Hengyuan Q1 2018 - Good Margins, Good Profit

david_tan

Publish date: Mon, 09 Apr 2018, 05:19 PM

2018 has been a turbulent year thus far for the share price of HRC. However, is the same turbulence seen in the operations of HRC? In this article, lets attempt to estimate the profitability of HRC in the 1st Quarter of 2018.

1. SALES

In estimating sales, cost of goods sold and gross profit of HRC for Q1 2018, the 3:2:1 Crack Spread approach is highly popular and favoured. This widely used crack spread ratio is based upon the premise that 3 barrels of crude oil produce 1 barrel of gasoil (diesel) and 2 barrels of gasoline (petrol).

a. Sales Price

The daily historical data of the followings were obtained from CME Group's website for the quarter from 1 January 2018 to 31 March 2018:

- Singapore Gasoil (Platts)

- Singapore Mogas 95 Unleaded (Platts)

b. Sales Quantity

Sales volume is determined as the average of the past 8 most recent quarters (1 January 2016 to 31 December 2017). In determining this average, quarters with the highest and lowest sales volume were disregarded to eliminate unusual fluctuations.

Using the 3:2:1 Crack Spread ratio, daily diesel sales is estimated at 36,790 barrels while daily petrol sales amounted to 73,580 barrels.

c. Sales In RM

Daily sales price extracted in US$ were converted to RM using daily foreign exchange rates extracted from Bank Negara's website. The daily sales price in RM is then multiplied with the sales quantity of diesel and petrol respectively on a daily basis, giving a sales revenue of RM3,058,775,000 for the quarter.

Note: Detailed daily sales calculation has not been included here as it is voluminous.

2. COST OF GOODS SOLD

Cost of goods sold is determined as Opening Inventories + Purchases - Closing Inventories.

a. Opening Inventories

Based on the latest breakdown of inventories available as at 31 December 2016, 56% of inventories was that of crude oil, 41% of refined products while the balance 3% was of other materials. Applying this ratio (but ignoring the insignificant 3% of other materials), the breakdown of inventories as at 31 December 2017 is estimated as below:

Cost of diesel and petrol is calculated based on Q4 2017 gross profit margin of 11.5%.

b. Puchases

For presentation purpose, it is assumed that daily crude oil used in production of 110,370 barrels is purchased and replenished on a daily basis.

As in the sales estimation above, daily prices of Brent Crude Oil were extracted in US$ and translated into RM using daily foreign exchange rates. This figure is then multiplied with daily sales of 110,370 barrels of crude oil, giving total purchases of RM2,624,104,000.

Note: Detailed daily purchases calculation has not been included here as it is voluminous.

c. Closing Inventories

For direct comparison, physical closing inventories is maintained per physical opening inventories.

The opening inventories of 2.6m barrels of crude oil is able to last daily production consumption of 110,370 barrels for 24 days. At daily crude oil purchases of 110,370 barrels per day, closing inventories of crude oil is calculated based on daily prices of Brent Crude Oil extracted (in US$ and translated into RM using daily foreign exchange rates) for the last 24 days of March 2018 giving a value of RM707,805,000.

For apple to apple comparison, gross profit margin of diesel and petrol are maintained at 11.5%.

Note: Detailed daily purchases calculation for the last 24 days of Q1 2018 has not been included here as it is voluminous.

3. OTHER INCOME

Other income is determined as the average of the past 8 most recent quarters (1 January 2016 to 31 December 2017). In determining this average, quarters with the highest and lowest other income were disregarded to eliminate unusual fluctuations.

4. MANUFACTURING EXPENSES

a. Manufacturing expenses is determined as the average of the past 8 most recent quarters (1 January 2016 to 31 December 2017). In determining this average, quarters with the highest and lowest manufacturing expenses were disregarded to eliminate unusual fluctuations.

b. Manufacturing expenses for Q2 2017 was normalised due to expenses incurred for an unplanned maintenance shutdown. Manufacturing expenses is adjusted accordingly based on number of production days.

5. ADMINISTRATIVE EXPENSES

Administrative expenses is determined as the average of the past 8 most recent quarters (1 January 2016 to 31 December 2017). In determining this average, quarters with the highest and lowest administrative expenses were disregarded to eliminate unusual fluctuations.

6. DEPRECIATION AND AMORTISATION

Depreciation and amortisation expenses are determined as the average of the past 8 most recent quarters (1 January 2016 to 31 December 2017). In determining this average, quarters with the highest and lowest depreciation and amortisation expenses were disregarded to eliminate unusual fluctuations.

7. OTHER OPERATING GAINS

On 23 January 2018, HRC took a new term loan amounting to US$430m (RM1.7b) to refinance existing term loans, to finance the planned 2018 capital expenditure and a revolving credit facility for working capital purposes.

As at 31 December 2017, the outstanding US$ denominated term loans amounted to RM1,205,008,000. The foreign exchange on that date was 4.0620. The exchange rate as at 23 January 2018 was 3.9270. Assuming the new term loan was drawndown for full repayment on the said date, the realised foreign exchange gain for HRC amount to RM40,048,000.

8. FINANCE COST

Finance cost is determined as the average of the past 8 most recent quarters (1 January 2016 to 31 December 2017). In determining this average, quarters with the highest and lowest finance cost were disregarded to eliminate unusual fluctuations.

9. PROFIT BEFORE TAXATION

10. TAXATION EXPENSE

Depreciation is assumed as capital allowance for taxation purpose.

11. PROFIT AFTER TAXATION FOR Q1 2018

HENGYUAN (4324)

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Discussions

Be the first to like this. Showing 50 of 99 comments

Investor48

Excellent analysis David
Thanks for sharing your hard work.

2018-04-10 05:45

trulyinvest

Again ppl estimate profit. In d end all pokai. Kikimkmk

2018-04-10 06:19

trulyinvest

If someone is so good in estimate a company profit, he can become d owner of the company. No need to invest in stock market

2018-04-10 06:22

tibetmonk

Good at estimate can become owner - What kind of logic is this?
All analyst can become ceo?
Trulyidiot.

Posted by trulyinvest > Apr 10, 2018 06:22 AM | Report Abuse
If someone is so good in estimate a company profit, he can become d owner of the company. No need to invest in stock market

2018-04-10 06:44

tibetmonk

If no estimate, how to value share?

chanting namotolongtolong kah?

Posted by trulyinvest > Apr 10, 2018 06:19 AM | Report Abuse
Again ppl estimate profit. In d end all pokai. Kikimkmk

2018-04-10 06:45

seedarren

david, good work! What is the comparison of average crack spread between 2017 Q4 and 2018 Q1?

2018-04-10 08:03

CharlesT

Nowadays promoters are very shy to talk abt crack spreads

2018-04-10 08:14

nekosan

already email SC, they will investigate accordingly for all sorts of pump and dump activities

seedarren, you can refer the report by another ANALyst david lim

2018-04-10 08:48

nekosan

confirm pump and dump. hengyuan open high now red.

2018-04-10 09:07

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