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Hengyuan - No Doom For 2018
Much fear has been created for Hengyuan Refining Company Berhad owing to its planned Euro 4M Mogas and Atlas II plant upgrade exercise expected to be carried out in the 2nd half of 2018. There is no doubt that the said exercise will affect its production, revenue and profitability; but is the level of fear being bandied about justified? Is it all doom and gloom for HRCB in 2018? Lets pay this issue a visit.
How Will The Top Line Be Affected?
Below are figures extracted from HRCB's quarterly reports.
Based on the above figures, we estimate sales volume and gross profit of HRCB for 2018 to be as below:
Sales volume for 2018 is estimated based on Q4 2017 figures of 113,374 barrels per day, while gross profit is calculated based on that of Q4 2017 amounting to RM34.21 per barrel.
We believe that our sales volume estimated is conservative as it takes into account a 100% shutdown of all operations of HRCB for the entire 2.5 months. However, management of HRCB is likely to execute the upgrading exercise in stages so as to allow for partial operations to continue. We have also not taken into account the increased capacity of the upgraded plants; the real output for Q4 2018 should be higher than our figures here.
The gross profit margin of HRCB i.e. the crack spread is also conservatively taken at the latest reported numbers (Q4 2017). Crack spread has been rather volatile in 2018 thus far with numerous days when crack spread shot up much higher than prices seen in Q4 2017. Also, it is key to note that prices of crude oil and crack spread steadily climbed through 2017 with significantly lower prices seen in early 2017. 2018 is expected to see more stability at higher prices as compared to 2017. Nevertheless, do consider that Q3 2017 was a highly profitable period for HRCB due to disruptions in certain refineries globally which caused crack spread to shoot up.
RM164 Million Realised Foreign Exchange Gain From Settlement Of US$ Loans
On 23 January 2018, HRCB secured a US$430,000,000 loan to refinance its existing term loans and for capital expenditure purposes. Assuming US$300,000,000 is used to refinance existing term loans and US$130,000,000 is to be utilised for the 2018 plant upgrade, HRCB will book in a significant realised foreign exchange gain.
Why US$300,000,000? Simply because as at 31 December 2017, it is reported that HRCB's term loans amounted to RM1,205,008,000. At foreign exchange rate of 4.0620 as at 31 December 2017, that translates to US$296,653,865.
US Dollar Denominated Term Loans amounting to RM1,416,913,000 were drawndown on 22 December 2016. At foreign exchange rate of 4.4745 as at 22 December 2016, that translates to US$316,663,985. The base exchange rate for comparison is therefore 4.4745. Assuming that the US$ Term Loans were settled on 23 January 2018, the foreign exchange rate for that day was 3.9270.
US$300,000,000 x (4.4745 - 3.9270) = RM164,250,000 realised gain on foreign exchange.
(Please note that US$20,000,000 loan repayments were made in FY 2017).
Tax Savings From Reinvestment Allowance
HRCB will be incurring US$160,000,000 to upgrade the plant to Euro 4M Mogas and the Atlas II project. At today's foreign exchange rate of 3.9045, that will be an equivalent of RM625,000,000. 60% of this amount incurred will qualify as reinvestment allowance which can be utilised to offset the company's chargeable income. HRCB therefore has total reinvestment allowance of RM375,000,000.
(Note that utilisation of reinvestment allowance is capped at 70% of chargeable income for the year of assessment).
For simplification, lets assume that profit before taxation of HRCB and it's chargeable income are the same. Based on our estimated profit before taxation of RM829,073,117, the 70% cap amount to RM580,351,182. Hence, all of the reinvestment allowance can be utilised to offset against current year chargeable income. The balance of the chargeable income will be taxed at corporate tax rate of 24%.
FY2018 Still Looks Very Impressive
Based on the above estimates and assumptions, we derive our income statement for 2018 as below:
For comparison purpose and due to lack of detailed information, other income, manufacturing expenses, administrative expenses, depreciation and amortisation, other operating gains, and finance costs, incurred in 2017 is maintained for 2018.
Our Valuation of HRCB
For guidance, as at 6 March 2018, HRCB is trading at 3.36x only.
