Future Potential of HengYuan
Part 1 - Biggest Winner of Refinery Margin Rally
Hengyuan (HY) is a refinery company owned by Shandong HengYuan Petrochemical company limited, China. It acquired 51% shares from Shell oversea holding in Dec 2016 for RM300 mil. Let see from 2016 annual report who are the 30 largest shareholders of HY (after acquisition, updated to 31 March 2017)
One can observe that there are 3 local reputable institutional funds (Amanahraya, EPF, KWAP) still collectively holding more than 10% shares of HengYuan. Another investor that attracts my attention is Mr Deva Dassan Solomon (no 9, no 14, no 15, no 19 and no 20) holding substantial stake (some are through his family members).
A lot of investors may have bad perception about china controlled listed companies in Malaysia. From its Malaysia based business (factories in Port Dickson, auditors in Malaysia) and the data that I gathered, I think credibility of Hengyuan is Not an issue at all. You can refer to an article (by Icon88) about Hengyuan at https://klse.i3investor.com/blogs/icon8888/127661.jsp
Fundamental Data
HY’s profit (5 years) and dividend charts can be referred to my another article at https://klse.i3investor.com/blogs/david_petronm/127594.jsp. HY generated 171 sen EPS (Profit before tax). HY can be exempted of paying income tax is due to utilisation of tax losses (deductible temporary). Let revisit HY profit over past 3 years as shown in Figure below:
Its trailing 12-month profit before tax climbing to RM512 mil (171 sen EPS). If we consider about 26% tax rate, then EPS of HY will be around 126.5 sen which lead to PE ratio of 4.57. This is the past data and I am more interested on its future possible profit and PE. Let us have an analysis of HY possible future profit.
Coming quarter Profit Forecast for Q2’17 (April-June 2017)
Let me perform a forecast analysis for their latest Q2’17 (to be released in August) based on its refinery business.
Due to Crude oil price sliding from 31 March as compared to 30 June 2017, it will suffer some inventory stock loss as it should keep around 18-21 days of crude oil stock (18 days crude inventory of 2.02mil barrels is from calculation of quarterly crude oil sold data).
Calculation of profit (including stock loss)
1) Brent Crude oil reference price on 31 Mar17 = 52.95 USD/brl (based on investing.com on 31 March)
On 30 June, Brent oil price closed at = 48.2 USD/brl (based on Brent oil price at Asia time at 11.59pm from Investing.com)
Stock loss = 2.02mil brl x (48.2 - 52.95)
= USD - 9.59mil
= RM-41.24mil
(2.2mil brls are estimated 18 days stock from 10.1 mil barrels sold. Source: Q1’17 report)
2) Refinery margin in a quarter (based on its Q1 estimated throughput per day of 112.2kbpd although its max daily capacity is 156kbpd).
= 10.1mil barrels X USD8.25 (estimated profit margin per barrel)
= USD 83.33mil
= RM 358.30mil
Maybe some of you wonder how I get the refinery margin of USD8.25. Please refer to my 2nd article on Petronm (https://klse.i3investor.com/blogs/david_petronm/127424.jsp) or check on the graph for Singapore Crack Spread (refinery margin) data as below
The average data of 3 months crack spread is around USD9.1 and I take the value of USD8.25 is due to I discounted 10% for possible data reading error for higher margin of safety.
Still not convincing enough? Let see some past official refinery margin data from 2016 Hengyuan (former Shell) Annual Report (page 47) as below:
Source: HengYuan 2016 Annual report
From the table above, we can observe that HY’s FIFO (first in first out) margins were USD5.46 per barrel due to higher sales volume in 2016 vs 2015.
A quick comparison of the CME group crack spread chart and the table (2016 AR) we can notice that refinery margin was climbing higher in period of Q1’17 (average is higher than 5.46) that lead to the HengYuan reported a super high net profit of RM279 mil. One can also notice that refinery margin is even higher in Q2’17 (April-June) which is serve as ground support for my refinery profit calculation (358.30mil).
