simple answer, cash flow'

it takes longer time for profit to be realized into cash due to hedging

Posted by UlarSawa > Sep 8, 2022 11:36 AM | Report Abuse

Why need to borrow more money leh. One simple question. Why need to issue 5bil notes if all arectaken care off. Why. Why. Why. Haiyoh. Correct?

@ular, check on cash flow hedging reserve....as potential risk mitigation plan, they need to take necessary measures

cash flow hedges needs to paid BEFORE money is collected from physical sales transactions...and cost of hedging reserve is high

who knows it can persist if gasoline crack spread shoot up above 31 USD/brl again

to protect themself from potential cash flow issues its good to keep more cash

Posted by UlarSawa > Sep 8, 2022 11:29 AM | Report Abuse

If everything is ok why need to raise 5bil notes leh. Haiyoh. Correct?

payable is taken care of receivables ma..

Posted by UlarSawa > Sep 8, 2022 11:28 AM | Report Abuse

Then trade payable almost 4bil how. Haiyoh. Correct?

I finalized realized MM is the man... just so in tune with Bursa investors

@ular, have you gone through this?

Reference:

worth spending 5 min to understand though the english is quite difficult to grasp. After 3 minutes into the overview, the main part comes and its easy to understand.

'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'

https://www.youtube.com/watch?v=arCSncmfB8k

pot calling the kettle black

Posted by Income > Sep 8, 2022 10:42 AM | Report Abuse

I hold my head high even if I am B40.
Useless to be Millionaires but keep your useless facts and figures and very cocky and kurang Asam attitude.

Post removed.Why?

the enlightened one...give us some light

Posted by Income > Sep 8, 2022 10:35 AM | Report Abuse

ProfB, you teach ajaran sesat kah by looking at what you want only while ignoring the rest of the factors?
Speechless

only need high margin...all that matters is the crack spread

it has no relation to oil price you can say

Posted by UlarSawa > Sep 8, 2022 10:28 AM | Report Abuse

HY need high vol and high oil price and high margin to earn explosive result but subjected to hedging gain or loss leh. Can all the factors just happen at the same time for HY to enjoy the best result. Think lah. Macam kena 4d ini macam lah. Kena 3 nombor pun takda get any prize lah. Haiyoh. Correct?

for the same demand, if supply is higher the oil price can be lower

however refinery can dictate high margin (crack spread) as they are the constraint for producing refined products

Posted by BobAxelrod > Sep 8, 2022 10:24 AM | Report Abuse

Then where is the demand for Oil and your Sales in quantity in finished products?

Posted by Sslee > 2 minutes ago | Report Abuse
I prefer oil price at USD50 and refining margin stay at double digits figure.
This will benefit refinery a lot in reducing their working vapital and at the same time earned a double digits refining margin.

Unrealized Cost of Hedging Reserve (COHR) , loss / gain: (A-M) x V

A = hedged crack spread value, 12.7 USD/brl
V = barrels volume of refined products hedged, 18 million
M = Marked to Market pricing of the hedged refined product at end of reporting period (mark to market)

Since at the end of June 22', the avg crack spread of the refined products, e.g gasoline at 31.6 USD/brl, the opportunity lost for the period of hedging is

Unrealized Cost of Hedging Reserve (COHR):
= (12.7 - 31.6) USD/brl x 18 million barrels
= - 338 million USD or MYR 1,490,267,000

...

Now lets see what happens when say at end of Sept 22, Gasoline crack drops to its usual average of 5.7 USD/brl

Unrealized Cost of Hedging Reserve (COHR):
= (12.7 - 5.7) USD/brl x 18 million barrels
= 90 million USD or gain of MYR 395,000,000

he he.. price up a little later also can...

you go through and comment ular pls

Posted by UlarSawa > Sep 8, 2022 10:13 AM | Report Abuse

Ya lah. 5 minutes after watch liao. HY price can rebound kah. Haiyoh. Correct?
Reference:

worth spending 5 min to understand though the english is quite difficult to grasp. After 3 minutes into the overview, the main part comes and its easy to understand.

