Energy 120118


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Energy 120118

  1. 1. Energy & Materials StrategyEquity Research Asia Sector StrategyJanuary 18, 2012 China: Commodity Demand SlowsS&P 2012 GDP ESTIMATES:China: 7.7%-8.2% Expect China’s commodity demand growth to slow . Although China’s slow.Hong Kong: 2.5%-3.0% latest macro data point to resilient domestic consumption, growth isIndia: 6.8%-7.3% moderating nonetheless. At this stage, we see the government sustainingIndonesia: 6.0%-6.5% fiscal spending, but growth is likely to be contained on the back of increasedJapan: 1.5%-2.0% government vehicle net gearing risks and a desire to keep price pressuresKorea: 2.8%-3.3% low. Hence, we expect China’s consumption of key commodities such asMalaysia: 4.4%-4.9% refined products, chemical feedstock, steel and cement to moderate in 2012. With the slower near-term growth, we expect a benign international priceSingapore: 2.0%-2.5% environment for iron ore, coking coal and crude oil, barring geopoliticalTaiwan: 2.3%-2.8% risks.Thailand: 3.5%-4.0%U.S.: 2.0% Cutting Energy to Marketweight (from Overweight). The oil & gas sectorEurozone: 0.2% has outperformed the Hang Seng Index (HSI) by 7.8% over the last three months, led particularly by gains at PetroChina and Sinopec. Meanwhile,2012 INDEX TARGETS: coal sector performance, flat over the last three months, was dragged downS&P 500: 1,400 by weakness at Yanzhou Coal Mining Co., on slower demand for coking coalS&P Euro 350: 1,050 in line with moderating demand for steel. With slower oil and coking coalS&P Asia 50: 3,500 demand growth for 2012, and relatively flat average crude oil prices for 2012 driving down profit gains for the upstream players, we cut our sector weighting a notch to Marketweight. Materials recommended weighting remains neutral. As of Jan. 15, the main China and Hong Kong materials companies listed in Hong Kong have gained 6.4% year-to-date (market cap weighted), marginally higher than ourEnergy Hong Kong/China universe gain of 6.1%. We see pockets of strength in some segments such as copper and precious metals on supply constraints, but aMarketweight mixed outlook for other bases metals leaves us neutral as a whole. Top picks are Sinopec (oil & gas), Yanzhou Coal (coal) and Jiangxi gas) ,Materials Copper ( ma terials ). We prefer Sinopec within the Chinese oil & gas space, (ma terials). primarily on its cheap valuations and cost-efficient refining operations.Marketweight Sinopec is more leveraged to reforms in the domestic product pricing mechanism than PetroChina. We expect the latter’s share price performance will lag as valuations look unattractive. While CNOOC Ltd’s valuations remain cheap, we suspect its share price will continue to be weak ahead of its strategy call today. 2012 production may be flat YoY on recent spills at the PL19-3 field and the Zhuhai gas terminal.Ahmad Halim, CFAEquity Analyst We believe Yanzhou Coal is poised for a rebound in 2012 as its share priceHooi Tow, Chew has corrected by around 47% from the peak of HKD32.95 in May 2011 toEquity Analyst about HKD17.60 as of Jan. 15, 2012, in response to the slowdown in demand for coking coal that followed lower steel production. An increase in Peng,Su Peng , Ng production following recent expansion and acquisitions and the listing of itsEquity Analyst Australian subsidiary are positive catalysts. We prefer to play the potential rebound in the Materials sector through Jiangxi Copper. Although we also like Maanshan Iron & Steel for its higher mix of long steel products, the company’s 64% rebound in the past three months leaves upside more limited.Standard & Poor’s This report is for information purposes and should not be considered a solicitation to buy or sell any security. Neither Standard & Poor’s nor any other party guarantees its accuracy or makes warranties regarding resultsEquity Research Services from its usage. Redistribution is prohibited without written permission. Copyright © 2012. All required30 Cecil Street d i s c l o s ur e s a nd an a l y st c er t if i c a t io n ap p e ar s o n t he la s t 3 p a g e s of t h i s r epo r t . A dd i t io n a l i nf or m a t io n i sPrudential Tower, 17th Floor a v a i l a b le on r eq u e st .Singapore, 049712
