Posted by ken > 2017-08-30 21:41 | Report Abuse

David,
Good article.. like.

Posted by probability > 2017-08-30 21:53 | Report Abuse

Fantastic! The best article from David so far...
super convincing to me.

Posted by musangfoxking > 2017-08-30 21:56 | Report Abuse

good read! thumbs up!

Posted by swiftwind > 2017-08-30 21:58 | Report Abuse

Thanks for sharing David, as always.

Highly educational.

Posted by MCC8 > 2017-08-30 22:33 | Report Abuse

Excellent, Thank you Prof David Lim.

Posted by stockraider > 2017-08-30 23:04 | Report Abuse

General Raider says david lim analysis is perfect loh....!!

1. Strong cash generation over 6 mths.
2. Strong Profit for half year despite Q2 profit below expectation.
3. The lower profit in q2 is due to one time exceptional expenses due to exceptional maintenance cost and 21 days unplanned shutdown plus forex losses and inventory losses.
Exception maintenance expenses and shutdown may not recur in q3 and inventory losses and forex losses in q3 may reverse .
4. Strong crack margin which almost more than double within 6 mths.

Given such a profitable potential of HRC , this is a great investment opportunity loh...!!

Also u must remember u can purchase the business at attractive pe 2x to 5x mah compare with pet dag 24x loh...!!

Just bcos there is a 1 qtr of negative earnings volatility out of 4 qtr in a year....does it warrant to give rating pe 2x to 5x pe leh ??

bearing in mind Going fwd the refinery current in an upcycle phase loh...!!

Posted by brightsmart > 2017-08-30 23:05 | Report Abuse

If share market is a maths test, you will surely win the top price.

But, 2018 is a bad year for Hengyuan due to stoppage for major upgrades.

come 2019, Shell will leave them and take their products from the modern Rapids Petronas complex and Hengyuan will supply China via its parent company and Profit and Loss Account will be all about transfer pricing....and....don't even mention dividends...that is not the reason they are in Malaysia........

Posted by duitKWSPkita > 2017-08-30 23:17 | Report Abuse

Good work.

Posted by Flintstones > 2017-08-30 23:19 | Report Abuse

By 2019, hengyuan shareholders already laughing all the way to bank while brightsmart still being a keyboard warrior explaining why hengyuan will get worse!

Posted by Alex Foo > 2017-08-30 23:27 | Report Abuse

everything has been said. super gooding. alex can only say

huat ar tv set~

Posted by brightsmart > 2017-08-30 23:27 | Report Abuse

the greater fool theory will work....until it doesn't work........

Posted by stockraider > 2017-08-30 23:33 | Report Abuse

Posted by brightsmart > Aug 30, 2017 11:05 PM | Report Abuse

If share market is a maths test, you will surely win the top price.

But, 2018 is a bad year for Hengyuan due to stoppage for major upgrades.

come 2019, Shell will leave them and take their products from the modern Rapids Petronas complex and Hengyuan will supply China via its parent company and Profit and Loss Account will be all about transfer pricing....and....don't even mention dividends...that is not the reason they are in Malaysia........ !!

GENERAL RAIDER CLARIFY LOH;

VERY STUPID COMMENT LOH...!!

U DON KNOW SHELL AND HENGYUAN GOT EXCLUSIVE AGREEMENT FOR 10 YEARS MEH...!!
THATS MEANS EXCLUSIVE CONTRACT END IN 2027 LOH...!!

DON ACT SMART LIKE EXPERT LOH...!! U MAY MISLEAD BCOS U NEVER DO PROPER RESEARCH LOH...!!

BTW....RAIDER ASK U LAH...!!
SHELL...CAN SELL THE REFINERY TO PETRONAS WHAT !!
WHY THEY SELL IT CHEAP CHEAP TO CHINA MAN SHPC ??

ANSWER: BCOS THEY DON WANT TO BUY REFINE PRODUCTS FROM PETRONAS, THEIR COMPETITOR MAH..!!

Posted by brightsmart > 2017-08-30 23:37 | Report Abuse

frame this.....


But, 2018 is a bad year for Hengyuan due to stoppage for major upgrades.

come 2019, Shell will leave them and take their products from the modern Rapids Petronas complex and Hengyuan will supply China via its parent company and Profit and Loss Account will be all about transfer pricing....and....don't even mention dividends...that is not the reason they are in Malaysia........

