Asia Oil and Petrochemicals - margins dip slightly :: Macquarie Research,

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Asia Oil and Petrochemicals
Petrochemical margins dip slightly
Refining and petrochemicals update
 GRMs robust; Petchem margins dip: Singapore complex GRMs, though
down 4.5% WoW due to a mild increase in Dubai crude prices, were robust at
US$8.8/bbl. Petrochem margins dipped 5-10% WoW across the board due to
increased Naphtha prices. MEG margins continued to plummet on account of
restart/quicker turnaround of multiple plants in China/Taiwan, and are now at
10-year seasonal lows. However, we are bullish on the overall Polyester
chain, and expect this to be a short-term phenomenon.

Theme of the week
 China’s fuel price hike a relief for refiners; also aims to control demand:
Our China Oil and Gas team hosted a conference call with Mr. Zheng Baomin,
Sinopec's board secretary, who indicated that refiners are under pressure at
current fuel price levels, and that the central government aims to resolve
diesel shortages and use prices as a tool to curb demand growth. In our view,
stocks should react positively to the recent fuel price hike. In the short term
we see incrementally positive sentiment regarding Sinopec due to cheap
valuations, positive catalysts of a fuel price hike (its 70% EBIT comes from
downstream) and NDRC's determination to move towards a market-oriented
pricing system.
Country-specific developments and views
 Korea: S-Oil and Honam Petrochemical are our top picks in the Korean oil
refining and petrochem sector. Despite concerns over near term earnings
catalysts post 1Q11 results, we believe these two stocks have the best mid to
long term fundamentals stemming from earnings growth amid sales volume
expansion. In the near term, LG Chem stands out as an electronic materials
turnaround is likely to start in 2Q11.
 Thailand: Thai refiners only traded for two days last week. The current focus
remains 1Q11 earnings. Following a recovery in margins, crude oil and PX,
optimism is running high. While diesel subsidies continue to make headlines,
these are not directly impacting refining margins. We maintain our preference
for Thai Oil, PTT and Esso Thailand.
 India: With China having increased fuel prices, India’s oil marketing
companies are also awaiting a hike in retail prices to alleviate the subsidy
burden. Current losses on diesel sales are of the order of US$55/bbl, with
International diesel prices having touched US$138/bbl.
 Taiwan: Formosa Petrochem hosted a conference call last week and guided
for the refinery division to carry the strength into 2Q, while the olefin business
should remain healthy; in line with our expectations. For the rest of the
Formosa Group, we believe current prices have built in high expectations
following a strong 1Q11; hence current weak petrochem margins could offer
investors a reason to take profit. However, as the long-term fundamentals
remain positive, we would accumulate FPC, NPC, FCFC after a 10-15%
pullback. For FPCC, we still think the valuation is too rich on a regional
comparison basis.
Outlook and Strategy
 Among Asia stocks, we like PetroChina, PTTCH, Nan Ya Plastics, and RIL.