Let calculate the Gross profit of Hengyuan’s Q2’17 as below:
Gross Profit = -41.24+ 358.30
= 317.06mil
Assuming same operating cost, other income and finance cost of RM116.1 mil as per Q1’17 (from Q1 report),
Net Profit = (317.06-116.1) mil = RM200.96 mil.
This net profit has not factored in the highly possible forex gain due to appreciation of RM in Q2.
Assume Zero tax rate as per last quarter (utilize tax losses)
Net profit = RM200.96 mil
RM197.3 mil --> EPS of 66.99 sen.
Let see the possible coming 3 quarters result for YoY comparison
2016 and 2017 Quarter Profit
|
|
2016 (mil, EPS in sen) |
2017 (mil, EPS in sen) |
|
Q1 |
101.97, 33.88 |
279.48, 93.16 |
|
Q2 |
107.05, 35.56 |
calculated (200.96, 66.99) |
|
Q3 |
-80.80, -26.95 |
estimated by 80% from Q1’17 profit(223.84, 74.52) |
|
Q4 |
207.04, 69.27 |
?? (depend on refinery margin) |
|
Total |
335.72mil, 111.7 |
estimated 3Q only (709.26 mil, 234.67) |
Based on current price of RM5.79 with a possible 234.67 sen EPS (3 quarters only), one can estimate the possible PE for Henyuan after Q3’17 result is released in Nov 2017 (PE 2.4 or lower if refinery margin can be maintained).
From Q1’17 and Q4’16 reports, one can notice that HY keeps high level of inventory (increase from 825mil to 1075mil). I will discuss its possible motive of this high level of inventory in part 2 article.
I think Hengyuan should still have 30-40% upside in term of current market valuation. If refinery margin can be maintained in 2H2017, its upside room is sky high as it can reap super high profit from operation (Shell traded at price of RM8+ to RM10+ from 2011 to Sept 2013, please check the EPS at that period!)
Worry of its high level of debt?
One should notice that HengYuan has RM1,414 mil borrowings (Q1’17 report). We should assess its future earning capability and more importantly its free cash flow from operation to know its ability to pare down its debt.
Let have a look on its latest inventory value (source: HY Q1’17 report)
Inventory value: RM1,075 mil
Receivables = RM960 mil
Payables = RM604 mil
Cash in hand = RM285 mil
One should know that its inventory consist of and crude oil and refined petroleum products (gasoline, diesel etc) which is highly liquidable (can be easily sold in market). If HY really desperate for cash, it can always reduce its inventory level and convert some of them to cash.
In fact, it also has high level of Receivables which if we minus out Payable will result in a surplus of RM356 mil.
Total liquid assets = 1075+960-604 = RM1,431 mil
These liquid assets (without considering its cash in hand, lands, PPE etc) actually can settle ALL borrowings of HY with a positive surplus of RM17 mil.
Risk:
1. Stock loss of finished product (gasoline and diesel etc) from frequent price change which is a result of weekly price system (HY employs FIFO system which should has some gain and loss)
2. Big drop in refinery margin which I think is not likely to happen in short term based on my monitoring on Singapore Future price of petroleum finished products (Mogas 92 and 95).
3. High volatility of crude oil price (dropping may result in stock loss) while price up will result in stock gain but the loss can be easily offset by higher refinery margin with surplus (from 2015 and 2017 Q1’s results). Crude oil is in decent range (USD43-USD55) which is profitable for refinery player (from increasing refinery crack spread data from CME website)
4. Upgrading plan (RM700 mil) which has been finalized to ensure HY to meet the Euro 4M specifications mandated by the government. The project is planned to be financed mainly from a mix of cash flow generated from operations and a further draw down from an existing term loan. High level of debt can be reduced by foreseeable huge profit and cash flow from operation.
5. This RM700mil upgrade also increase the daily throughput which may further increases its profit and drive down its refinery processing cost per barrel.