  2. 2. January 18, 2012 Energy & Materials Stra tegy 2011 oil demand: a story of two halves. Total oil demand growth for China remained strong in 1H11, registering above 8% YoY growth for all months 2 but June. 2H11, however, painted a different picture, with growth ranging from 3%-5% as weakness in the export markets, continuing European sovereign debt crisis and uncertainties on the global economy drove down demand growth, particularly for kerosene and light chemical feedstock. Diesel demand growth for the year, always more in tune with domestic consumption, ended lower at 8%, vs. 10% in 2010. A slowing economy to cool o il demand growth in 2012. Given our expectation for China’s economy to record 7.7%-8.2% GDP growth for 2012, slower vs. 2011’s 9.2%, we think demand for crude oil in China will only grow by 5%-6%, vs. the 7% expected in 2011. Drilling down to the oil products, we expect further weakness on diesel demand growth as it plays catch-up to the other products, but support for domestic consumption should be provided by the likelihood of a relatively more relaxed monetary policy by the PBoC. Gasoline, kerosene and light chemical feedstock should also see some continuing weakness as the export market continues to meander, but we do not expect a contraction in demand, barring a global financial meltdown as experienced in 2009. Benign price environment, barring excepti onal circumstances. Based on exceptional December 2011 EIA data, we expect China will continue to drive incremental global demand growth for oil in 2012, but its share of incremental demand is likely to fall to about 41%, vs. 64% in 2011, due to slower absolute volume growth and higher demand growth from other emerging economies (e.g. Central & South America and the Middle East countries). We see a relatively benign price environment for oil in 2012, with demand growth adequately balanced by increased production, both from OECD (U.S. & Canada) and non-OECD (OPEC - largely from non-crude liquids - and China). Risks remain, however, as the demand outlook can be affected by continuing global economic worries, while geopolitical tensions in key production areas or transportation channels e.g. Iran’s Strait of Hormuz, can have a substantial impact on security of supply, and hence prices. Cooling real estate development may slow steel and cement demand growth . China’s steel demand relies heavily on real estate development, which takes up 61%-63% of the country’s steel annually. The drive to cool the property market has seen transactions drop recently and prices in some Tier-1 cities (e.g. Shanghai, Beijing, Hangzhou) are down more than 20% YoY from their recent peaks in some cases. As such, we see real estate development as a lesser driver of steel demand in 2012. Demand for long steel products may be less impacted than flat steel, given the government’s plans to build up to 36 million affordable houses by 2015 that we believe should help prop up demand. Nonetheless, with our view that property prices and transactions will ease, we could see steel demand falling by 70 mln tons, which is about 10% of current annual steel production. R ailway spending cutbacks are another negative. Further, rail construction is expected to contract by 15% YoY to CNY400 bln in 2012, after an estimated 33.9% YoY fall to CNY469 bln in 2011, resulting in a fall in demand equivalent to less than 2% of China’s annual steel production. Although the impact is minimal, this just adds to the negative sentiment for the steel industry Standard & Poor’s Equity Research
