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Author: FutureEyes   |   Latest post: Mon, 14 Aug 2017, 02:19 PM

 

HENGYUAN Q2 EPS, Just 19 cents

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HENGYUAN Q2-2017 EPS, Just 19 cents.

 

I am writing this article to ensure the investors in i3 are fully aware what to expect on the coming quarter results of Hengyuan and make their investment or trade decisions accordingly

 

For any refinery, there are two independent factors that contribute to its quarterly earnings, one is the Refining Margin (1) and the other is the Inventory gain/loss (2) due to crude oil price changes between the reporting period.

Now let us get an estimate for Hengyuan Q2 2017 earnings accordingly:

 

Earnings factor (1): the refining margin

This is called the profit due to CCS Margin.

CCS Profit = Refining Throughput, (Barrels/day) x No. of days in operation (Days) x Refining CCS Margin (USD/Brl) x Exchange rate (RM/USD)

Using a realistic estimate of the expected Q2 average refining margin of 8USD/brl, HRC CCS profit is as per below:

= 112k bpd x 90 days x 8 USD/brl x 4.3 RM/USD

= 346 M

 

Note there are significant drop in overall Refining Margin due to Jet Fuel oil crack spread and Diesel fuel  margins which had dropped significantly compared to Q1 as can be seen on below chart April - June 17:

 

Note: the above chart is with reference to Dubai Crude and HRC feed is Brent. The margin above has to be reduced by ~ 3 USD/brl to compare with Brent. Considering the dip in Gasoline crack spread also during the same period, the CCS margin is estimated to be max 8 USD/brl instead of 9 USD/brl as observed for Q1 2017 for HRC.

 

Earnings factor (2): Inventory gain / loss,

The is simply the valuation of their Inventory (consisting of both product and feed crude) as per the market valuation at end of the reporting period. One can view this similar to how a property company re-values its asset as per latest market pricing or how the Forex effects reported for assets or debts held in different currency than RM.

The oil price used by the company during the reporting period is quite dependent on the date they chose as a reference, we may only use the Brent closing price on the last week of the month as an approximate indicator.

As such taking a conservative approach, I estimate that Brent price used ~ 45 USD/brl as reported on 26June17 for qtr ending Jun17 and 53 USD/brl on 30 March17 for qtr ending Mar17. The difference is 8 USD/brl. The value of Inventory of HRC as of Mar17 in balance sheet is 1,075M (RM) is taken as 250M in terms of USD.

 

(A)  Inventory size in Barrels = Inventory value / Price of Brent during reporting period

= 250M / (USD 53/brl)

= 4700k brl (approximately)

 

Since HRC is operating at a throughput of 112k barrels per day, their inventory turnover in days is calculated as per below:

= 4700 / 112

= ~ 40 days (exactly as per what they had reported on their website, ‘Future of HRC’ on stockholdings)

 

 

(B)  The inventory loss = Ending Value of inventory (Jun 17) – Starting Value of Inventory (Mar 17)

Starting Value of Inventory (Mar17) = Inventory (barrels) x Starting Price of Brent (USD/barrel)

= 4700k barrels x USD 53/brl

= 250M

 

Ending Value of Inventory (Jun17) = Inventory (barrels) x Ending Price of Brent (USD/barrel)

= 4700k barrels x USD 45/brl

= 211M

 

Thus, the inventory loss is

= 211M – 250M

= - 39M USD

= - 167M RM

 

 

 

The Total Effect (1)+(2) , Is the FIFO profit which will be the reported Gross profit is simply the addition of the CCS Profit with Inventory gain/loss.

Refineries divide the FIFO profit by the barrels processed to obtain FIFO refining margins.

Thus, the FIFO Profit (GROSS PROFIT):

= CCS Profit + Stock gain/loss

= 346M – 167 M

= 179 M

 

Taking HRC’s Sales & Admin overhead costs, Other expenses and Finance costs which comes to approximately 120M, the Net profit would be:

= 179M – 120M

= 59 M (this results with an EPS of only 19 cents for Q2 -17 for HRC assuming no tax as per previous qtr).

 

 

However, one must be made aware that the Inventory gain/loss is a temporary phenomenon which will be offset later if the crude price reverts back to where it started. Imagine if the Brent price closing for the month Sept 17 is back to 53 USD/brl. The same inventory loss now will result with inventory gain.

