisions for PTTGC (+6%/+7%) and TOP (+29%/+26%), with PTTGC’s 2015E DCF‐based TP raised to Bt72/share (vs. Bt65/share previously); however, TOP’s 2015E DCF‐based TP is left unchanged at Bt58/share with the upward revision on GRM to be offset by the downward revision on aromatics spreads (over ULG 95) and lube base spreads. We also raise PTT’s 2015‐16E earnings forecasts by +1%/+2% and the 15E SOTP‐based TP to Bt414/share (vs. Bt409 earlier) to reflect the upward revisions made to PTTGC and TOP. Meanwhile, we maintain our earnings forecasts for BCP and IRPC, with the former’s high market GRM of US$6/bbl already factored into 2015‐16E and the latter’s market GIM (gross integrated margin) previously revised up to US$11/bbl in 2015E and US$13/bbl in 2016E, with cost savings from yield loss and stronger refined product spreads as the main catalysts. Figure 5: Summary of product spreads Products spreads (US$/ton)
New
Old
1Q14
2Q14
3Q14
4Q15
1Q15
2Q15 QTD
1H15 YTD
2014
2015E
2016E
2015E
2016E
Naphtha MOPJ
935
951
913
647
494
563
529
862
540
585
450
585
Ethylene – MOPJ
507
496
565
567
532
824
678
534
600
550
420
400
Propylene – MOPJ
434
328
388
385
339
366
353
384
350
380
420
420
HDPE – MOPJ
620
618
691
802
694
816
755
683
700
650
650
620
LLDPE – MOPJ
625
627
688
785
687
814
751
681
700
650
600
600
LDPE – MOPJ
705
653
688
793
698
843
771
710
700
680
680
650
Condensate
917
922
872
634
453
533
493
836
531
573
448
573
PX – Condensate
386
334
479
401
332
387
360
400
350
330
330
350
BZ – Condensate
380
370
430
320
217
259
238
375
220
280
300
300
PX – ULG95
273
221
371
252
255
255
255
279
250
260
280
300
BZ – ULG95
286
254
327
207
98
121
109
268
120
210
250
250
Olefins & PE
Aromatics
Source: PTTGC, TOP, KT ZMICO Research
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 6 of 9
Figure 6: 2015‐16E earnings forecasts of upstream and downstream players Core profit (Btmn) 2014*
2015E
% CAGR
2016
(15-16E)
NP (Btmn) 2014*
2015E
% CAGR 2016E
(15-16E)
% chg in NP from old
2015E
2016E
Downstream BCP
11
5,551
5,294
2,098
712
5,303
5,146
168.9
0%
0%
IRPC
(8,560)
5,280
7,901
nm
(5,235)
7,831
7,901
nm
0%
0%
TOP
(5,408)
10,272
10,325
nm
(4,026)
9,977
10,325
nm
29%
26%
PTTGC
16,053
31,457
32,033
41.3
15,036
30,669
32,033
46.0
6%
7%
49,341
28,176
36,936
(13.5)
21,490
30,688
36,936
31.1
0%
0%
78,845
96,633
110,217
18.2
55,795
99,236
110,217
40.5
1%
2%
Upstream PTTEP Integrated PTT
15E TP (Bt)
Rating
New
Old
New
38.5
38.5
BUY
BUY
8.8
5.1
5.1
BUY
BUY
11.1
Old
15E PER (x)
15E EV/EBITDA (x)
15E Yield (%)
15E ROE (%)
1.2
6.3
4.5
1.2
10.7
4.5
15E PBV (x)
Downstream
TOP
58
58
Underperform
Underperform
10.7
1.2
7.0
4.2
PTTGC
72
65
Outperform
Underperform
9.8
1.2
6.4
4.6
14.8 11.1 11.5 13.0
122
122
Underperform
Underperform
14.4
1.0
3.5
3.2
7.3
414
409
BUY
BUY
9.8
1.3
4.7
3.6
13.5
BCP IRPC
Upstream PTTEP Integrated PTT
Source: KT ZMICO Research Note: *low base earnings due to massive stock loss, LCM impact, and impairment losses on assets/investments
“Neutral” rating maintained, with selective picks We maintain our “Neutral” rating on the energy sector and prefer downstream/integrated players to upstream E&P given that the low crude oil price will provide more benefit to downstream players (cost savings from yield loss/high product demand from low prices) against PTTEP (with the lag time effect from low oil prices to apply negative pressure to the gas price); moreover, the tightening ethylene‐chain market with a projected high operating rate will firmly uphold PE spreads towards 2016E. Given this investment theme, we believe the 15E PBV trading range of downstream players, mostly at mean to ‐1SD, will outperform PTTEP’s level of ‐2SD. With the rally in the market GRM having mostly played out in 1H15 and the GRM to turn less upbeat in 3Q15 after the resumption of plants from the maintenance season alongside the end of Ramadan and the US driving season in 3Q, we expect some selling pressure on downstream to provide a good opportunity for accumulation, with selective picks as our strategy. Our basket of top picks still includes PTT (Buy; 15E TP Bt414) given its more defensive earnings relative to the benefit from energy reform and its affiliates, and IRPC (Buy; 15E TP Bt5.1) given the expected high cost savings from high yield loss (6% against the other downstream players at the average of 3‐4%) and the earnings base enlargement backed by the UHV project (contribution to start in 4Q15). Meanwhile, we turn more positive on high PE exposure as the spreads are likely to stay solid towards 2016E; thus, we upgrade PTTGC’s rating to “Outperform” with a newly‐revised 15E TP of Bt72 (from “Underperform” previously). REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 7 of 9
Figure 7: Energy’s share price performance
Source: Bloomberg, KT ZMICO Research Figure 8: Energy stocks at their current 2015E PBV vs. their historical PBV trading range
Source: Bloomberg, KT ZMICO Research
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 8 of 9
DISCLAIMER This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. The use of any information contained in this document shall be at the sole discretion and risk of the user.