'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'

https://www.youtube.com/watch?v=arCSncmfB8k

Reference:

worth spending 5 min to understand though the english is quite difficult to grasp. After 3 minutes into the overview, the main part comes and its easy to understand.

'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'

https://www.youtube.com/watch?v=arCSncmfB8k

Jet fuel, crack spread jumped to 41 USD/brl..

https://www.tradingview.com/symbols/NYMEX-ASD1!/

as predicted, Diesel Crack exploded to 55 USD/brl...

https://www.tradingview.com/symbols/NYMEX-GZ1!/

HY delivered the best ever EPS (at almost half of its market cap)....

and yet, purely due to GROSS MISPERCEPTION on the meaning of the below two clauses, it has market thinking HY earnings will revert back to its earlier earnings.

1. Cash flow hedge reserve (CFH), &
2. Cost of hedging reserve (COHR)

...............

The figures of the above reported in OCI of HY Q2 results, was purely to do with the effects of the Refining Margin Swap Contract (RMSC) that HY had entered.

Cash flow hedge (CFH) are simply ineffective (loss/gain) hedge portions of the RMSC which has been liquidated (settled) as of 30th June and awaiting respective physical market transaction to take place to offset these hedging losses.

Only when physical sales & purchase of the commodity takes place it can be reflected on P&L statement.

Reference:

'When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?'

https://www.youtube.com/watch?v=arCSncmfB8k


Whereas, Cost of hedging reserve (COHR) is simply the following:

Forward looking Mark-to-market estimate of the difference between the fixed price (hedged) and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate determined by the producer.

If one understands the above, it shall be perfectly clear why both (CFH & COHR) are not reported in P&L statement.

Think about it - if its a real loss they will surely reflect it as and when its known on P&L instantly.

When does Cash Flows Hedge Reserves (under OCI) gets transferred to P&L?

https://www.youtube.com/watch?v=arCSncmfB8k

Rock bottom EPS analysis
.........................

let us assume as extreme conservative scenario where 50% of HY throughput is hedged where they will only reflect hedge margin at 10 USD/brl, with the balance free to capture market margin

1. Diesel at 46% yield, cracks USD 50.36/brl
2. Jet fuel at 7% yield, cracks USD 38.40/brl
3. Gasoline at 35% yield, cracks USD 7.77/brl
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/brl

Gross profit from (Hedged) portion:
..............................

= (10.7 million x 50%) x (10 USD/brl) x (MYR 4.45/USD)
= 238 million MYR .....(1)



Gross profit (UN-HEDGED) portion:
............................

Refining margin/brl:

= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.35 x 7.77) + (0.12 x 7.77)
= (23.18 + 2.70 + 2.72 + 0.93)
= US $ 29.5 / brl

Gross profit:
= (10.7 million x 50%) x (29.5 USD/brl) x (MYR 4.45/USD)
= 702 million MYR ......(2)



Total gross profit (1) + (2)
= 238 + 702
= 940 million MYR

PBT = 840 million
PAT = 638 million
EPS = 2.12

you take out dividend, this stock is trading at 4.50 now

It has delivered EPS even better than what was estimated and yet, purely because of wrong perception on the meaning of the two clauses below, market is thinking it will revert back to its earlier earnings.

Cash flow hedge & Cost of hedging reserve

From what i have extracted and studied, these are nothing but the effects of the Refining margin swap contract.

Cash flow hedge (CFH) are basically hedge portions of the RMSC which has been liquidated as of 30th June and awaiting respective physical market transaction to take place to offset these hedging losses.

Whereas, Cost of hedging reserve (COHR) is simply the following:

Forward looking Mark-to-market estimate of the difference between the fixed price and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate determined by the producer.

Even if we assume the RMSC covers complete Gasoline production capacity of 35% yield x 10.6 million, 3.7 million barrels, you are securing the below gross profit after hedging losses or gain.

= 3.7 million x 12.7 USD/brl x 4.45 ex
= 209 million MYR.....(1)

No matter what the figures are reported on CFH & COHR, they are purely trying to show the ineffectiveness / effectiveness of the hedging but the profit contribution remains the same. (SERIOUSLY, THINK ABOUT THIS)

The CFH shows how much 'opportunity for greater profit than 209 million / per qtr' is confirmed loss while COHR shows potential loss if the scenario prolongs indefinitely for the balance notional value.