Posted by brightsmart > 2017-08-30 23:41 | Report Abuse

modern Petronas Rapids refinery in Johor will eat the old Hengyuan plant in PD for lunch come 2019..........

Posted by supersaiyan3 > 2017-08-30 23:43 | Report Abuse

1+1=39. I can't see how you did it....

Posted by stockraider > 2017-08-30 23:48 | Report Abuse

Posted by brightsmart > Aug 30, 2017 11:41 PM | Report Abuse

modern Petronas Rapids refinery in Johor will eat the old Hengyuan plant in PD for lunch come 2019..........

RUBBISH LOH....!!

1.HRC CONTRACT WITH SHELL IS SECURE WITH SHELL FOR 10 YEARS LOH..!!

2. PENGERANG REFINERY 300K BPD COSTING RM 66 BILLION COMPETITIVE MEH COMPARE WITH HRC REFINERY 120K BPD COSTING ONLY RM 2.7 BILLION ?

PETRONAS REFINERY IS A ROLLS ROYCE...USE IT AS A TAXI AND COMPETE WITH EFFICIENT CHEAP HRC SURE LOSE LOH...!!

Posted by InsiderR > 2017-08-30 23:55 | Report Abuse

Some assumptions are over optimistic.
For example, crack spread $10 for overall 'refinery gross margin'? Do u know about hedging of 'crack spread/margin'? If HY has hedging policy, what price HY hedged their margin, how many % of refined products they hedged?
Let say HY hedged at $x.xx, whatever rocketed high margin (above this hedged $x.xx) due to Harvey in GoM, China refinery fire, Shell Pernis fire, Indonesia refineries shut down etc. is irrelevant to HY earnings.

Unplanned maintenance could happen anytime for an old refinery. Please take note the existing problems highlighted in 2016 AR for their LRCCU and one of the big project (Atlas 2) during 2018 Shutdown is to replace the major components in LRCCU. Nobody can guarantee this process unit can run smoothly with expected throughput until 2018. Maybe Probability can tell about the drawbacks if the unit is down for unknown days from his chemical engineering knowledge.

Posted by pjseow > 2017-08-30 23:58 | Report Abuse

The Devil is in the details . Great analysis

Posted by LaLaLa > 2017-08-31 00:18 | Report Abuse

if stock market really works in such way, maybe you are right, but unfortunately it is not... anyway appreciated your hard work here...

Posted by sunztzhe > 2017-08-31 00:22 | Report Abuse

HRC continued to advance n closed at RM 7.52 today. Next target to overcome is RM 8.52. When RM 8.52 is taken out, Bullish forces will continue to advance.  

With expectation of benign crude oil prices in Q3 albeit with a slight upside bias from July onward, there is high chance that bullish forces will continue to advance on expectation of a much better if not spectacular Q3 results due within 3 mths.

Posted by Aseng > 2017-08-31 00:39 | Report Abuse

I am wondering , whether a contractor can ask the god not to rain so that he can earn more in the project....

Posted by brightsmart > 2017-08-31 01:14 | Report Abuse

cash generating machine....

too bad cash generated is for China....not for Malaysians........

Posted by Ricky Yeo > 2017-08-31 05:08 | Report Abuse

Let's summarize this whole article into one sentence - Crack spread. If anyone can get that correct, you probability to make a good return is high. That's a big if. Suddenly everyone start getting quite intelligent with predicting macroeconomic.

Posted by yfchin66 > 2017-08-31 06:30 | Report Abuse

http://www.theedgemarkets.com/article/hengyuan-invests-rm580mil-new-refinery-complex-euro-4m-gasoline-production#.Wac8UxORIyI.whatsapp

Posted by yfchin66 > 2017-08-31 06:34 | Report Abuse

Seen like the upgrading job will not destruct the current refinery.
It could mean minimum shutdown/effect on current operation.

Posted by yfchin66 > 2017-08-31 06:35 | Report Abuse

Thanks again David for the hard work.

Posted by soojinhou > 2017-08-31 07:13 | Report Abuse

What can I say? Cash is king!

Posted by musangfoxking > 2017-08-31 07:34 | Report Abuse

What can I say? Heng is king!

Posted by Alex Foo > 2017-08-31 08:33 | Report Abuse

in short term there's no visible correlation between price and value. but in long term there is 100% correlation between price and value

Posted by Alex Foo > 2017-08-31 08:34 | Report Abuse

let HRC proves himself again in Q3. huat ar cash

Posted by brightsmart > 2017-08-31 09:11 | Report Abuse

cash generating machine.....but not cash sharing machine.

