Asia Oil and Petrochemicals - Petchem pack gains on Naphtha fall:: Macquarie Research

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Asia Oil and Petrochemicals
Petchem pack gains on Naphtha fall
Refining and petrochemicals update
 GRMs held on to their ~US$8/bbl levels, as a mild dip in middle distillate
cracks was made up by the inching up of gasoline and fuel oil spreads.
Petchem margins were in an uptrend, with Polyester margins continuing to
rise slowly for the third straight week and with Ethylene increasing its spread
over primary input Naphtha by 15% WoW due to a pullback in Naphtha prices.
Country-specific developments and views
 Thailand: Thai downstream stocks have rallied sharply following Thailand's
election results. Stocks are enjoying a relief rally from oversold levels. We
have maintained our optimism through this selldown, and that view is
unchanged. The next material events for these stocks will be 2Q11 results
due out over the next month and the possible emergence of populist policies
that could either cut corporate tax rates or cap refined product prices. Our
preferred names in the space are Thai Oil and Esso Thailand.
 Korea: With 2Q11 coming to an end and considering lacklustre share price
movements, we believe much of the negatives on near-term earnings are
behind us. We remain positive on the Korean oil refining sector, with price
cuts coming to an end on 6 July, and we believe a good opportunity to
accumulate is in place. Our numbers are under review.
 India: The Government of India (GoI) has provisionally cleared the Cairn-
Vedanta deal, but has imposed stringent preconditions, with the most
important ones being that Cairn India is deemed liable to pay a 20% royalty
and to withdraw its arbitration case against paying a cess at the rate of
Rs2,650/MT on crude production from its Rajasthan block. If accepted,
this would imply an NPV impact of ~US$2.1bn being transferred from Cairn
India (negative impact of Rs49/sh) to ONGC (positive impact of Rs11/sh).
 Taiwan: Formosa Group companies should report June sales this week, with
all expected to report a MoM decline due to a plant shutdown and generally
weak PTCM pricing. We also expect 2Q earnings to show a QoQ decline as
most petrochemicals were weaker due to lower demand caused by China
tightening. However, we think a high cash dividend could support the share
price. FPC, NPC, FCFC, and FPCC are scheduled to pay cash dividends of
NT$6.8/sh, NT$4.7/sh, NT$7.5/sh, and NT$3.9/sh, respectively,
representating dividend yields of 6.3%, 6%, 7%, and 3.8%, respectively. Exdividend
dates should start from July 8 to July 15.
Outlook and Strategy
 Among Asian stocks, we particularly like S-Oil, Hanwha Chemical and
PTTCH. We also like HPCL/BPCL as plays on the short-to-medium term
subsidy alleviation and longer term strategic shift away from the subsidyridden
petro-retail business.