For every negative value on CFH & COHR that will take place, there will be equally higher gross profit in future physical market transaction where after deducting the hedging loss anticipated, you will report the same 209 million for gasoline per qtr.


For the balance refined products diesel, jet fuel and others (10.7 - 3.7 = 7 million barrels per qtr) , you have the following:

1. Diesel at 46% yield, cracks USD 50.36/bbl
2. Jet fuel at 7% yield, cracks USD 38.40/bb
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/bbl

Gross refining margin/brl:

= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.12 x 7.77)
= (23.18 + 2.70 + 0.93)/ (0.65)
= US $ 41.2 / brl

Gross Profit :

= (7 million barrel sales per qtr) x ( US $41.2/brl) x (MYR 4.45/USD)
= 1.283 Billion MYR........(2)


Total gross profit after hedging gain / loss: (1) + (2)
= 1.483 Billion MYR

EPS will be exceeding RM 3 per QTR

The above is what we will obtain going forward if the Diesel & Jet Fuel margins are stable around there. The hedging losses reported on page 8 (438 million) are the effects of monthly hedging of Diesel & Jet fuel as all refinery does and this expected to become zero as crack spread stabilizes from month to month.

ROCK BOTTOM EPS analysis
.........................

let us assume as extreme conservative scenario where 50% of HY throughput is hedged where they will only reflect hedge margin at 10 USD/brl, with the balance free to capture market margin

1. Diesel at 46% yield, cracks USD 50.36/brl
2. Jet fuel at 7% yield, cracks USD 38.40/brl
3. Gasoline at 35% yield, cracks USD 7.77/brl
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/brl

Gross profit from (Hedged) portion:
..............................

= (10.7 million x 50%) x (10 USD/brl) x (MYR 4.45/USD)
= 238 million MYR .....(1)



Gross profit (UN-HEDGED) portion:
............................

Refining margin/brl:

= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.35 x 7.77) + (0.12 x 7.77)
= (23.18 + 2.70 + 2.72 + 0.93)
= US $ 29.5 / brl

Gross profit:
= (10.7 million x 50%) x (29.5 USD/brl) x (MYR 4.45/USD)
= 702 million MYR ......(2)



Total gross profit (1) + (2)
= 238 + 702
= 940 million MYR

PBT = 840 million
PAT = 638 million
EPS = 2.12

you take out dividend, this stock is trading at 4.50 now

It has delivered EPS even better than what was estimated and yet, purely because of wrong perception on the meaning of the two clauses below, market is thinking it will revert back to its earlier earnings.

Cash flow hedge & Cost of hedging reserve

From what i have extracted and studied, these are nothing but the effects of the Refining margin swap contract.

Cash flow hedge (CFH) are basically hedge portions of the RMSC which has been liquidated as of 30th June and awaiting respective physical market transaction to take place to offset these hedging losses.

Whereas, Cost of hedging reserve (COHR) is simply the following:

Forward looking Mark-to-market estimate of the difference between the fixed price and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate determined by the producer.

Even if we assume the RMSC covers complete Gasoline production capacity of 35% yield x 10.6 million, 3.7 million barrels, you are securing the below gross profit after hedging losses or gain.

= 3.7 million x 12.7 USD/brl x 4.45 ex
= 209 million MYR.....(1)

No matter what the figures are reported on CFH & COHR, they are purely trying to show the ineffectiveness / effectiveness of the hedging but the profit contribution remains the same. (SERIOUSLY, THINK ABOUT THIS)

The CFH shows how much 'opportunity for greater profit than 209 million / per qtr' is confirmed loss while COHR shows potential loss if the scenario prolongs indefinitely for the balance notional value.

For every negative value on CFH & COHR that will take place, there will be equally higher gross profit in future physical market transaction where after deducting the hedging loss anticipated, you will report the same 209 million for gasoline per qtr.


