Asia Oil and Petrochemicals: Refining uptrend continues

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Asia Oil and Petrochemicals
Refining uptrend continues
Refining and Petrochemicals update

 Singapore GRM’s 5% WoW increase was driven by light distillates, with
gasoline spreads up 8% WoW. Diesel shortage in China keeps middle
distillate spreads at healthy level and we expect this trend to be supportive of
refining margins through year-end. In petrochemical space, ethylene-naphtha
spread jumped 21% WoW while downstream spreads narrowed.


Theme of the week
 Deregulation unleashing opportunities. Both China and India are the
current global growth engines, whose energy requirements are
correspondingly increasing at a fast clip; and a low per-capita usage of energy
implies many more years of sustained growth before these two Asian giants
begin to compare with developed economies. In both countries, auto-fuel
consumption (gasoline and diesel) is driving crude oil demand (10 year
CAGR: 6.8% for China and 4.1% for India), much of which has to be imported.
The cost-effectiveness of natural gas is incrementally being utilized as large
indigenous resources are being unlocked through increased upstream activity,
improved regulations and pipeline infrastructure. The complete chain of oil
and gas is benefiting from the above phenomena. Through the following
themes, we attempt to drill down and differentiate between companies, to
identify stocks across the chain that we believe are the best investment ideas
in these geographies.

Country-specific developments and views
 SE Asia’s key downstream event was the listing of Petronas Chemicals.
We initiated with an OP recommendation and RM5.9 target price. We expect
a premium valuation to support the share price given its gearing to crude oil,
relatively unique status in Malaysia and earnings optimism related to its
restructuring. With the backdrop of improving refining sector fundamentals
our favorite refining names in SE Asia remain Thai Oil and PTT.

 Continued strength in oil refining margin and PX margin support our
positive view on Korean oil refineries. Recent share price weakness due to
concerns on Chinese government's tightening provides a good opportunity to
revisit the stocks, in our view. S-Oil remains our top-pick in Korean Oil & Gas
given its strong earnings growth outlook by 2012 and attractive dividend yield.

 Our visit to JX Holdings (5020 JP, OP) Sendai refinery confirms that cost
cutting targets are being exceeded and synergy effect from the merger
between Nippon Oil and Nippon Mining is being realized. We are also
positive on the company's move to accommodate more exports, which would
help cushion margins in the domestic market. We reiterate OP on JX
Holdings with TP 630 yen.

 For 2011, we maintain a positive view on Nan Ya Plastic (1303 TT) MEG
and polyester businesses, as both will benefit from tight cotton fundamentals
and lack of new capacity in 2011. Given the strong share price rally this year
and the major shareholder's selling overhang, we’d wait for another 5-10%
pull back to start accumulating.