KT ZMICO RESEARCH – RECOMMENDATION DEFINITIONS STOCK RECOMMENDATIONS BUY: Expecting positive total returns of 15% or more over the next 12 months OUTPERFORM: Expecting total returns between ‐10% to +15%; returns expected to exceed market return over six months period because of specific catalysts UNDERPERFORM: Expecting total returns between ‐10% to +15%; returns expected to below market return over six months period because of specific catalysts SELL: Expecting negative total returns of 10% or more over the next 12 months
SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months.
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 9 of 9
th
th
th
th
KT•ZMICO Securities Company Limited
st
8 , 15 -17 , 19 , 21 Floor, Liberty Square Bldg., 287 Silom Road, Bangrak, Bangkok 10500 Telephone: (66-2) 695-5000
Phaholyothin Branch
rd
Fax. (66-2) 631-1709
Ploenchit Branch
th
nd
2
Sindhorn Branch
3 Floor, Shinnawatra Tower II,
8 Floor, Ton Son Tower,
1291/1 Phaholyothin Road,
900 Ploenchit Road, Lumpini,
Floor, Sindhorn Tower 1, 130-132 Wireless Road, Lumpini,
Phayathai, Bangkok 10400
Pathumwan, Bangkok 10330
Pathumwan, Bangkok 10330
Telephone: (66-2) 686-1500
Telephone: (66-2) 626-6000
Telephone: (66-2) 627-3550
Fax. (66-2) 686-1666
Fax. (66-2) 626-6111
Fax. (66-2) 627-3582, 627-3600
Nakhon Pathom Branch 1156 Petchakasem Road, Sanamchan Subdistrict, Amphoe Meuang , Nakhon Pathom Province 73000 Telephone: (034) 271300 Fax: (034) 271300 #100
Chachoengsao Branch
Viphavadee Branch
Phitsanulok Branch
G Floor, Lao Peng Nguan 1 Bldg.,
Krung Thai Bank, Singhawat Branch
333 Soi Cheypuand, Viphavadee-Rangsit Road,
114 Singhawat Road,
Ladyao, Jatujak, Bangkok 10900
Muang, Phitsanulok 65000
Telephone: (66-2) 618-8500
Telephone: 083-490-2873
Fax. (66-2) 618-8569
th
Chonburi Branch
Pattaya Branch
108/34-36 Mahajakkrapad Road,
4 Floor, Forum Plaza Bldg.,
382/6-8 Moo 9, T. NongPrue,
T.Namuang, A.Muang,
870/52 Sukhumvit Road, T. Bangplasoy,
A. Banglamung, Cholburi 20260
Chachoengsao 24000
A. Muang, Cholburi 20000
Telephone: (038) 362-420-9
Telephone: (038) 813-088
Telephone: (038) 287-635
Fax. (038) 362-430
Fax. (038) 813-099
Fax. (038) 287-637
Khon Kaen Branch
5th Floor, Charoen Thani Princess Hotel,
Hat Yai Branch
Sriworajak Building Branch
200/301 Juldis Hatyai Plaza Floor 3,
1st – 2nd Floor, Sriworajak Building, 222
260 Srichan Road, T. Naimuang,
Niphat-Uthit 3 Rd,
Luang Road, Pomprab,
A. Muang, Khon Kaen 40000
Hatyai Songkhla 90110
Bankgok 10100
Telephone: (043) 389-171-193
Telephone: (074) 355-530-3
Telephone: (02) 689-3100
Fax. (043) 389-209
Fax: (074) 355-534
Fax. (02) 689-3199
Central World Branch
Chiang Mai Branch
Phuket Branch
999/9 The Offices at Central World,
422/49 Changklan Road, Changklan
22/61-63, Luang Por Wat Chalong Road,
16th Fl., Rama 1 Rd, Pathumwan,
Subdistrict, Amphoe Meuang,
Talat Yai, Mueang Phuket,
Bangkok 10330
Chiang Mai 50100
Phuket 83000
Telephone: (66-2) 673-5000,
Telephone: (053) 270-072
Tel. (076) 222-811,(076) 222-683
(66-2) 264-5888 Fax. (66-2) 264-5899
Fax: (053) 272-618
Fax. (076) 222-861
Pak Chong Branch
Cyber Branch @ North Nana
173 175, Mittapap Road,
Krung Thai Bank PCL, 2 Floor, North Nana Branch 35 Sukhumvit Rd.,Klong Toey Nua Subdistrict , Wattana District, Bangkok 10110 Telephone: 083-490-2871
Nong Sarai, Pak Chong, Nakhon Ratchasima 30130 Tel. (044) 279-511 Fax. (044) 279-574
Nakhon Ratchasima Branch
Bangkhae Branch
6th Floor The Mall Group Building Bangkhae 275 Moo 1 Petchkasem Road, North Bangkhae, Bangkhae, Bangkok 10160 Tel. (66-2) 454-9979 Fax. (66-2) 454-9970
624/9 Changphuek Road, . Naimaung, A.Maung, Nakhon Ratchasima 30000 Telephone: (044) 247222 Fax: (044) 247171 Information herein was obtained from sources believed to be reliable, but its completeness and accuracy are not guaranteed. All opinions expressed constitute our views on that date and are not intended as an offer or solicitation to sell or buy any securities. Investors should exercise care when making a decision to invest in securities. No one may modify or distribute any part of this report unless written permission is first received from Seamico Securities Plc. If any modifications are made, quotes or references taken from the report and the report date must be clearly mentioned and must not cause misunderstanding or damage to the company.
