汇丰银行-全球-化工行业-全球化工业：化工商品步入上升通道-2019.8.16-22页.pdf

Disclosures&Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix,and with the Disclaimer,which forms part of it.Issuer of report:HSBC Bank plc View HSBC Global Research at:https:/ In hindsight,we werent bearish enough on commodity chemicals;when demand is weak everything is oversupplied That said,the valuation difference between commodity and defensive names in chemicals is at an extreme Its not clear what might cause the turn but there remains meaningful upside skew to commodity chemical returns Not bearish enough:With the benefit of hindsight,we have clearly not been bearish enough on commodity chemicals over the last couple of years.Our primary error,we think,has been to try to identify the best positioned chains,either from a supply perspective(chloralkali)or those with raw material tailwinds(PET)or those close to an inflection point(TiO2),instead of recognizing that in a weak demand environment everything is oversupplied and every single major commodity chemical chain has generated negative returns since the start of 2018.The difference between commodity chemicals and defensives is at an extreme,both in terms of performance and valuation.Industrial gases and specialities stocks with reasonably certain high single-digit earnings growth are trading at 13-14x EBITDA for FY2019e,while there is an unwillingness in the market to play guess the trough on commodity stocks such as in TiO2(trading at 5-6x trough EBITDA),which can fall further still,especially if macro issues continue to worsen.We expect this to turn,even if its not clear what might catalyse the turn.Demand remains weak and investors are concerned about recessionary risks.That said,with commodity space earnings levels now 25%below normalised levels(a sharp contrast from 12 months ago,when earnings were 25%above normalised)and multiple chains at troughs,we think the upside skew from here is much more meaningful than the downside.We remain positive on the TiO2 names Chemours,Venator and Tronox.TiO2 was the first to signal the downturn and we expect it(at some point)to be one of the first chains to recover.We also reiterate our Buy rating on LyondellBasell and Hold on Dow.We adjust our target prices to reflect the recent Q2 2019 earnings and lower our estimates.Changes to target prices Current _ TP _ Upside/Market cap Company Ticker Currency price Old New Rating downside (USDm)Chemours CC US USD 12.60 45.00 43.00 Buy 241.3%2,060 Tronox TROX US USD 8.14 21.00 20.00 Buy 145.7%1,155 Venator VNTR US USD 2.10 15.00 13.00 Buy 519.0%224 LyondellBasell LYB US USD 75.61 121.00 125.00 Buy 65.3%25,348 Dow Inc DOW US USD 46.85 53.00 51.00 Hold 8.9%34,819 Source:Refinitiv Datastream,HSBC estimates.Priced as of close at 13 August 2019 16 August 2019 Sriharsha Pappu*Global Head of Chemicals Research HSBC Bank plc +44 20 7991 9243 Prateek Bhatnagar*,CFA Analyst HSBC Securities and Capital Markets(India)Private Limited prateekbhatnagarhsbc.co.in+91 80 4555 2757 Martin Evans*Head of European Chemicals Research HSBC Bank plc +44 20 7991 2814 Thomas C.Hilboldt*,CFA Head of Resources&Energy Research,Asia Pacific The Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 2922 Dennis Yoo*,CFA Analyst,Asia-Pacific Oil&Gas,and Chemicals The Hongkong and Shanghai Banking Corporation Limited .hk+852 2996 6917 Nikita Makhija*Associate Bangalore *Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulations Global Chemicals Equities Chemicals Global Commodity chemicals upside skew Equities Chemicals 16 August 2019 2 In hindsight,not bearish enough In a weak demand environment,everything is oversupplied We have been pretty bearish on the outlook for the primary commodity chemicals,from olefins and polyolefins to methanol and ethylene glycol,over the past couple of years,see Global Chemicals Quantum of solids,7 December 2017,and Global Chemicals Naphtha cracking:The squeeze,10 May 2018,primarily on growing supply risks.Although these risks have largely played out as expected,it is clear that we have clearly not been anywhere near bearish enough.Our primary error,we think,has been to attempt to differentiate between the various commodity chemical chains and trying to identify the best positioned of those commodity chains from a supply perspective(chloralkali,PVC),chains with significant raw material tailwinds(PET),or those with weak performance but close to an inflection point(TiO2).All of that is well and good,but in a weak demand environment,every single commodity chemical chain is oversupplied.Upside skew In hindsight,we werent bearish enough on commodity chemicals;when demand is weak everything is oversupplied That said,the valuation difference between commodity and defensive names in chemicals is at an extreme Its not clear what might cause the turn but there remains meaningful upside skew to commodity chemical margins Commodity sub sector performance since 2018 Source:Refinitiv Datastream,HSBC calculations -70-60-50-40-30-20-100102030Perf since Jan 2018Perf YTD in 2019TiO2European BasicsOlefinsMethanolChlor AlkaliFertilizers 3 Equities Chemicals 16 August 2019 and it really has been a demand issue There are a number of different charts we could use to represent weak demand.End-market data charts,particularly slowing autos,have been used exhaustively but are a pretty useful reminder of the significance of the auto market in driving demand for chemicals.Our preferred chart though is the one showing sharp declines in co-product spreads over the last couple of years.Co-products were expected to be the bright spot for naphtha crackers with the addition of new US supply,as those were products that new US ethane crackers would not be making.A limited supply growth environment should have been quite positive for the co-product chain.However,as the declining spreads indicate and in a market with weak demand everything is oversupplied.Polyolefins demand,PE and PP,by contrast,have held up better(given the large packaging and consumer end-markets)but thats where we have seen the biggest increments of new supply and so spreads in those markets have also contracted.China PE and PP apparent consumption growth(%)Co-product spreads(indexed)Source:IHS Chemical,HSBC calculations Source:IHS Chemical,HSBC calculations Chemical price performance:Commodities vs Defensives Valuation dispersion:12m fwd P/E(indexed)Source:Refinitiv Datastream,HSBC calculations Source:Refinitiv Datastream,HSBC calculations 0%2%4%6%8%10%12%14%16%18%Q1 15Q1 16Q1 17Q1 18Q1 19PEPP050100150200Jan-18May-18Sep-18Jan-19May-19BDBTX(average)PhenolABSSBR406080100120140Jan-18May-18Sep-18Jan-19May-19CommoditiesDefensives020406080100120140160Aug-04 Mar-07Oct-09 May-12 Dec-14Jul-17CommodityDefensives Equities Chemicals 16 August 2019 4 What price defensives?Since weaker demand first became apparent in Q4 2018 with weak auto sales data,there has been a significant difference in performance between the commodity chemical group and the defensives(here we include the industrial gases,specialty chemical companies and ingredients companies).The difference between the commodity chemicals and defensives is now at an extreme in terms of valuations.Defensive stocks where earnings growth of 8-10%seems more certain are trading at 13-14x EV/EBITDA(see Air Products,Downgrade to hold,a lot in the price,1 August 2019),whereas there is a risk that commodity chemical names,which are trading on valuations that look attractive,may fall even further,especially given continued potential risks to the macro environment.Its not clear what could cause the turn We continue to expect several upstream commodity chemicals to remain oversupplied through H1 2020 with ethylene,polyethylene,methanol,isocyanates and MEG,particularly exposed-and our economists remain concerned about the downside risks to growth(see Global Economics Quarterly,Keeping the engine running,2 July 2019).but it always turns Multiple commodity chains are at bottom of the cycle in terms of spreads.If the risks in July 2018 were to the downside with sector margins that were on average 25%above normalized Chemical chain margin snapshot(USD/ton)July 2018 Source:IHS Chemical,HSBC calculations Chemical chain margin snapshot(USD/ton)July 2019 Source:IHS Chemical,HSBC calculations (500)-500 1,000 1,500 2,000 2,500 3,00080-20 percentile2017 averageQ2 FY18 average(500)-500 1,000 1,500 2,000 2,500 3,00080-20 percentile2018 averageJuly-192017 average 5 Equities Chemicals 16 August 2019 levels(see Global Chemicals:Chain profitability,over/under earning,13 July 2018),the risks now appear to be to the upside,with margins on average 25%below normalized levels(compare the chart at the top of the page with that at the bottom).And so given our normalized valuation framework,which gives weight to through the cycle earnings rather than attempting to overweight any given phase of the cycle,we remain positive on the TiO2 names and reiterate our Buy rating on LyondellBasell and our Hold rating on Dow.TiO2 stocks have fallen sharply this year,but just as TiO2 was the first chain to signal the downturn in demand,we expect(at some point)for it to be one of the first chains to show signs of recovery.We are starting to see pretty clear signs within the TiO2 space of stabilization in pricing as well as a turn in volumes,and we still see significant value.One can,today,buy all of the listed Western TiO2 capacity of 3.5mntpa for USD4.5bn in market capitalisation and under USD9.5bn in EV at roughly half of replacement cost,on our estimates.Chemours(CC US,Buy,CP USD12.6,TP USD43)Chemours is the highest quality global TiO2 franchise with visible growth in Fluor and a strong cash generation/cash return story.We continue to see the benefits of Chemours strategy of reducing price volatility.We reiterate our Buy rating and reduce our target price to USD43(down from USD45 on our lower earnings estimate).Changes to estimates We reduce our