Summary
1. We are talking about nearly 40 mil barrels of oil sales volume per annum (AR 2016 data). Imagine if HY can reap a profit margin of USD6 to USD8 per barrel, how much gross profit HY can generate per year?
2. Crude oil price has been stabilizing in the range of USD43 to USD55 in 2017. This paves the room for stable (in fact increasing) refinery margin and I foresee future margin should be sustainable.
3. Due to Ramadan month was in Q2’17 (June), it is expected higher number of land and air travelling which should increase HY’s selling volume (HY major customer is Shell Malaysia)
4. Possibility of increasing its daily refinery throughput will further drive its profit to higher level. Currently HY is running at around 72% of its max daily capacity (156kbpd)
5. Higher future demand of gasoline, diesel, LPG, and aviation fuel from growing vehicle population in Malaysia will provide future growth opportunity in profit for Hengyuan.
6. Buying a counter is buying its future profitability where past FA data is served as reference. Although HY current balance sheet is still not healthy enough, but with lucrative refinery margin in 1H2017, I think it can improve its balance sheet and cash flow by year end.
Stay tune for my Hengyuan’s part 2 report for its free cash flow analysis, motive of its high inventory, ROE, quality of earning, possible foreign exchange gain or loss, valuation analysis and its major customer relationship.
If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is my own imagination for all the assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.
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HENGYUAN Part 8: Valuation, Q4 profit and Q12018 Spread (Davidtslim)
Created by davidtslim | Jan 19, 2018
Discussions
8 people like this. Showing 38 of 38 comments
I hate environmental polluting corporations.
http://ejchina.blogspot.my/2014/05/blog-post_5322.html?m=1
I rather pick petronm and pchem.
2017-07-21 19:36
For those who do not read Chinese, I provided a news report link on the parent company of Hengyuen. The news was published by an environmentally concern reporter in 2012.
It said Hengyuan Shandonghas been polluting the nearby area through directly channel dark-color waste water into the drainage and black smog spreading tenths of mile, creating problems such as undrinkable underground water, sickness etc.
We all have choices. May goodness be with you.
2017-07-21 19:52
http://www.youtii.com/news/html/2017/4/94549.htm
This is a news link that Hengyuan Shandong is fined rmb400,000 for refuse to comply with environmental law, this happen as recent as April this year.
2017-07-21 20:06
As recent as Jan this year, Hengyuan shandong was penalised.
http://news.iqilu.com/shandong/yaowen/2017/0126/3361662.shtml
2017-07-21 20:58
If you see the above article i posted on Ruwais refinery, what is most mind-boggling is this:
"they are now mainly producing Fuel Oil as they could only operate their Hydroskimming unit as their Catalytic Cracking unit for Higher conversion to Gasoline (and other lower hydrocarbon chain lengths) is the one damaged due to the fire"
Despite all this the Singapore Fuel Oil Crack spread is currently shooting sky high...meaning there are so many other factors that are conducive regionally to maintain a healthy overall refinery margins.
2017-07-21 21:02
Probability: It seem that refinery margin keeping its momentum in Q3'2017. Hengyuen super high profit in Q1'17 maybe can be repeated in Q3 or Q2.
2017-07-21 22:05
yeah David...i am certain by the time Q3 results are out (just 4 months away), HRC would be in a completely different class.
2017-07-21 22:28
The crude oil stock maybe more than 18 days as its inventory value is high.
2017-07-21 22:36
yup, that is one point i wanted to correct you, but leave it...as there are safety margins on your refining margins, throughput, forex etc. Even if its way lower it does not matter.
Inventory down valuation does not affect cash flow, i.e will cause cash flow to be higher than earnings. I am hoping for a spectacular cash flow on Q2!
2017-07-21 22:39
Probability: I get your point. I also thinking of higher days of crude oil stock but I hv no data from AR to refer.