  3. 3. January 18, 2012 Energy & Materials S tra tegy Positive points are that inventory and costs pressures are low . End-2011 inventory has fallen 10% from end-2010, indicating potential restocking 3 could happen soon. The decline in long steel products could also be a result of demand from the social housing program. Lower prices of raw materials such as iron ore and coking coal should also help cushion profits. Also, with pricing for some companies now settled on a monthly basis (vs. quarterly), the beneficial impact of input prices will be felt much quicker than previously. Industry consolidation to intensify . The other positive point coming out of the present slowdown is, we believe, the impetus for industry consolidation. We see smaller mills closing, as competition intensifies, amid weaker global demand. This should help consolidate the fragmented industry in favor of the larger players and help contain the risk of periodic excess capacity. Fixed Asset Investment growth (on left below) eased in China to the lowest level since data first commenced in 2004 as outlook government spending fell from 2009 and 2010 highs. The outlook for 2012 points to moderate growth with real estate investment, a key driver of 2010 and 2011 growth (see breakdown on right below), slow ing . b reakdown below), slowing ing. 36 100% 90% 14% 14% 15% 15% 15% 34 80% 8% 8% 9% 9% 8% 32 70% 24% 24% 22% 24% 25% 30 60% YoY% 50% 11% 10% 12% 28 12% 9% 40% 8% 7% 7% 6% 5% 26 30% 24 20% 30% 31% 30% 31% 34% 10% 22 4% 5% 4% 4% 4% 0% 20 2007 2008 2009 2010 YT Nov. 11 p ar r ay l v n b n g t c Ju Oc Ap No Ja Fe Ju Au Se De M M Mining Manufacturing Utilities Transport & Storage 2007 2008 2009 Real Estate Water & Environment 2010 2011 Others Source: CEIC Standard & Poor’s Equity Research
  4. 4. January 18, 2012 Energy & Materials Stra tegy 4 Top Commodity Sector Picks: Performance and Key Capital IQ Consensus Ratios as at Jan . 18, 2012 Jan. 18 Price Performance PER (x) PAT Growth Market Ma rket Trading Cap (USD Company Name CIQ Ticker Ccy Share Price mln) 1 Mth 3 Mths 6 Mths FY2011 FY2012 FY2011 FY2012 O&G China Petroleum & Chemical Corp. SEHK:386 HKD 9.15 103,634 14.4% 28.2% 20.6% 8.5x 7.8x 11.2% 8.6% CNOOC Ltd. SEHK:883 HKD 15.78 90,724 14.3% 21.0% -11.8% 8.3x 8.4x 33.1% -1.5% Materials Anhui Conch Cement Co. Ltd. SEHK:914 HKD 25.40 14,896 8.8% 5.0% -35.9% 8.8x 8.6x 108.9% 5.3% Zijin Mining Group Co. Ltd. SEHK:2899 HKD 3.38 13,343 11.9% 10.8% -23.9% 9.5x 8.5x 33.7% 15.8% Jiangxi Copper Co. Ltd. SEHK:358 HKD 19.16 11,649 11.8% 23.6% -29.4% 7.2x 7.4x 61.7% -5.4% Maanshan Iron & Steel Co. Ltd. SEHK:323 HKD 2.99 3,113 17.3% 57.4% -10.2% 49.0x 19.0x -75.7% 336.0% EV/EBITDA PBV ROE Gross Margin Div Yield Company Name FY2011 FY2012 FY2011 FY2012 FY2011 FY2012 FY2011 FY2012 FY2011 FY2012 O&G China Petroleum & Chemical Corp. SEHK:386 5.1x 4.7x 1.4x 1.2x 16.8% 16.1% 16.75% 17.14% 3.13% 3.43% CNOOC Ltd. SEHK:883 4.4x 4.3x 2.2x 1.9x 28.8% 23.5% 59.33% 53.10% 4.13% 4.04% Materials Anhui Conch Cement Co. Ltd. SEHK:914 5.6x 5.5x 2.4x 2.0x 30.2% 23.7% 41.40% 39.27% 2.25% 2.16% Zijin Mining Group Co. Ltd. SEHK:2899 8.4x 6.9x 2.3x 1.9x 25.0% 24.1% 37.95% 38.00% 3.52% 4.07% Jiangxi Copper Co. Ltd. SEHK:358 6.9x 7.0x 1.4x 1.2x 20.0% 16.6% 11.26% 11.31% 2.14% 2.19% Maanshan Iron & Steel Co. Ltd. SEHK:323 7.6x 6.2x 0.7x 0.7x 1.4% 4.0% 5.22% 6.27% 2.63% 14.32% Source: S&P Capital IQ Standard & Poor’s Equity Research
  5. 5. January 18, 2012 Energy & Materials Stra tegy S&P Capital IQ Research S&P Capital IQ U.S. includes Standard & Poor’s Research–Glossary Investment Advisory Services LLC; Standard & Poor’s Equity Research Services Europe includes Standard & Poor’s LLC- London; Standard & Poor’s Equity 5 Research Services Asia includes Standard & Poor’s LLC’s offices in Singapore,S&P STARS - Since January 1, 1987, S&P Capital IQ Equity Research has ranked a Standard & Poor’s Investment Advisory Services (HK) Limited in Hong Kong,universe of U.S. common stocks, ADRs (American Depositary Receipts), and ADSs Standard & Poor’s Malaysia Sdn Bhd, and Standard & Poor’s Information Services(American Depositary Shares) based on a given equity’s potential for future (Australia) Pty Ltd.performance. Similarly, S&P Capital IQ Equity Research has used STARS® Research Abbreviations Used in S&P Capital IQ Equity Resear ch Reportsmethodology to rank Asian and European equities since June 30, 