For the balance refined products diesel, jet fuel and others (10.7 - 3.7 = 7 million barrels per qtr) , you have the following:

1. Diesel at 46% yield, cracks USD 50.36/bbl
2. Jet fuel at 7% yield, cracks USD 38.40/bb
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/bbl

Gross refining margin/brl:

= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.12 x 7.77)
= (23.18 + 2.70 + 0.93)/ (0.65)
= US $ 41.2 / brl

Gross Profit :

= (7 million barrel sales per qtr) x ( US $41.2/brl) x (MYR 4.45/USD)
= 1.283 Billion MYR........(2)


Total gross profit after hedging gain / loss: (1) + (2)
= 1.483 Billion MYR

EPS will be exceeding RM 3 per QTR

The above is what we will obtain going forward if the Diesel & Jet Fuel margins are stable around there. The hedging losses reported on page 8 (438 million) are the effects of monthly hedging of Diesel & Jet fuel as all refinery does and this expected to become zero as crack spread stabilizes from month to month.

What is a Cash Flow Hedge?

keyword - FORECASTED TRANSACTION (thats why its not placed into P&L).

A cash flow hedge is a hedge of the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction, that is attributable to a particular risk. It is possible to only hedge the risks associated with a portion of an asset, liability, or forecasted transaction, as long as the effectiveness of the related hedge can be measured.

Accounting for a Cash Flow Hedge

The accounting for a cash flow hedge for the hedging item is to recognize the effective portion of any gain or loss in other comprehensive income, and recognize the ineffective portion of any gain or loss in earnings. The accounting for a cash flow hedge for the hedged item is to initially recognize the effective portion of any gain or loss in other comprehensive income.

Reclassify these gains or losses into earnings when the forecasted transaction affects earnings.

https://www.accountingtools.com/articles/cash-flow-hedge

Cash flow hedge:

Settlement Risk

In an oil and gas transaction, settlement risk is the risk that a counterparty takes physical delivery of the producer's oil or gas and fails to pay for any or all of the delivered product. Settlement risk is, therefore, unique to physically settled contracts, including fixed-price and floating-price contracts. An oil and gas producer's exposure to settlement risk can be estimated in advance of delivery by multiplying the quantity of oil or gas to be delivered by the price to be paid by the purchaser.

Failure by a purchaser to pay under a physically settled oil and gas contract can impact the producer's ability to satisfy its obligations under a financially settled hedging contract. When a producer enters into an oil or gas swap contract it relies on its physical purchaser to take, and pay in a timely manner for, the oil or gas produced. When the oil or gas index price specified under the swap is greater than the fixed price under the swap for any specified period, the producer
owes the difference to the swap counterparty (see Swap Contracts). The producer often secures the funds to make payment under the financially settled hedging contract from funds received under the physically settled oil and gas contract.

The physical oil and gas transaction and the swap transaction are separate and distinct transactions. As a result, failure of a purchaser to perform under its contract does not excuse the oil and gas producer's obligation to make payment under the swap.

Cost of hedging reserve:

Mark-to-market risk is forward looking and is an estimate of the difference between the fixed price and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate determined by the producer. Both counterparties to a fixed-price contract are exposed to mark-to-market exposure as spot prices fluctuate during the term of the contract

@BLee, FYI on core principle of hedging (how it works)

Posted by probability > Sep 4, 2022 4:56 PM | Report Abuse

@MM, i bet if you can squeeze your brain cells a bit after a strong cup of coffee and spend 10 minutes to understand the below concept, you will be quite confident HY makes money (secures) through hedging

try taking this challenge for you:

Extract from below article:
www.cmegroup.com/education/articles-and-reports/introduction-to-crack-...

Fixing Refiner Margins Through a Simple 1:1 Crack Spread

In January, a refiner reviews his crude oil acquisition strategy and his potential gasoline margins for the spring. He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. Similarly, a professional trader can analyze the technical charts and decide to “sell” the crack spread as a directional play, if the trader takes a view that current crack spread levels are relatively high, and will probably decline in the future.

In January, the spread between April crude oil futures ($50.00 per barrel) and May RBOB gasoline futures ($1.60 per gallon or $67.20 per barrel) presents what the refiner believes to be a favorable 1:1 crack spread of $17.20 per barrel. Typically, refiners purchase crude oil for processing in a particular month, and sell the refined products one month later.

