Macquaire ::Refining margins hold strong -Recommend RIL

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Asia oil and petrochemicals
Refining margins hold strong
Refining and petrochemicals update
 GRMs bounce back: Singapore complex GRMs rose 9.4% WoW to
US$7.9/bbl; indicating continuing strength in middle distillate and gasoline
spreads, which were supported by stronger demand for heating amid the cold
winter.

 Petrochemical margins slightly fell amid Chinese New Year: Major
petrochemical margins showed slight WoW fall as product prices remained
unchanged amid CNY, while its feedstock (naphtha) rose as a result of higher
crude oil price. Polyester chain products on the other hand, showed resilient
spreads as we suspect demand to have remained firm throughout the long
holiday. Going forward, as we enter the period of regular maintenance
shutdown, as well as seasonal strength in demand we expect margins to
show a gradual increase.
Country-specific developments and views
 Korea: Robust oil refining margin with continuous strength in middle distillates
is positive for Korean refineries. With rising crude oil price and rapidly
expanding polyester chain spreads such as MEG, we continue to like Honam
Petrochemical as our top picks in the Korean petrochemical sector. Looking at
the Korean oil refining sector, our positive stance is unchanged, with our
conviction rising towards SK Innovation, given crude oil price strength.
 India: The Oil Marketing Companies were provided some relief from rapidly
increasing subsidy losses of Rs470bn YTD through the Govt. allocating
a tranche of Rs80bn cash (first tranche of Rs130bn was disbursed in 2Q
FY11). As they were awaiting subsidy relief, the OMCs had postponed their
3Q FY11 results, and shall be reporting later this week. Having fallen 20-30%
on subsidy concerns, the OMCs are available at cheap valuations.
 Taiwan: The polyester supply chain petrochemical products posted strong
margin improvement last week and we expected the strength could last post
Chinese New Year holidays as cotton price remained high while polyester is
stepping into seasonal peak demand. Other than MEG and PTA, SM margin
also recorded a sensible rebound last week and we expect SM will be better
off this year due to limited capacity increase. These further reinforced our
positive view on Nan Ya Plastics and Formosa Chemical and Fibres.
 Thailand: Thai downstream names are continuing to cope with lower volumes
and increased volatility. Inflation concerns are stoking fears related to recent
adjustments to Thailand's LPG pricing policy while the upcoming release of
4Q10 results is supporting optimism. Our preferred names in the Thai space
remain: PTT Aromatics, Thai Oil and Esso Thailand.
Outlook and Strategy
 We expect chemical and oil refining stocks to remain robust as respective
margins trends are continually showing strength. Integrated downstream plays
are the ultimate beneficiaries and we believe Thai Oil, SK Innovation, and RIL
to be well positioned for the cyclical recovery. Coupled with our preference for
polyester plays, we also recommend Honam Petrochemical, Nan Ya Plastics,
PTT Chem, and Reliance Industries as key sector picks.