I think cash flow can be higher than earning in coming Q2 results. I think a spectacular cash flow in Q2 is likely to happen.
2017-07-21 22:46
market has now realized Not to link Oil price with Refinery Performance i.e Margins..same way they will realize stock loss or gains are temporary effects which will be having zero cumulative effects just like how you take out non-core operating profit (one off gains/loss) to value the stock based on core operating profit.
I was a bit concern on inventory loss effects on Reliance India results using a a greater delta change on Brent pricing than u had used, but their results proved otherwise, meaning your basis on delta price are probably more correct.
2017-07-21 22:53
Raider says...people are too worried about refinery earnings loh...!!
U need to understand loh...HRC trading at PE 3x...why leh bcos sceptical about refinery profit sustainablility loh...!!
Also people worried about inventory losses too loh !!
Put it this way loh....!!
At PE 3x....HRC is generating 33% return pa loh...!!
If u look at 2015 and 2016 HRC is generating more than EPS Rm 1.00 mah...!!
So if HRC can generate another EPS above rm 1.00 in 2017 certainly mkt will rerate mah....!!
It is unsustainable HRC PE maintain so low at 3x mah....!!
What is the fair rerate conservative value leh ??
Raider think at least PE 6x loh....!!
Thus if
2015 EPS Rm 1.00
2016 EPS Rm 1.00
2017 est EPS Rm 2.00
Avg EPS Rm 1.33
So if AVG EPS Rm 1.33 for 2017 ...rerate PE 6x....will mean HRC easily immediate target share price of Rm 8.00, this is coming 2nd qtr reporting loh...!!
So be prepare to expect HRC share price at around Rm 8.00 in aug after 2nd qtr reporting date loh...!!
2017-07-21 23:52
If petronm can very smooth to hit RM12,
I think hrc also will ard RM10
Ppl Will chase same type company
"Refinery"
2017-07-22 00:00
Probability: My calculation try to be conservative. When the actual result released in Aug are better than my estimated profit, this can give market a surprise and triggers a strong buy.
2017-07-22 00:02
No need to depend on Petron....in fact HRC will take the lead in the month of August loh....!!
Its share price will move ahead 1st....in anticipation of good result coming loh....!!
2017-07-22 00:03
I think both stock hvnt got banker come and goreng..
Both of their total share quiet limit
All below 300mil
If up can shoot very fast
2017-07-22 00:03
David and probability estimate of HRC result too high loh...!1
Raider see even if HRC report EPS Rm 0.35 for 2nd qtr, HRC share price will fly, bcos the previous yr corresponding qtr eps is only Rm 0.15 loh...!!
If we set low hurdle of eps Rm 0.35 for 2nd, 3rd & 4th...HRC eps will exceed rm 2.00 loh...!!
2017-07-22 00:07
always amazed by raiders ability to take a step back..and look at the big picture..
unlike many of us who gets bogged down with silly nitty gritties..he he
Posted by stockraider > Jul 21, 2017 11:52 PM | Report Abuse
Raider says...people are too worried about refinery earnings loh...!!
U need to understand loh...HRC trading at PE 3x...why leh bcos sceptical about refinery profit sustainablility loh...!!
Also people worried about inventory losses too loh !!
Put it this way loh....!!
At PE 3x....HRC is generating 33% return pa loh...!!
If u look at 2015 and 2016 HRC is generating more than EPS Rm 1.00 mah...!!
So if HRC can generate another EPS above rm 1.00 in 2017 certainly mkt will rerate mah....!!
It is unsustainable HRC PE maintain so low at 3x mah....!!
What is the fair rerate conservative value leh ??
Raider think at least PE 6x loh....!!
Thus if
2015 EPS Rm 1.00
2016 EPS Rm 1.00
2017 est EPS Rm 2.00
Avg EPS Rm 1.33
So if AVG EPS Rm 1.33 for 2017 ...rerate PE 6x....will mean HRC easily immediate target share price of Rm 8.00, this is coming 2nd qtr reporting loh...!!