The refiner decides to “sell” the crack spread by selling RBOB gasoline futures, and buying crude oil futures, thereby locking in the $17.20 per barrel crack spread value. He executes this by selling May RBOB gasoline futures at $1.60 per gallon (or $67.20 per barrel), and buying April crude oil futures at $50.00 per barrel.

Two months later, in March, the refiner purchases the crude oil at $60.00 per barrel in the cash market for refining into products. At the same time, he also sells gasoline from his existing stock in the cash market for $1.75 per gallon, or $73.50 per barrel. His crack spread value in the cash market has declined since January, and is now $13.50 per barrel ($73.50 per barrel gasoline less $60.00 per barrel for crude oil).

Since the futures market reflects the cash market, April crude oil futures are also selling at $60.00 per barrel in March — $10 more than when he purchased them. May RBOB gasoline futures are also trading higher at $1.75 per gallon ($73.50 per barrel). To complete the crack spread transaction, the refiner buys back the crack spread by first repurchasing the gasoline futures he sold in January, and he also sells back the crude oil futures. The refiner locks in a $3.70 per barrel profit on this crack spread futures trade.

The refiner has successfully locked in a crack spread of $17.20 (the futures gain of $3.70 is added to the cash market cracking margin of $13.50). Had the refiner been un-hedged, his cracking margin would have been limited to the $13.50 gain he had in the cash market. Instead, combined with the futures gain, his final net cracking margin with the hedge is $17.20 — the favorable margin he originally sought in January.

what a perfect description by i3lurker of himself

Posted by i3lurker > Sep 6, 2022 9:37 PM | Report Abuse

serial pill popping is a big problem in todays youth.

Serial Pill Popping dissolves brain
and does a hedge swap between brain neurons with testicular tissues straddled by prostate waste matter
and you get sperm ramblings as can be clearly discerned above

glad you are absorbing fast

in everything there is risk

seriously, if they can break down HY refinery into 100 smaller refinery , i would definitely buy out one mini refinery (take over the company).

where to find 2 qtr payback period?

Posted by PSAi3alert > Sep 6, 2022 8:49 PM | Report Abuse

Probability,

I rationalized it by imagining hedge positions that are being closed for previous positions and being opened for future positions, on a monthly basis.

The marked-to-market derivative losses were high because the crack spread margins were very high on 30th June, and were above the contracted price to sell.

So, come July, Aug, etc, they will just deliver the products at those contracted prices.

However, there are just to many variables to consider.

MM might drive into the refinery in a car full of explosives. Suddenly the options become naked.

(Rare events can happen. The Kobe earthquake on 17 January 1995, took Nick Leeson's short straddle positions into tailspin and total losses were £827 million.)

@Blee, FYI on risks..

Infact, hedging is to reduce risk (not the other way).
We have a paranoia in i3 where now hedging is viewed negatively as a form of gambling..

Posted by probability > Sep 6, 2022 8:24 PM | Report Abuse X

if they are hedging 18 million barrels distribute over 24 month that like 2 million barrel hedged every qtr for a plant that produce 10 million barrels...

Its calculated risk. If the plant got into fire and it has prolonged shutdown, they can always clear their hedge position on the market albeit with small loss or even gain.

risk is too low

Posted by BobAxelrod > Sep 6, 2022 8:18 PM | Report Abuse

Of course they know their production handling capacity. But to Hedge without goods and for futures that are uncertain....is pure Gambling.

@Blee, FYI on cash flow

Posted by probability > Sep 6, 2022 8:13 PM | Report Abuse X

FCF will blast up next qtr....

why? Hedging GAIN from gasoline.

Your futures market cash IN FLOW is higher than your physical market cash OUT FLOW...