Petron Malaysia Refining & Marketing Berhad, which is often seen as a close domestic peer, is currently trading at 6.48x.
According to The Edge Financial Daily, the median PE ratio of HRCB's global peer is at 9.4x; while HRCB's 10-year average is 9.5x.
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Discussions
2 people like this. Showing 50 of 53 comments
traderman,
Management of HRCB had in their Q4 2017 report commented that a delay in the planned completion is expected but at the moment, there is no indication stating that it cannot be completed before the October 2018 dateline.
The delay also does not mean the exercise requires a timeframe longer than 2.5 months as planned; the delay is due to a longer time needed to fabricate the main equipment. It simply means that commencement of work will be delayed. As such, production downtime of 2.5 months remains.
Thank you.
traderman smary guy, Euro 4M Mogas completion is delay. please study the quarter report first
06/03/2018 18:54
2018-03-06 19:15
A very good report, I like it.
Good work.
Look like David Tan and David Lim are all very good analysts.
Thumb up !!
2018-03-06 19:32
good analyst definition is getting the prediction wrong by a wide margin?
Zhuge_Liang A very good report, I like it.
Good work.
Look like David Tan and David Lim are all very good analysts.
Thumb up !!
06/03/2018 19:32
2018-03-06 19:38
Do not attack any writer here.
Please show us your reports to justify your comments.
Empty tin made the most noises.
2018-03-06 19:46
Meaning y-o-y eps comparison still down. If the market is still weak, I don't see it can go higher PE. I will avoid for now.
2018-03-06 19:51
Now wait another big fund to handle the price. Previous big fund already take profit and leave it to small potato. Good luck to those who continue hold whatever profit or loss.
2018-03-06 19:51
Time lagging for claiming reinvestment allowance is the main concerned in near future. Can HY claim reinvestment allowance if the upgrading works has not been completed ?
2018-03-06 20:07
Wow, at 4p.e. Hrc will be parking at $10.80 ?
Should we discount it for the Safety of Margin ?
Thx to Davibtslim for such a good tabulated analyst.
2018-03-06 20:18
PE 4x is based on history
the the PE will expand once profit
drop drastically as predicted my analysts
2018-03-06 20:24
HRC still has inventory value of RM1.1bn which wasn't factor in to the above calculation.
No point for HY keeping the inventory during the 2.5mth down time.
2018-03-06 20:28
smart guy, this is from latest report
B4 Status of Project Euro4M Mogas
On 16 June 2017, the Company had announced the Final Investment Decision on the Euro4M Mogas
project with planned completion in the 2nd half of 2018.
We continue to anticipate a delay in the planned completion of the Euro4M Mogas project due to the
longer than expected duration to fabricate the main equipment. We are currently evaluating options
to minimise the impact and will provide further information in due course.
2018-03-06 20:34
B5 Profit forecast
The Company does not issue any profit forecast.
The Company continues to prepare for a planned major statutory turnaround scheduled to be carried
out in the third quarter of FY2018. This major turnaround is planned to take approximately 2.5 months.
Accordingly, revenues for the financial year ending 31 December 2018 will reflect the anticipated
reduction in sales and production activities.
2018-03-06 20:34
Posted by Icon8818 > Mar 6, 2018 08:26 PM | Report Abuse
there are BIG ERRORs in the above estimation as shown below:
(1) 2017 Gross profit was derived despite Inventory Gain more than 400 Million for the year.
(2) 2017 Gross profit had exceptional Refining Margin due to Hurricane Harvey
Take out the above two effects in 2017 and replace it with below for 2018:
(1) Huge potential for Inventory loss (crude price has more downside risk)
(2) Refining margin had significantly dipped as shown in Q4 2017 despite inventory gain for this quarter. The refining margin was higher in Q4 2017 than current Q1 2018. Current low margin is what to be expected for the whole year 2018.
(3) The MTA shutdown will easily exceed 2.5 months. There is a huge risk of commissioning / troubleshooting not turning up well escalating delays to even a year.