So be prepare to expect HRC share price at around Rm 8.00 in aug after 2nd qtr reporting date loh...!!
2017-07-22 00:08
Looking carefully on share performance in its glory days;
yr share price range average pe
2005 8.50 to 12.30 6x
2006 9.55 to 11.20 12x
2007 9.50 to 11.60 5.5x
2008 7.95 to 11.80 loss
2009 8.05 to 11.30 10x
2010 10.40 to 10.98 30x
2011 9.11 to 11.20 loss
2012 8.38 to 10.38 loss
2013 6.38 to 8.99 loss
2014 4.60 to 7.00 loss
2015 4.40 to 6.00 3.5x
2016 2.10 t0 6.00 3x
What cause HRC earnings to collapse in 2011 to 2014 ??
It is due mainly to HRC capacity and few billion capex in 2011 during the refinery margin downturn loh....!!
In 2011 to 2014 refining gross margin collapse to usd rm 1.00 to 1.50 per barrel loh....!!
This make a disaster for HRC with huge depreciation after the refinery expansion in 2011 and low gross refinery margin a recipe for destruction mah....!!
HRC is on the road to recovery with refining margin of USD 6.00 bpd in 2015 and USD 5.50 bpd in 2016.
It is expected 2017 the refinery margin will be USD 7.00 to 9.50 bpd mah.....!!
With this type of good margin PE rerating can easily go 6x or more loh...!!
Raider sees the glory days of SHELL trade above Rm 10.00 will be restored in 2017.
2017-07-22 12:08
Alex...any teaching, whether investing, trading, treating patience or even religion (especially) one can never reveal the secrets 100% completely..share share a bit can la...
If not how the teacher, the preacher or even the doctor can cari makan in future?
some teachers are also as smart as u la...
2017-07-22 13:41
THE STRONG CASE FOR PETRON ARE AS FOLLOWS;
1. STRONG SHAREHOLDER SAN MINGUEL DESERVE HIGHER RATING
2. INTEGRATED WITH REFINERY AND RETAIL
3. STRONGER BALANCE SHEET
4. PAYS DIV
PETRON IS STILL VERY BIG UNDERVALUE WHEN COMPARE WITH PET DAG.
IT DESERVE BETTER PRICE TOO...!!
2017-07-23 12:51
Malaysia : Oil Refinery Players :-
1)Melaka I Refinery (Petronas), 100,000 bbl/d (16,000 m3/d)
2)Melaka II Refinery (Petronas/Phillips 66), 170,000 bbl/d (27,000 m3/d)
3)Kertih Refinery (Petronas), 40,000 bbl/d (6,400 m3/d)
4)Hengyuan Port Dickson Refinery (Hengyuan), 156,000 bbl/d (24,800 m3/d)
5)Petron Port Dickson Refinery (Petron), 88,000 bbl/d (14,000 m3/d)
6)Kemaman Bitumen Refinery (TIPCO), 30,000 bbl/d (4,800 m3/d)
Remarks :
HENGyuan Vs PetronM
HengYuan's refinery capacity is twice the size of Petron Malaysia, hence with good crack spread we should see HengYuan's profit will be double of PetronM's earning potential.
It should be a better bet in terms of profitability for HengYuan against PetronM.
Theoritically, HengYuan's share price (300mil shares @ RM5.80) should be higher than PetronM (279Mil shares @ RM8.50).
It is about time for HengYuan to catch up again PetronM. I believe within 6-9 months, HengYuan's share price should be running ahead of PetronM.
2017-07-24 08:30
"it will suffer some inventory stock loss as it should keep around 18-21 days of crude oil stock "
18-21 days duration? Anyone can help enlighten me? how long the inventory can be keep with a fix price? or the price fluctuated each day?
2017-07-30 01:03
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paperplane2016
another great work! master piece. I am more interested in the Free cashflows.
2017-07-21 18:21