estimates on lower earnings for Q2 2019,further guidance cuts for FY19 and an expected short-term loss in market share.Our adjusted EBITDA estimate for 2019 stands at USD1.08bn,now in the middle of the revised guidance of USD1.0-1.15bn.KRO:TiO2 pricing and EBIT/ton(USD)TiO2 volume index*Source:Corporate reports,HSBC Source:Corporate reports,HSBC*wtd average of CC,TROX,VNTR and KRO Chemours:Changes to estimates USDm _ New estimates _ _ Old estimates _ _ Change in estimates _ 2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021e Revenue 5,540 6,906 7,460 6,151 7,313 7,514-10%-6%-1%Adj EBITDA 1,079 1,508 1,679 1,264 1,615 1,698-15%-7%-1%A income 465 786 905 638 876 931-27%-10%-3%Source:HSBC estimates 02040608010012014005001,0001,5002,0002,5003,0003,5004,000Q117Q217Q317Q417Q118Q218Q318Q418Q119Q219Price/ton(LHS)EBIT/Ton-20%-15%-10%-5%0%5%10%Q117Q317Q118Q318Q119 Equities Chemicals 16 August 2019 6 Valuation We value Chemours using a combination of mid-cycle EV/EBITDA and a DCF.For EV/EBITDA we use a 6.5x(unchanged)multiple on our mid-cycle EBITDA estimate of USD1.47bn(lower than USD1.55bn earlier on our lower earnings estimate)for Chemours,which yields a fair value of USD40 per share(down from USD42 earlier).We also use a DCF to value Chemours.We use a 10.3%cost of equity for CC,comprising a 3.0%risk-free rate,a 6.0%equity risk premium and a Bloomberg adjusted beta of 1.33.We assume a 6%cost of debt and a 60/40 target equity to debt ratio,which leads us to a weighted average cost of capital of 8.1%(all assumptions unchanged).Applying an 8.1%WACC on our cash flow estimates yields an equity value per share of USD46(down from USD48 earlier on lower earnings).Our valuation methods yield a narrow range,from USD46 per share using a DCF to USD40 per share on normalised EV/EBITDA.We use the rounded average of these two values,USD43(down from USD45 earlier),as our target price.This implies upside of 241%from current levels;we therefore maintain our Buy rating on the stock.Key downside risks include:The primary risk to our Buy rating is a prolonged cyclical downturn,which would drive down TiO2 prices and volumes and result in significantly lower earnings estimates Faster-than-expected decline in base refrigerant prices Slower-than-expected adoption of Opteon Commodity chemical companies tend to have high operating leverage and therefore extensive unplanned shutdowns can impact earnings.Chemours operates multiple plants across geographies and therefore the risk is mitigated but remains material Litigation risks from product liability claims and tort actions,in particular litigation related to the production and use of PFOA(perfluorooctanoic acids)by DuPont prior to the spin-off Tronox(TROX US,Buy,CP USD8.14,TP USD20)Tronox has a strong cash underpin and is a synergy delivery story.Although TiO2 margins and prices declined post a strong 2018,given the synergy and limited capex needs,the business should generate cash.Valuation We value Tronox using a combination of EV/EBITDA and a DCF(50%weight each).For EV/EBITDA we use a multiple of 7.1x(unchanged)on our mid-cycle EBITDA estimate of USD853m vs our earlier estimate of USD855m;this yields a fair value of USD21.2 per share(down slightly from USD21.3).We also use a DCF to value Tronox.We use a 13.5%cost of equity,comprising a 3.0%risk-free rate,a 6.0%equity risk premium and a Bloomberg adjusted beta of 1.75.We assume a 5%Tronox:Changes to estimates USDm _ New estimates _ _ Old estimates _ _ Change in estimates _ 2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021e Revenue 2,802 3,282 3,315 2,730 3,209 3,251 3%2%2%Adj EBITDA 632 857 930 673 862 935-6%-1%-1%A income 60 232 295 173 239 308 -65%-3%-4%Source:HSBC estimates 7 Equities Chemicals 16 August 2019 cost of debt and a 60/40 target equity to debt ratio,which leads us to a weighted average cost of capital of 9.7%.Applying a 9.7%WACC on our cash flow estimates yields an equity value of USD19.8(down from USD21.1 per share on lower earnings).Our valuation methods value yields a value of USD19.8 per share using a DCF and USD21.2 per share on EV/EBITDA.We use the average of these two values to get a rounded value of USD20(down from USD21),as our target price.This implies upside of 146%from current levels;we therefore maintain our Buy rating on the stock.Key downside risks include:The primary risk to our Buy rating is a prolonged cyclical downturn,which would drive down TiO2 prices and volumes and result in significantly lower earnings estimates If Tronox is not able to take the full benefit of the acquisition,synergies may be lower than expected There is also a downside risk if the synergy benefits are realised later than expected Venator(VNTR US,Buy,CP USD2.10,TP USD13)Venator is the most leveraged player to any potential improvement within the TiO2 market and it remains cheap on a normalized basis.We still think the USD75m break-up fee benefit from Tronox on the Ashtabula plant deal is only parti