Posted by Zhuge_Liang > Sep 6, 2022 7:51 PM | Report Abuse

The present market cap of Hengyuan = 1.458 billion.
PAT for the first half of FY2022 = 715 million.
I believe the PAT for second half of FY2022 = 1.3 billion.
I also believe total PAT for FY2022 = 2.0 billion which is 542 million more than the present market cap.
My sifu taught me the 5 most important FA criteria to assess the FA report for the first half of FY2022.
1.) Growth > 917% better than the previous first half year.
2.) Free cash flow = -16 million. However, Hengyuan is still able to make an operating profit before changes in working capital of RM 939.171 million in the first half of FY2022.
3.) PER = 1.73 very good.
4.) ROE = 45% which is very high.
5.) EV/EBIT = 2.13 very good.

I can see the free cash flow is = -16 million which is not a positive free cash flow.
The rest of criteria are excellent.
I will say the fundamental of Hengyuan is very good after the first half result of FY2022.
Is there any stock listed in KLSE has PER = 1.73 and EV/EBIT = 2.13 ?
The answer is no. You cannot find any stock with such low PER and EV/EBIT.
I still conclude the fundamental of Hengyuan is very good.

could be Zhuge, my views are as such because of extraordinary crack in June, would have resulted in huge gain in July..

anyway it does not matter much

Posted by Zhuge_Liang > Sep 6, 2022 8:33 PM | Report Abuse

Posted by probability > 1 minute ago | Report Abuse
of course Zhuge, i have share my derivation on Q3 gross profit.
Q3, do not expect any hedging loss..
-------------
I believe Q3 2022 still has a small hedging loss.
Q4 2022 will have a hedging gain.

when you hedge refined products, 100% of the crude amount in barrels is hedged simultaneously

the hedging of 100% is the monthly clearing (physical and futures market interval of 1 month), this is as per the below derivation.

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

the hedging of in futures (long term maturity) has a notional amount - this is only utilized on avg 20% every qtr

of course Zhuge, i have share my derivation on Q3 gross profit.
Q3, do not expect any hedging loss..

Posted by Zhuge_Liang > Sep 6, 2022 8:13 PM | Report Abuse

Sslee, probability and Johnzhang,
I believe the PAT for second half of FY2022 = 1.3 billion.
Is this estimate possible ?

@PSAi3alert, i have share the derivations on the article i made. You share to me where its mention they 100% hedge.

if they are hedging 18 million barrels distribute over 24 month that like 2 million barrel hedged every qtr for a plant that produce 10 million barrels...

Its calculated risk. If the plant got into fire and it has prolonged shutdown, they can always clear their hedge position on the market albeit with small loss or even gain.

risk is too low

Posted by BobAxelrod > Sep 6, 2022 8:18 PM | Report Abuse

Of course they know their production handling capacity. But to Hedge without goods and for futures that are uncertain....is pure Gambling.

FCF will blast up next qtr....

why? Hedging GAIN from gasoline.

Your futures market cash IN FLOW is higher than your physical market cash OUT FLOW...


Posted by Zhuge_Liang > Sep 6, 2022 7:51 PM | Report Abuse

The present market cap of Hengyuan = 1.458 billion.
PAT for the first half of FY2022 = 715 million.
I believe the PAT for second half of FY2022 = 1.3 billion.
I also believe total PAT for FY2022 = 2.0 billion which is 542 million more than the present market cap.
My sifu taught me the 5 most important FA criteria to assess the FA report for the first half of FY2022.
1.) Growth > 917% better than the previous first half year.
2.) Free cash flow = -16 million. However, Hengyuan is still able to make an operating profit before changes in working capital of RM 939.171 million in the first half of FY2022.
3.) PER = 1.73 very good.
4.) ROE = 45% which is very high.
5.) EV/EBIT = 2.13 very good.

I can see the free cash flow is = -16 million which is not a positive free cash flow.
The rest of criteria are excellent.
I will say the fundamental of Hengyuan is very good after the first half result of FY2022.
Is there any stock listed in KLSE has PER = 1.73 and EV/EBIT = 2.13 ?
The answer is no. You cannot find any stock with such low PER and EV/EBIT.
I still conclude the fundamental of Hengyuan is very good.

@Bob, no...thats how hedging with futures works. They simply know they have refining ability to produce before the maturity. The hedging amount is only 20% oh their throughput.