Posted by brightsmart > 2017-08-31 09:14 | Report Abuse

come 2019, the modern Petronas complex in Rapids will eat this obsolete refinery for lunch.

Posted by probability > 2017-08-31 09:17 | Report Abuse

InsiderR, dont worry on downtime, just see the average barrels processed per qtr for the last few years, except for the MTA which happens every 3 - 5 years, the downtime we have seen in Q2-17 was a rare event.

Its very simple, decide on the barrels they can process per qtr, the reasonable probable margin they can capture from the available crack-spread futures (Ricky Yeo, its not that difficult to forecast)...and you decide.

Again, i repeat, this is the only business which such low no. of variables determining its profit...revenue is fixed, and you have 100% relevant data on Margin...

I cant find a simple business as this one.

Forget about mean reversion...that could be one of the most skewed bias we may have on evaluating business. There are no magic forces to force it back to where it was a few years...in fact your mean figures basis itself is incorrect.

If one asks me what is the mean figures..it should not be lower than than 6USD/brl, and that justifies 6.5B investment for a similar refinery PetronM is planning - its so damn straight forward.

Posted by sunztzhe > 2017-08-31 09:43 | Report Abuse

High probability Q3 result will be much better than Q2.

Posted by Ricky Yeo > 2017-08-31 09:44 | Report Abuse

Probability, yes it isn't hard to forecast the present crack-spread futures, just as it isn't hard to estimate present palm oil future vs palm oil production per qtr, or present MYR vs USD exchange rate vs total export of a company, but you are talking about present, while stock market is forward looking. Did anyone forecast today's crack spread 2 years ago?

Posted by probability > 2017-08-31 09:51 | Report Abuse

Ricky, we dont have to forecast 2 years future crack spread to justify investment on HRC at current price.

We are seeing the current crack-spread as a margin of safety to enter at current price...

like i said, even before the recent phenomenal change on crack spread, HRC had been obtaining around 6 USD/brl margins but had been masked by the inventory losses.

if we dont forecast as a margin of safety based on these available informations..not sure what are we supposed to base and decide before investing...mean reversion?...cash in hand?..historical performance?

No way. I dont believe in these magic. Well i dont like to 'believe' anything...i just see and make my decisions..

Posted by stockraider > 2017-08-31 09:59 | Report Abuse

Why HRC is a superb cash generation machine ??

Petron 90k bpd new capacity investment at cost of Rm 6.4 billion.

Petronas pEngerang new refinery 300k bpd costing Rm 66.0 billion.

If u believe these 2 companies are not stupid and they have done their homework. We assume they want IRR of 10% on its investment loh...!!

Petron 90k bpd Rm 6.4 billion x 10% = Rm 640m pa min hurdle rate.
Petronas 300k bpd Rm66 billion x 10% = Rm 6.6 billion pa hurdle rate.

petron return per bpd on refinery Rm 640m/90k = Rm 7.11 per bpd return.
Petronas per bpd on refinery Rm 6.6b/300k = Rm 22.00 per bpd return

Thus profit of HRC 120k bpd based on Refinery capacity return;

Benchmark to Petron; Rm 7.11 x 120k = Rm 853 M pa profit.

Benchmark to Petronas ; Rm 22 x 120k = Rm 2640 M pa profit.

HRC Eps pa based on Petron benchmark Rm = Rm 2.84

HRC Eps pa based on Petronas benchmark Rm = Rm 8.8.


If we take pe 6x for HRC;

The Potential value of HRC based on refinery capacity earnings bpd per petron & petronas at pe 6x is as follows per share Rm 17.00 to Rm 52.8

Posted by sunztzhe > 2017-08-31 10:01 | Report Abuse

All forecasts r probabilistic n have varying degrees of accuracy n confidence kevel as the key element is time duration for the forecast. 

Long term forecast of 2 years time duration in the future has high chance for errors in assumptions, has low confidence level n consequently low chance for accuracy. 

However short term forecast for remaining time duration of 1 month till end September has higher confidence level n higher chance for accuracy. 

Based on latest trend in crude oil price, there is high chance Q3 results will be much better than Q2.

HRC price is on uptrend n is advancing forward after the recent expected correction.

