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Manufacturing
Investment Insight: Bullish on private refining sector on profit prospect
CKN
2018/07/12 03:52:02
103

Jul 12, 2018 (China Knowledge) - China's three major private refining and chemical manufacturing projects, conducted by Zhejiang Petrochemical Co., Ltd (ZPC), Hengli Petrochemical Co., Ltd and Hengyi Petrochemical Co., Ltd, face a bright prospect of higher profits, according to TF Securities as a top local broker.

ROE on refinery industry outnumbers most other manufacturing industries, even is higher than GDP growth of China, as huge investment and the complicated process for obtaining government approval to set up high barrier to the entrance of the oil refining market.

There are 4 major drivers of the revenue of refining and chemical projects: the oil price, the sales volume of petroleum products, market dynamics of major chemical products as well as fees and taxes. Profits of these 3 projects are all subject to fluctuation of oil and PX price, as their chemical products are mainly made from PX. Beyond that, ZPC is dominant in the deep processing of chemical products and oil sales and Hengli is expected to enjoy the profit for early operation and the zero-freight benefit brought by the PX-PTA integration, while Hengyi Brunei project takes advantage in oil products and low taxes.

On the core assumption of crude oil price at USD 71 per barrel, in the bull/base/bear case, the annual net profit of ZPC will be RMB 12.4/10.6/9.3 billion, with Hengli RMB 6.7 billion, 4.3 billion and 2.4 billion, as well as Hengyi RMB 3.8 billion, 3 billion and 2.6 billion respectively.

Therefore, we maintain Buy ratings of 4 players in private refining sector that including Rongsheng Petrochemical, Hengli Petrochemical, Hengyi Petrochemical and Tongkun Group.

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