 

 (I felt it is important to enlighten i3 members on the above, as we have Superinvestor who will sell off the moment latest result drops significantly below preceding qtr and TA Sifu who may just trigger cut loss subsequently. People will be lost for words on why the earnings drop so much. This information should be equally important for superinvestor and TA sifu to act accordingly).

References:

http://english.yonhapnews.co.kr/business/2017/07/26/0503000000AEN20170726002551320.html

http://in.reuters.com/article/southkorea-s-oil-idINL3N1KH1BB

S-Oil reported a 117.3 billion won ($104.9 million) operating profit for the three months to end-June, down 82 percent fall from a year ago and down 65 percent from the previous quarter due to a fall in crude prices and weak inventory valuation, the company said.

 

 

 

 

 

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Labels: HENGYUAN

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HENGYUAN 8.32 +0.10 (1.22%) 6,249,800 

  5 people like this.
 
vinc3362 Above article datas are biased.....................

HRC main product is gasoline, why use jet fuel kerosene futures to substantiate your figures..............

Why use 26th June Brent crude prices when 30th June is the month end and is on Friday, a trading day. The pricing differential is already nearly USD 3 per barrel for that few days of trading.

Got to go back to work, will work out the details later.....but for sincere investors, please double check the data and don't follow blindly.
12/08/2017 11:05
ktsk88 Whatever it is, the inventory as at reporting quarter will depend on oil pricing and the inventory valuation gain/loss will definitely affected the bottom line and also the stock price too.

Thanks for highlighting the issue.........consider a fair view minus the calculations.
12/08/2017 11:26
fattmoney Just to add to vinc3362 comments on usage of Brent price on 26 June, if you really want to use 26 June, then it should be compared to 27 March price (26 March is a weekend) to be consistent, which is about USD51. Hence, the difference would still be smaller by USD2 (stock losses would be less).
12/08/2017 11:28
ckcc FutureEyes you not from Affin IB? Why you cover same stock like OTB?
12/08/2017 11:29
BornToSpeculate Inventory loss is common and should be the same for all oil refining operations. The question we should be asking the past 2 quarters how much was the 'extra-ordinary gain on inventory'.

Obviously we cant just take crack spread and use this as the only input for profitability.

Super investor if you ask me, would have bought in cheap when HengYuan first reporting their Q4 turnaround profit of 200m+. Knowingly that there are not much shares in circulation, this is the best down to pare down some holdings when there is volume.
12/08/2017 11:30
InsiderR Q2 inventory loss can be recovered in q3? Nobody can guarantee. How well the crude oil will perform in Aug & Sept still unknown. And nobody knows which day exactly HRC place order for crude. Buy high sell low is very likely, everythg depends on how good are HRC crude experts. Also, pls take note HRC has no hedging as of today. For inventory loss, u may go through Shell previous reports, it is possible inventory loss can wipe out all your margin when crude up/down tremendously. It is not as simple as just minus crude price at end of the mth/qtr with early of the mth/qtr. Anyway, counting down remaining +/-10 trading days for Q2. Good lucks!
12/08/2017 11:42
ckcc If HRC crude is expert why last year Hengyuan can drop below RM 2? There are also some loss qtrs.
12/08/2017 11:45
RedGreen Why hold 40 day stock ? Are they preparing for refinery maintenance or inspection ? Petron corp philipines shutdown 45 days for the maintenance ?
Just suggesting.
12/08/2017 12:02
vinc3362 Anyway, please apply above article calculations to HRC 1st QR report.........
For your info....Brent crude prices (from Bloomberg) as at
30/12/2016 USD 56.82
31/3/2017 USD 52.83
30/6/2017 USD 47.92

1st QR Brent crude price decreased USD 3.99 bpd
2nd QR Brent crude price decreased USD 4.91 bpd

HRC 1st QR EPS 93 sen.
HRC 2nd QR EPS ????? ( Only HRC finance guys will know the important key price
datas to input for profit estimation)

To predict HRC EPS at 19 sen is way off the mark. And from FutureEyes analysis, he is a smart guy. Why throw so much red herring to unsuspecting amateur investors like us.........

I will quote following forummer's comment .......


Jupiterang> If i'm a shark with insider news, here's how I will run the monkey show... 

Before a Good News out, I create a panic sell to collect. When Good News out, Market will panic buy at high. I sell sell sell... 

Before a Bad News out, I create a panic buy to sell. When Bad News out..kaboom! It's none of my business as I have already sold all my holdings... 

All still remember how atta, lbalum, comcorp, Prelexus rose up by panic buying and crashed after Bad News out.. 