(4) The 25% Tax
2018 has every reasons to be disaster for Hengyuan
My sincere warnings to all
我 : i dont know how true is it,,,, but thx to shiw the blind spot here.
2018-03-06 20:36
see 3q2015lah shut down 44 days only then rugi more than 100m . shutdown 2.5 months u still have positive valuation? sorry i totally in DOUBT
2018-03-06 20:57
Talk what also no point lah. The price is definitely going lower even how good it can be. Buying can only be done not solely based on trust of promoters. I am going to buy hy but not based on the choice of promoters, but on the right suitable price deemed fitted. Eversince, when hy was hovering over 19++, alot of promoters with vested interests keep shouting buy....buy....buy and going for more.
In the end today,how many got trapped, stuck up with hefty debts and broke..... do you know why ? Figured out yourself with clear conscience and with good intentions. Don't get irritated for what l have written solely not applying to you alone with offence intentions.
2018-03-06 21:08
I would advise to stop promoting HY. Keep your good homework to urself. Don't mislead the others, hoping ur article can convince ppl to push up so that u can exit urself.
A GOOD FUNDAMENTAL company does not need excessive promotions. Let the market decides.
2018-03-06 21:24
KYY already left. So who is willing to push up a counter with vulnerability of earnings? Just move on to some better counters is a viable choice. I can see Heng Yuan breaking RM10 support very soon. Might be even tomorrow..
2018-03-06 22:16
Fabien,l do agree with you.lt is their usual tricks to reap up high profits while left those blind followers bleeding in self despair and broke .
2018-03-06 22:21
KYY had his fingers burned in Xinquan before. He has learned his lesson and now smarter.
2018-03-06 22:21
the rule of the game is to get out before the big shark leave....after the big shark leave it's game over
2018-03-06 22:23
KYY already left and his supporters will panic looking for the exit tomorrow. Sell first can buy back when upgrade complete.
2018-03-06 22:40
awesome article. big shark is just out temporary . they will buy back low - this is how the game go on .
2018-03-06 22:44
credit to david_tan for sharing
however, thanks to Icon8818 for highlighting factors we may miss.
what is certain is EPS for 2018 would be lower than 2017.
How much is HY worth?
Let's not forget that when we compare to regional or global peer, a lot of these companies are covered by analysts and earnings are quite predictable. It is not like HY when so many, called sifus diligently showed their analysis but actual results is only half of the estimates.
Let me draw your attention to HK listed Sinopec. PER based on FY2017 EPS is 7.5x with a dividend yield of 6%. A lot of analysts cover this stock.
How much discount would global investors pay for HY? when dividend yield is almost nil. Where investors find it difficult to forecast the earnings, almost nil dividend.
So, the next time some contributors bark 10X PER, think twice. For every ikan bilis buyer like you and me, someone is selling to you at RM17 and RM19.
2018-03-06 23:19
Call warrant holder also kena trap, mother share also got people kena trap. Cut loss or if you believe HY will move up, then you continue to hold. But Call warrant holder have no choice, please keep update when is your call warrant last trading. Sell when you able to.
2018-03-07 06:17
No matter how u analyse, u cant beat market maker....so dont put too much hope.
2018-03-07 07:37
From HY Report:
The Company has changed its functional currency from RM to USD with effect from 1 January 2017 following the refinancing of the Company's borrowings to entirely USD denominated loans
2018-03-07 08:04
Syabas David for your analysis !! Btw, can one just rely on the CME webpage futures prices on Spore Mogas prices to estimate its coming revenue ? If so, then it's a straight forward case, right David?
2018-03-07 10:37
D operator press,, D price down using accumulate &dump(1 sell & another buy using 7-10a/c) method @11.30am but still hold 4500Lot of share. How can these happen why no aughority investige?
2018-03-07 11:51
Icon 8818,
Below is my reply to your concerns.
1. Your inventory gain of RM400m is incorrect. I believe you are referring to MFRS 13 (Fair Value Measurement). The inventory is classified as a Level 1 asset and the market market value is quite readily available.
As at 31 December 2016, inventory is valued at RM826m. Brent crude price was RM255 per barrel. This translates to approximately 3.2m barrels in hand.