Posted by stockraider > 2017-08-31 10:07 | Report Abuse

Since Refinery capacity cash generation return is so valuable, it is no wonder HRC can make Eps Rm 1.21 per share half year and generate cashflow per share of Rm 1.44 half year,

The decision to invest by petronas and petron on new Refinery capacity verify & confirm the value of wealth generation power of HRC refinery 120k bpd loh..!!

Posted by sunztzhe > 2017-08-31 10:19 | Report Abuse

Crude oil price trend for July to August is already known. The unknown is crude oil price behaviour for September n beyond. Based on this, there is high chance that Q3 results will be better than Q2 based on 66.6% known info on crude oil prices for Q3. More pertinent is ...can Q3 be better than Q1 result? There is also a chance that it may better or surpass Q1 result. 


On a longer term basis, there is high concurrence among the experts that crude oil price remains benign with slight upside bias to say USD 55 per bbl. 

Given this scenario, all refineries will do well. The differentiating factor amongst refineries is on the cost of production, quality of management in managing the refinery assets.

Posted by sunztzhe > 2017-08-31 10:25 | Report Abuse

The question that begets investors now is ....amongst the 3 refineries in Msia, which refinery will deliver superior EPS, better cash flows within the next 6 mths to 1 year??

Posted by stockraider > 2017-08-31 10:55 | Report Abuse

Posted by sunztzhe > Aug 31, 2017 10:25 AM | Report Abuse

The question that begets investors now is ....amongst the 3 refineries in Msia, which refinery will deliver superior EPS, better cash flows within the next 6 mths to 1 year??

OF COURSE IT IS HRC LOH...THE MOST EFFICIENT REFINERY IN MSIA LOH...!!
PETRONAS MODERN BUT WASTEFUL LOH...U USE ROLLS ROYCE FOR TAXIS MAH..!!

PETRON REFINERY VERY OLD....THE LAST UPGRADE IN 1996 LOH...!!
UNLESS THEY SPEND RM 6.4 BILLION TO MODERNISE, TECHNOLOGY WISE THEY ARE STILL BEHIND HRC LOH...!!

Posted by stockraider > 2017-08-31 11:00 |

Post removed.Why?

Posted by tealeaf > 2017-08-31 11:04 | Report Abuse

very insightful article ....thanks for sharing

Posted by gohku > 2017-08-31 11:55 | Report Abuse

This is a great article.
It reminded us to be patience and be discipline when we wait and reap for good harvest.

If you cut your vegetable too early you cannot get a good reasonable weight.

Sometime the market act funny, they will shakeout and creating alots of fear, we need to have the stomach to weather the storm.

Last week monday, i was so panic and freakout and to avoid the panic and the pain, i have to just switch off the screen.

Lucky tuesday and wednesday Hengyuan share price recorded some pleasant recovery.

I hope with the improvement in crack margin in Q3, the coming Hengyuan profit will grow alot.

Posted by gohku > 2017-08-31 12:05 | Report Abuse

The write up by stockraider article covering, comparative study on Petronas and Petron investment on new refinery capacity, give us an in sight of the potential wealth generation power of Hengyuan on a normalise earnings basis based on IRR 10% pa.

The reasons why Petron and Petronas refinery invest , means there are sustainable refinery profitability out there.

That means, even if the crack margin drop back to USD 5 to 6 per barrel, the refinery still can sustained at good profit level at this normalised level.

I am sure Petronas and Petron had done their sensitivity analysis before they decide to invest in the new capex.

Posted by brightsmart > 2017-08-31 12:19 | Report Abuse

I am sure Petronas and Petron had done their sensitivity analysis before they decide to invest in the new capex....and the new Rapids refinery will eat the old Hengyuan plant for lunch.

Shell is prepared to mothball the ancient plant and turn it into reserve tanks until the Chinaman comes along.

Posted by sunztzhe > 2017-08-31 12:34 | Report Abuse

Opinions r good to have to boost one's ego but what matters most is price action in the near term.

Based on known crude oil price behaviour from July to August n likely crude oil price action in September futures, high chance Q3 result will be better than Q2.

There is also a chance that Q3 may surpass Q1 result.

Posted by sunztzhe > 2017-08-31 12:37 | Report Abuse

High chance bullish forces will nudge HRC price higher within next 3 months

Posted by sunztzhe > 2017-08-31 12:41 | Report Abuse

The great opportunity to buy on retracement for a strong uptrending stock like HRC was the selling climax experienced recently