Do not chase high..
10/08/2017 14:30


Good luck for all those onboard HRC ship........remember Sifu Raider's advice dumb dumb hold........
12/08/2017 12:22
FutureEyes Note, my article is not misleading.

It was a very practical, realistic estimations. Q1 results could be due to stock gain resulting from improved products margins.

I agree with InsiderR points below (no hedging by HRC), and thus made a conservative estimation.

Note, as I had mentioned earlier you will obtain exactly the same inventory loss by accounting any fraction you wish on the inventory as refined products provided the refining margins remained the same between reporting period.

If you can see through my article content, you will realize it was meant to remove the misleading bias (too much weightage given) by market on quarterly earnings.


Posted by InsiderR > Aug 12, 2017 11:42 AM | Report Abuse

Q2 inventory loss can be recovered in q3? Nobody can guarantee. How well the crude oil will perform in Aug & Sept still unknown. And nobody knows which day exactly HRC place order for crude. Buy high sell low is very likely, everythg depends on how good are HRC crude experts. Also, pls take note HRC has no hedging as of today. For inventory loss, u may go through Shell previous reports, it is possible inventory loss can wipe out all your margin when crude up/down tremendously. It is not as simple as just minus crude price at end of the mth/qtr with early of the mth/qtr. Anyway, counting down remaining +/-10 trading days for Q2. Good lucks!
12/08/2017 12:36
JayC Very very good analysis. Keep it up.... I believe price is high atm
12/08/2017 13:15
Bettyem 良好的分析。保持 but price high
12/08/2017 14:45
Flintstones Cyclical earnings are to be expected from hengyuan. Inventory gain or loss is a zero sum game. Wat comes down will go up again.
12/08/2017 14:54
InsiderR -Davidslim-
Yes. Inventories include crude oil and refined products. When current crude price i.e. Brent drops, both the 'value' of crude and refined product held by refinery will drop parallelly in response to crude price (provided margin remained the same). U only need to know the 'delta' of purchased crude and inventories to figure out the inventory loss. So estimating inventory loss by assuming all stockholdings as crude in FutureEyes' research should be valid.
12/08/2017 14:58
LA777 Flintstones, absolutely agree with you.
12/08/2017 14:58
InsiderR Inventory gain and loss is not neccessary a zero sum. It should be based on which day and what price refinery buy crude and what price they lock their products. When crude fluactuates up and down, inventory gain= buy low sell high, inventory loss= buy high sell low. Both scenarios are possible for refinery without hedging.
12/08/2017 15:05
Flintstones Anyway should investors focus on quarterly earnings of a refiner? A correction in this stock is an opportunity to accumulate in my opinion. If you ask any CFA on how to value a refiner, all of them will use reproduction cost instead of earnings. At this moment, hengyuan is indeed severely undervalued
12/08/2017 15:25
davidtslim InsiderR: If hengyuan didnot has any hedging, do you think they will keep super high level of inventory of crude in view of down trend of crude oil price?

Assume of some of the inventory are refined products, as long as the Crack spread or margin is positive (in fact high value of margin), then how can these refined products can lead to stock LOSS?

If future eye's inventory loss data is valid, then how to derive Q1 super profit data for Hengyuan?

In my opinion, inventory gain is not equal to buy low sell high, inventory loss is also not equal to buy high sell low.
12/08/2017 15:57
cstanmyinvest These are the Real Facts for Hengyuan EPS, Brent crack spread and Brent crude prices for the last 3 quarters :

4Q/2016 - EPS 69.27, average crack spread $6.80, Brent crude $46-$57 (+$11)
1Q/2017 - EPS 92.16, average crack spread $7.80. Brent crude $57-$52 (-$5)
2Q/2017 - ??? average crack spread $7.80, Brent crude $52-$48 (-$4)

Davidtslim has called 2Q EPS at 66.9 sen. We need more than Hard Facts to believe FutureEye's call at 19sen.
12/08/2017 16:02
Jeffbkt FutureEye, you need to back test your calculation on the past Q result to confirm the accuracy.
12/08/2017 16:54
360Capitalist The actual EPS will not less than RM1.00 for Q2'17
12/08/2017 18:31
beware1 Bought abv RM 8? Wish you lose kaw kaw.