2002. Under CAGR- Compound Annual Growth Rateproprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank CAPEX- Capital Expendituresequities according to their individual forecast of an equity’s future total return CY- Calendar Yearpotential versus the expected total return of a relevant benchmark (e.g., a regional DCF- Discounted Cash Flowindex (S&P Asia 50 Index, S&P Europe 350® Index or S&P 500® Index)), based on a EBIT- Earnings Before Interest and Taxes12-month time horizon. STARS was designed to meet the needs of investors looking EBITDA- Earnings Before Interest, Taxes, Depreciation and Amortizationto put their investment decisions in perspective. Data used to assist in determining EPS- Earnings Per Sharethe STARS ranking may be the result of the analyst’s own models as well as internal EV- Enterprise Valueproprietary models resulting from dynamic data inputs. FCF- Free Cash FlowS&P Quality Rankings (also known as S&P Earnings & Dividend Rankings Rankings)- FFO- Funds From OperationsGrowth and stability of earnings and dividends are deemed key elements in FY- Fiscal Yearestablishing S&P’s earnings and dividend rankings for common stocks, which are P/E- Price/Earningsdesigned to capsulize the nature of this record in a single symbol. It should be noted, PEG Ratio- P/E-to-Growth Ratiohowever, that the process also takes into consideration certain adjustments and PV- Present Valuemodifications deemed desirable in establishing such rankings. The final score for R&D- Research & Developmenteach stock is measured against a scoring matrix determined by analysis of the scores ROE- Return on Equityof a large and representative sample of stocks. The range of scores in the array of ROI- Return on Investmentthis sample has been aligned with the following ladder of rankings: ROIC- Return on Invested Capital ROA- Return on AssetsA+ Highest B+ Average C Lowest SG&A- Selling, General & Administrative ExpensesA High B Below Average D In Reorganization WACC- Weighted Average Cost of CapitalA- Above Average B- Lower NR Not Ranked Dividends on American Depository Receipts (ADRs) and American DepositoryS&P Issuer Credit Rating - A Standard & Poor’s Issuer Credit Rating is a current Shares (ADSs) are net of taxes (paid in the country of origin).opinion of an obligor’s overall financial capacity (its creditworthiness) to pay itsfinancial obligations. This opinion focuses on the obligor’s capacity and willingnessto meet its financial commitments as they come due. It does not apply to any specificfinancial obligation, as it does not take into account the nature of and provisions of Disclosures/Disclaimers Disclosures/Disclaimersthe obligation, its standing in bankruptcy or liquidation, statutory preferences, or thelegality and enforceability of the obligation. In addition, it does not take into accountthe creditworthiness of the guarantors, insurers, or other forms of creditenhancement on the obligation. Required Disclosures In contrast to the qualitative STARS recommendations covered in this report, whichS&P Capital IQ EPS Estimates – S&P Capital IQ earnings per share (EPS) estimates are determined and assigned by S&P Capital IQ equity analysts, S&P’s quantitativereflect analyst projections of future EPS from continuing operations, and generally evaluations are derived from S&P’s proprietary Fair Value quantitative model. Inexclude various items that are viewed as special, non-recurring, or extraordinary. particular, the Fair Value Ranking methodology is a relative ranking methodology,Also, S&P Capital IQ EPS estimates reflect either forecasts of S&P Capital IQ equity whereas the STARS methodology is not. Because the Fair Value model and theanalysts; or, the consensus (average) EPS estimate, which are independently STARS methodology reflect different criteria, assumptions and analytical methods,compiled by Capital IQ, a data provider to S&P Capital IQ Equity Research. Among quantitative evaluations may at times differ from (or even contradict) an equitythe items typically excluded from EPS estimates are asset sale