Posted by BobAxelrod > Sep 6, 2022 8:08 PM | Report Abuse

In other words, they are Hedging without Goods......isn't that Gambling???

@Blee, what i meant was HY can always hedge at longer maturity, along with physical stock they can produce at a later point in time.

Meaning, the current high margin 'opportunity' is not lost due to hedging completely, but deferred due to hedging. This is not related to their refining capacity or storage tanks

Guys take note of the following:

For every amount lost under 'cash flow hedge' due to their 'refining margin swap contract (RMSC)', they are entering into a higher margin fresh contract (RMSC) by the same amount.

The fantastic margins opportunities are never really lost by HY, but only deferred to a later date. HY can always do this as they have unlimited physical product to hedge along with new opportunities (just that it will take place at a later date).

Guys take note of the following:

For every amount lost under 'cash flow hedge' due to their 'refining margin swap contract (RMSC)', they are entering into a higher margin fresh contract (RMSC) by the same amount.

The fantastic margins opportunities are never really lost by HY, but only deferred to a later date. HY can always do this as they have unlimited physical product to hedge along with new opportunities (just that it will take place at a later date).

some useful reading on IFRS9 - airline:

www.iata.org/contentassets/4a4b100c43794398baf73dcea6b5ad42/airline-disclosure-guide-hedge-accounting.pdf

The IFRS9 itself was spurred by Cost of hedging reserve

Interest rate swap is a good example

https://www.bloomberg.com/professional/blog/ifrs-9-adoption-spurred-cost-hedging-approach/

The IFRS9 itself was spurred by Cost of hedging reserve

Interest rate swap is a good example

https://www.bloomberg.com/professional/blog/ifrs-9-adoption-spurred-cost-hedging-approach/

sslee, my thoughts are each hedged barrels are marked to market based on futures prices corresponding to their respective maturity date, at the end of the reporting period.

we can assume the 'A' we had used here as 'reflective' of their composite effects

If you use only Mogas92 crack spread: USD 31.58
Equation:
V x A=226,945,000 or V=226,945,000/A
V x (31.58 – A) = 1,490,267,000/4.397

Posted by Sslee > Sep 5, 2022 11:31 AM | Report Abuse

If i will to attend the next HRC AGM, I will prepare the following questions on refining margin swap contract.
Refer refining margin swap contracts.
Is contact notional amt is sum of contracts (volume in barrel X hedged refining margin)?
What is refining margin swap contracts assets and liabilities and how it is computed?

If they had hedged large portion of Diesel / Jet fuel, the COHR would have easily shown huge loss like we saw at end of Q2 22', by end of Q1 22 itself.

Posted by probability > Sep 5, 2022 11:24 AM | Report Abuse X

@Zhuge,

Gasoline should be the most abundantly available in the futures for hedging far into the future and diesel & jet fuel had been having strong crack even under covid environment (less concerned) unlike gasoline demand affected by lockdown.

Thats why we can see in 2020 and 2021, HY still can deliver good earnings.

Further we can see in Q1 22 results the hedging losses under COHR is very low (even positive, as the futures maturing in 24 months could be well below 12.7).

@Zhuge,

prove on the effects of hedging when crack spread drop below hedging level for balance hedged contract is here

Posted by Sslee > Sep 3, 2022 6:17 PM | Report Abuse

If you look into HRC quarterly report.
On 31/12/19. NAPS is RM 6.7045.
Q1 end 31/03/20 EPS negative 41.37 cents but NAPS is now RM 7.4418

Posted by Sslee > Sep 3, 2022 6:32 PM | Report Abuse

You can check what is the mogas92 crack spread on 31/03/2020.
www.tradingview.com/symbols/NYMEX-D1N1%21/

@Zhuge,

Gasoline should be the most abundantly available in the futures for hedging far into the future and diesel & jet fuel had been having strong crack even under covid environment (less concerned) unlike gasoline demand affected by lockdown.

Thats why we can see in 2020 and 2021, HY still can deliver good earnings.

Further we can see in Q1 22 results the hedging losses under COHR is very low (even positive, as the futures maturing in 24 months could be well below 12.7).