Posted by 360Capitalist > Aug 12, 2017 06:31 PM | Report Abuse
The actual EPS will not less than RM1.00 for Q2'17
12/08/2017 18:35
vinc3362 360 Capitalist.......you have my vote.......
12/08/2017 18:51
360Capitalist Heng Yuan Earning Report Guidelines :-
http://stillwaterassociates.com/crack-spread-a-quick-and-dirty-indicator-of-refining-profitability/

As apended link, HengYuan is producing LPG, Propylene, Light Naphtha, Gasoline, Aviation Fuel (Jet Fuel), Diesel and Fuel Oil. (http://hrc.com.my/index.php/operations-products/ )

Earnings
1) To reflect the real scenario we should use 3-2-1 Crack Spread to gauge the profit of HengYuan ( https://www.energystockchannel.com/3-2-1-crack-spread/ )
Q2 ( April- June : USD16.00-20.00 per barrel ) / Avg : USD18
Gross Profit @ 10 million barrels Capacity Per Quarter : USD180mil
Processing Cost per Barrel Per Quarter: USD 6.50 = USD65Mil
Profit Before Overhead Cost : ( USD180mil-USD65mil ) X 4.3 = RM 495mil
Overhead Per Qtr : RM125mil
Net Profit : RM495mil - 125mil = RM370mil

Note :-
Q1'17 Avg Selling Price Per Barrel :USD65
(Crude Cost USD50, Crack Spread USD 15 per barrel)
Q2'18 Avg Selling Price Per Barrel : USD65
( Crude Cost USD47, Crack Spread USD 18 per barrel)

Inventory Loss
1) As inventory count is using First In First Out (FiFo) method, we should use the last crude oil price (May 1- June 30) to examine inventory holding status. Average loss per barrel USD4 X 4 - USD16mil or RM68.8mil

Earning Per Share (EPS)
RM370mil - RM68.8 =RM301.2 mil or EPS RM1.00

Industry Quarterly Profit >>>
Reference for Refinery PROFIT :-
http://zeenews.india.com/companies/ril-q1-results-net-profit-up-28-to-rs-9108-crore-2025393.html

Reference for Peer Share Price Benchmarking (All Time High) :-
https://www.investing.com/equities/reliance-industries
13/08/2017 04:22
LA777 360Capitalist, you have my vote too!
13/08/2017 08:23
John Lu 360capitalist...yes!! Agree with your calculation.
13/08/2017 08:23
ken 1. The Brent oil (Crude oil) pricing is misleading..

Around 1 April Brent oil price is around USD51 and End of June Brent oil price is around USD46.5.

As for Crude oil price, Beginning April is around USD48.5 and End of June is around USD44.

The price differ between 1 April to 30 June 2017 is around USD4.5 ... Not as stated USD8.

2. Base on last Q result, profit margin for each barrel is higher than USD8.. more than USD9.

As such Net profit estimate of 19 Cents is way too low. After all this Q stock loss will be next Q stock gain.... Comparing 1 Jan 2017 and 31 Dec 2017 stock gain/loss will be more meaningful..
13/08/2017 09:23
ken Your estimate gross profit RM346 mil compare with actual 1stQ2017 gross profit RM395.6 million... Your estimate of gross profit is out by about 50 million with assumption margin remain unchanged.
13/08/2017 09:35
ken Conclusion, David Lim's net profit estimate will be much more accurate than yours.
13/08/2017 09:40
suregain I think yoy up but qoq drop.. it all depends on market wether like it or not
13/08/2017 10:24
FutureEyes To PETRONM shareholders, especially call warrants holders, suggest to exit by tomorrow as I will be publishing an article probably Monday evening on its possible unsatisfactory earnings based on Petron Corp earnings reported on 8th August 2017.
13/08/2017 20:47
360Capitalist Future Eyes, dont show your stupidity to mislead others
13/08/2017 21:52
grateful_ FutureEyes I forecast Hengyuan loss QR why your profit so high?
13/08/2017 22:36
paperplane This guy wanna show he is smart....but end up showing his own stupidity
13/08/2017 23:14
360Capitalist Future Eyes, your write-up is not making any business sense.

1) How can a company register lower profit while crack spread (profit margin) is going higher and higher ?
Q4'16, Crack Spread USD14/barrel, Actual : RM207mil / EPS : 69 cts (Production :10.4 mil barrels)
Q1'17, Crack Spread USD16/barrel, Actual : RM279mil / EPS : 93 cts (Production :10.1 mil barrels)
Q2'17, Crack Spread USD18/barrel, **Est : minimum PAT RM300mil / EPS : RM1.00 (100 cents)
Allowance : Profit can touch RM365 mil if without inventory loss.