gains; impairment, analyst’s STARS recommendations. As a quantitative model, Fair Value relies onrestructuring or merger-related charges; legal and insurance settlements; in process history and consensus estimates and does not introduce an element of subjectivityresearch and development expenses; gains or losses on the extinguishment of debt; as can be the case with equity analysts in assigning STARS recommendations.the cumulative effect of accounting changes; and earnings related to operations thathave been classified by the company as discontinued. The inclusion of some items,such as stock option expense and recurring types of other charges, may vary, and S&P Global STARS Distributiondepend on such factors as industry practice, analyst judgment, and the extent to In North Americawhich some types of data is disclosed by companies. As of December 31, 2011, research analysts at S&P Capital IQ Equity Research North America recommended 39.1% of issuers with buy recommendations, 57.4%S&P Core Earnings - S&P Capital IQ Core Earnings is a uniform methodology for with hold recommendations and 3.5% with sell recommendations.adjusting operating earnings by focusing on a companys after-tax earningsgenerated from its principal businesses. Included in the S&P Capital IQ definition are In Europeemployee stock option grant expenses, pension costs, restructuring charges from As of December 31, 2011, research analysts at S&P Capital IQ Equity Researchongoing operations, write-downs of depreciable or amortizable operating assets, Europe recommended 31.5% of issuers with buy recommendations, 50.6% withpurchased research and development, M&A related expenses and unrealized hold recommendations and 17.9% with sell recommendations.gains/losses from hedging activities. Excluded from the definition are pension gains,impairment of goodwill charges, gains or losses from asset sales, reversal of prior- In Asiayear charges and provision from litigation or insurance settlements. As of December 31, 2011, research analysts at S&P Capital IQ Equity Research AsiaS&P 12 Month Target Price – The S&P Capital IQ equity analyst’s projection of the Month recommended 43.8% of issuers with buy recommendations, 51.0% with holdmarket price a given security will command 12 months hence, based on a recommendations and 5.2% with sell recommendations.combination of intrinsic, relative, and private market valuation metrics, including S&PFair Value. Standard & Poor’s Equity Research
  6. 6. January 18, 2012 Energy & Materials Stra tegyGlobally The research and analytical services performed by SPIAS, McGraw-Hill FinancialAs of December 31, 2011, research analysts at S&P Capital IQ Equity Research Research Europe Limited, S&PM, and SPIS are each conducted separately from any 6globally recommended 38.3% of issuers with buy recommendations, 55.7% with hold other analytical activity of S&P Capital IQ.recommendations and 6.0% with sell recommendations. S&P Capital IQ or an affiliate may license certain intellectual property or provide5-STARS (Strong Buy) Total return is expected to outperform the total return of a Buy): pricing or other services to, or otherwise have a financial interest in, certain issuersrelevant benchmark, by a wide margin over the coming 12 months, with shares rising of securities, including exchange-traded investments whose investment objective isin price on an absolute basis. to substantially replicate the returns of a proprietary Standard & Poors index, such4-STARS (Buy): Total return is expected to outperform the total return of a relevant as the S&P 500. In cases where S&P Capital IQ or an affiliate is paid fees that arebenchmark over the coming 12 months, with shares rising in price on an absolute tied to the amount of assets that are invested in the fund or the volume of tradingbasis. activity in the fund, investment in the fund will generally result in S&P Capital IQ or3-STARS (Hold): Total return is expected to closely approximate the total return of a an affiliate earning compensation in addition to the subscription fees or otherrelevant