@Zhuge,

Among the two possibility below derived by sslee, only gasoline fits the hedged crack value as found in 2021 annual report page 130 where the max margin was around 12 USD/brl.

The lowest crack spread closing on 30 June 2022 is only for gasoline around 31USD/brl (others like Diesel & Jet Fuel is way higher).
Only using the lowest mark to market crack spread end of June 22, you can derived the low value hedged crack spread as per annual report of about 12 USD/brl.

Using gasoline the hedged barrels is 18 millions as derived by sslee below.


Since we have passed 2 qtrs in 2022, the average crack spread hedged on the latest notional amount of USD 226 million is much higher than what was reported at end of 2021 (on annual report). It has been displaced by maturing hedged contract of gasoline at 0.75 million barrels/month x 6 = 4.5 million, with fresh ones as per market crack spread in future for gasoline in Q1 and Q2.


Posted by Sslee > Sep 2, 2022 8:59 AM | Report Abuse

Dear probability,
The outstanding Refining margin swap contract as on 30/06/2022
Notional amount: USD 226,945,000
Assets: RM 261,065,000
Liabilities: RM 1,751,332,000
Hence unrealized loss RM (1,751,332,000-261,065,000) = RM 1,490,267,000

On 30/06/2022:
Mogas92 crack spread: USD 31.578
Diesel crack spread: USD 56.125
Average of the two USD (31.578+56.125)/2= USD43.85
USD to MYR: 4.397

V: Volume of outstanding refining margin swap contract (Barrels)
A: Average outstanding margin per barrel hedged (USD)

Equation:
from notional amount: V x A=226,945,000 or V=226,945,000/A
from unrealized loss: V x (43.85 – A) = 1,490,267,000/4.397

226,945,000 x (43.85 – A) = 338,928,133 x A
9,951,538,250= (338,928,113 + 226,945,000) x A
A= 9,951,538,250/565,873,133
A= 17.586
V=226,945,000/17.586
V=12,904,746

If you use only Mogas92 crack spread: USD 31.58
Equation:
V x A=226,945,000 or V=226,945,000/A
V x (31.58 – A) = 1,490,267,000/4.397

226,945,000 x (31.58 – A) = 338,928,133 x A
7,166,923,100= (338,928,113 + 226,945,000) x A
A= 7,166,923,100/565,873,133
A= 12.665
V=226,945,000/12.665
V= 17,918,718



Posted by Zhuge_Liang > Sep 5, 2022 10:57 AM | Report Abuse

Post by probability
The reason why HY shows large unrealized loss on Cost of hedging reserve (COHR) is because it has around 18 million barrels of refined products, e.g Gasoline crack spread that is hedged for next 24 months at 12.7 USD/brl margin.


This is the Refining Margin Swap Contract (RMSC) shown as USD 227 million (USD 12.7 crack x 18 million barrels hedged).
-------------------
@probability,
I have 2 questions on your posting here.
1.) 18 million of refined products hedged at USD12.70/brl.
Is it all gasoline only ? No diesel and jet fuel or mixture.

2.) 18 million of refined products hedged at USD12.70/brl.
Is this hedging for 1 year or 2 years ?

Please advise.

all depends on availability of counter party to get into the hedging deals

Posted by ValueInvestor888 > Sep 5, 2022 11:38 AM | Report Abuse

@probability, do hengyuan secured big forward contract when crack spread at around USD 20-30?

If they do big hedging, the results should be very good in next 1 year...

sslee, my thoughts are each hedged barrels are marked to market based on futures prices corresponding to their respective maturity date, at the end of the reporting period.

we can assume the 'A' we had used here as 'reflective' of their composite effects

If you use only Mogas92 crack spread: USD 31.58
Equation:
V x A=226,945,000 or V=226,945,000/A
V x (31.58 – A) = 1,490,267,000/4.397

Posted by Sslee > Sep 5, 2022 11:31 AM | Report Abuse

If i will to attend the next HRC AGM, I will prepare the following questions on refining margin swap contract.
Refer refining margin swap contracts.
Is contact notional amt is sum of contracts (volume in barrel X hedged refining margin)?
What is refining margin swap contracts assets and liabilities and how it is computed?