Note :-
1) Crack Spread = Selling Price - Cost of Crude Oil per Barrel
2) Every USD2 increase in Crack Spread will boost HengYuan's profit by USD20mil or RM86mil or EPS 28 cts idf production volume is at 10 mil barrels per quarter.

2) Most of the refinery companies achieve better or increase profit in Q2'17, Shell, Reliance, Philip66 and many imdustry peers. This is something being announced by refinery companies and not based on own assumptions.

Reference for Refinery PROFIT :-
http://zeenews.india.com/companies/ril-q1-results-net-profit-up-28-to-rs-9108-crore-2025393.html

Reference for Peer Share Price Benchmarking (All Time High) :-
https://www.investing.com/equities/reliance-industries

(Future Eyes, please provide real case example instead of your own unproven assumptions to sustain your claims )

3) Lower crude oil will boost Super Profit for refinery companies.
If you based on crude oil price at USD50 per barrel and crack spread (profit margin) at USD20 per barrel, the GROSS PROFIT MARGIN is 40%, which is very lucrative for any manufacturing business. As compares to the time when crude oil is at USD100 perbarrel, the gross profit margin is only 20%.

4) Refinery is the Future ( Game Changer for Oil & Gas Industry)
Due to excess supply of crude oil, the crude price will remain low for next few years which is very good for refinery companies to sustain its profitability in medium term. The exploration & production will experience profit trade off with lower profit in long run while refinery will continue to enjoy sustainable and high profit in longer run.

Future Eyes,
I repeat Heng Yuan will report minimum EPS RM1.00 in Q2'17
14/08/2017 08:52
5858 360capitalist...very good analysis and powerful sharing...
14/08/2017 08:56
Alex Foo 360 should copy paste this at blog section, titled 'eps at least 91 sen and above' =)
14/08/2017 08:59
360Capitalist Bro Alex.. i dont know, please do for me,, Thank you
14/08/2017 09:01
grateful_ Your eyesight got problem? Why 19 sen reversed?

Posted by Alex Foo > Aug 14, 2017 08:59 AM | Report Abuse
360 should copy paste this at blog section, titled 'eps at least 91 sen and above' =)
14/08/2017 09:06
Icon8888 Future eyes you better be right. Many people reacted to your article by selling today. If later results comes out to be good, they might blame you
14/08/2017 09:13
Icon8888 Bloggers carry heavy responsibility

: )
14/08/2017 09:14
paperplane Or ask him give his contact , address, working address. If result is not true. Go bombard him. Ask for refund. Hehehe
14/08/2017 13:20
tftey Q2's profit should be rather close to Q1. Any dip is good opportunity to top up.
14/08/2017 15:35
hissyu2 hi pro, mind if you can use your method to calculate Q1 result? let us know if your estimation/calculation make sense?
14/08/2017 20:42
hissyu2 Ending Value of Inventory (Jun17) = Inventory (barrels) x Ending Price of Brent (USD/barrel)

= 4700k barrels x USD 45/brl

= 211M


brent crude oil price at 6/30 was 47 o... why 45$???
14/08/2017 20:55
hissyu2 please rework your calculation with brent crude oil price at 6/30 = 47$. then you got 100m profit wor... 35c, still not good?? share price only 7.5rm... annualize it you still get pe of 5x... where to find a? and please dont ignore the refinery margin rally after 6/30... LOL...
14/08/2017 20:59
FutureEyes hissyu2, please read again my article with the assumptions i had used to derive the brent price.

note also, the refining margin i had used as 8USD/brl for Q2 versus Q1 of 9USD/brl is very high considering the drop in jet fuel crack spread and gasoline relative to Q1.
14/08/2017 21:00
hissyu2 I Dont understand. since the brent oil price u used for 3/31 was 52$ .... hehe... but okay la~~ wait result lo~

given 20c Q2, 93c Q1, considering 60c for Q3+Q4... it is about 180c... then, forward PE also 4x nia~ cannot find any cheaper stock in bursa liao~ hoho
14/08/2017 21:30
Icon8888 Whoever that panic sold few days ago regret
17/08/2017 12:16
stockraider Calvin Tan,

Raider's friend who fought together with many successful battle, pls stay clear of HRC bcos the tsunami profit is coming loh....!!

Please don pick a fight with HRC anymore loh....!!

HRC result is superb & coming loh....!!
17/08/2017 12:16


 

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