benchmark over the coming 12 months, with shares generally rising in price compensation for services rendered by S&P Capital IQ. A reference to a particularon an absolute basis. investment or security by S&P Capital IQ and/or one of its affiliates is not a2-STARS (Sell): Total return is expected to underperform the total return of a recommendation to buy, sell, or hold such investment or security, nor is itrelevant benchmark over the coming 12 months, and the share price is not considered to be investment advice.anticipated to show a gain.1-STARS (Strong Sell Total return is expected to underperform the total return of a Sell): Indexes are unmanaged, statistical composites and their returns do not includerelevant benchmark by a wide margin over the coming 12 months, with shares falling payment of any sales charges or fees an investor would pay to purchase thein price on an absolute basis. securities they represent. Such costs would lower performance. It is not possible to invest directly in an index.Relevant benchmarks: In North America, the relevant benchmark is the S&P 500Index, in Europe and in Asia, the relevant benchmarks are generally the S&P Europe S&P Capital IQ and its affiliates provide a wide range of services to, or relating to,350 Index and the S&P Asia 50 Index. many organizations, including issuers of securities, investment advisers, broker- dealers, investment banks, other financial institutions and financial intermediaries,For All Regions: and accordingly may receive fees or other economic benefits from thoseAll of the views expressed in this research report accurately reflect the research organizations, including organizations whose securities or services they may securitiesanalysts personal views regarding any and all of the subject securities or recommend, rate, include in model portfolios, evaluate or otherwise address.issuers. No part of analyst compensation was, is, or will be, directly or indirectly,related to the specific recommendations or views expressed in this research For a list of companies mentioned in this report with whom S&P Capital IQ and/orreport. one of its affiliates has had business relationships within the past year, please go to: Global Quantitative services/articles/en/us/?assetID=1245187982940Recommendations Distribution DisclaimersIn EuropeAs of December 31, 2011, Standard & Poor’s Quantitative Services Europe With respect to reports issued to clients in Japan and in the case of inconsistenciesrecommended 50.7% of issuers with buy recommendations, 18.5% with hold between the English and Japanese version of a report, the English version prevails.recommendations and 30.8% with sell recommendations. With respect to reports issued to clients in German and in the case of inconsistencies between the English and German version of a report, the EnglishIn Asia version prevails. Neither S&P Capital IQ nor its affiliates guarantee the accuracy ofAs of December 31, 2011, Standard & Poor’s Quantitative Services Asia the translation. Assumptions, opinions and estimates constitute our judgment as ofrecommended 47.6% of issuers with buy recommendations, 21.9% with hold the date of this material and are subject to change without notice. Past performancerecommendations and 30.5% with sell recommendations. is not necessarily indicative of future results.Globally S&P Capital IQ, its affiliates, and any third-party providers, as well as their directors,As of December 31, 2011, Standard & Poor’s Quantitative Services globally officers, shareholders, employees or agents (collectively S&P Parties) do notrecommended 48.7% of issuers with buy recommendations, 20.7% with hold guarantee the accuracy, completeness or adequacy of this material, and S&Precommendations and 30.6% with sell recommendations Parties shall have no liability for any errors, omissions, or interruptions therein,Additional information is available upon request. regardless of the cause, or for the results obtained from the use of the information provided by the S&P Parties. 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