As at 31 December 2017, brent crude price was RM272 per barrel. The fair value of the said 3.2m barrels is therefore RM870m.
The fair value gain on inventories in FY 2017 was therefore only RM44m, and not RM400m claimed by you.
2. I agree that there was an exceptional gain in Q3 2017 and hence should not be taken into account for future projections. As such, our projected 2018 numbers were determined based on that of Q4 2017 (being the latest available numbers) and not the GP margin for the entire 2017. This was clearly explained in our analysis.
3. Re refining margin. It is incorrect to say that refining margin in 2018 thus far is below that seen in Q4 2017. As also pointed out in our analysis, 2018 thus far has seen a volatile crack spread movement. Yes, there were days when margins were below Q4 2017, but there were also days when margins were significantly higher than Q4 2017. You may refer to available information on the internet for confirmation.
4. Re plant upgrade shutdown. We believe that there is no basis for your stating that the planned exercise will 'easily exceed 2.5 months'. The said upgrade involves transfer of technology and know-how from HRCB's parent company in China. This is not a new exercise or technology to the Group as a whole. They are experienced professionals in an advanced industry.
5. Malaysia's corporate tax rate is 24%, and not 25% as stated by you.
6. Re the U$160m budgetted for upgrade exercise. Management had via the Q4 2017 report stated that RM542m had been approved and contracted for, while another RM205m had been approved but not contracted for.
The reinvestment allowance arising from this upgrade exercise is an approved tax incentive in Malaysia.
As HRCB will likely make a profit this year (as even your personal computation shows a profit of RM329m), the reinvestment allowance will certainly be of benefit to reduce HRCB's taxation expense for 2018.
I hope that the above clears your misunderstandings.
Thank you.
Icon8818 there are BIG ERRORs in the above estimation as shown below:
(1) 2017 Gross profit was derived despite Inventory Gain more than 400 Million for the year.
(2) 2017 Gross profit had exceptional Refining Margin due to Hurricane Harvey
Take out the above two effects in 2017 and replace it with below for 2018:
(1) Huge potential for Inventory loss (crude price has more downside risk)
(2) Refining margin had significantly dipped as shown in Q4 2017 despite inventory gain for this quarter. The refining margin was higher in Q4 2017 than current Q1 2018. Current low margin is what to be expected for the whole year 2018.
(3) The MTA shutdown will easily exceed 2.5 months. There is a huge risk of commissioning / troubleshooting not turning up well escalating delays to even a year.
(4) The 25% Tax
2018 has every reasons to be disaster for Hengyuan
My sincere warnings to all
06/03/2018 20:26
Capex of 160M was only budgetted, there is no certainty it will result with Tax reduction.
Also the tax benefit only becomes apparent when there is a good PBT to start with.
There is much bigger potential for a heavier inventory loss exceeding 200M.
2018-03-07 13:41
David tan, i'm expecting HY to report loss vs your GP of 65mil in 2018 Q3, lets come back here Nov18 to witness.
2018-03-07 14:11
Regulatory requirement to comply to Euro 4 by October 2018, only 7 months away from now.
Scheduled shut down for upgrade / maintenance take 2 1/2 months.
The Q4 report mentioned delayed with the upgrading parts availability.
It is a big concern and we don't know how confident the plant would be upgraded successfully and in time by October.
What if the upgrading takes longer time require?
What if the commissioning not successful?
What if by October and the plant still can't produce products that comply to requirement. Zero sales??
Too many " IF " and all these associated with Risk.
Risk is very high compare to minimum opportunity.
Hence, be extra careful to buy at this price.
2018-03-07 14:22
Icon8818,
I appreciate where you are coming from. But from an accounting point of you, your approach is incorrect.
Thank you.
2018-03-07 15:41
you are right, HY no doom for 2018. Now HY already rock bottom, I started revisit again for good bargain? yeah
2018-03-08 10:55
RM164 mil or USD42 mil savings from new loan facility. This computation is too simple and may be lack of commercial justifications. I reckoned it was more for flexibility and any benefits come gradually from future.
2018-03-09 09:36
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2018-03-06 19:00