摩根士丹利-亚太地区-化工行业-亚太化工业策略分析-2019.2.18-58页.pdf

Mayank.MYoung.STakato.WAndy.MVivek.RAttractiveMORGAN STANLEY ASIA(SINGAPORE)PTE.+Mayank MaheshwariEQUITY ANALYST+65 6834-6719MORGAN STANLEY&CO.INTERNATIONAL PLC,SEOULBRANCH+Young Suk ShinEQUITY ANALYST+82 2 399-4994MORGAN STANLEY MUFG SECURITIES CO.,LTD.+Takato WatabeEQUITY ANALYST+81 3 6836-5436MORGAN STANLEY ASIA LIMITED+Andy Meng,CFAEQUITY ANALYST+852 2239-7689MORGAN STANLEY ASIA(SINGAPORE)PTE.+Vivek RajamaniRESEARCH ASSOCIATE+65 6834-6740Morgan Stanley appreciates your support inthe 2019 Institutional Investor All-AsiaResearch Team Survey.Request your ballot.ASEAN Energy and MaterialsAsia PacificIndustryViewAsia ChemicalsAsia Chemicals|Asia Pacific Asia PacificReady,Set&GO:By 2H19,with polyethylene(PE)cycle turning as supplyadds slow,Asia players become more cost competitive and PEprices outperform ethylene.We think this is under appreciatedby market and could drive 30%margin expansion by 2020.Top picks:Siam Cement and Lotte Chem.Darkest before the dawn:A recovery in the Polyethylene(PE)cycle is non-consensus,but we expect it to start in 2H19(see Global Insight-Getting Ahead ofthe Curve)and lead to 30%upside for Asian chemical equities as the marketappreciates:1)the slowdown in polyethylene capacity adds and,moreimportantly,the once in many cycles shift in supply towards non-PE products;2)rising cost competitiveness for Asian players;and 3)earnings leverage in Asia tothis upcycle.These factors should drive an earnings upgrade cycle for our OWsafter near 30%de-rating last year.We upgrade SCC,PTTGC&PCHEM to OW.Where we differ:Our bottom-up work suggests a PE supply glut reduction witheffective global utilization rates above 91%in 2020,-a contrast to marketexpectation of oversupply continuing.Supply could tighten faster if Chinademand growth is above our more bearish expectations.Key surprises include:1)Rising cost competitiveness:The cost dynamic for Asian players is changing.Naphtha costs,which for decades were linked to oil prices,should underperformagainst oil as rising supply of light crude increases availability of naphtha andmakes Asian players more structurally competitive.2)Ethylene capacity=Polyethylene supply?No more:In the past two decades,90%of ethylene production was converted to PE.We expect this ratio to declineto 60%until 2021 and drive more rapid tightening of global PE cycle.Asiashould benefit most,given its near 90%+integration to downstream PE.3)Strength in co-products:A quarter of Asian producers sale volumes are co-products,where capacity growth has been muted and should boost margins forintegrated oil based producers by 10%.Above three factors should drive 15%earnings CAGR in 2018-21 and start afresh upgrade cycle in 2H19,leading to 14%upside to consensus 2020 outlook.Within Asia we prefer oil based producers in Korea&Thailand over China.These producers have nearly 33%PE exposure in terms of volumes and 40%interms of earnings with 10-15%earnings sensitivity for a 10%change in marginsand are early-stage recovery plays:Siam Cement(top pick)followed by LotteChemicals,LG Chemical,IRPC and Mitsubishi Chem.Gas based players,PTTGC,Reliance Industries and Petronas Chemicals,will eventually benefit,but remainlate cycle plays as price recovery lags margins.Whats priced in?Asian chemicals equities have priced in an elongated weaknessin demand and trough cycle margins,post the very challenging past quarter.Exhibit 1:Asia Chemicals:What we prefer to play theUpcycleCompanyUpside toOldNewOldNewCMP2019e2020ePTTGC(Bt)UWOW758524%-3%-2%Siam Cement(Bt)EWOW44955220%-3%3%Petronas Chemicals(RM)UWOW7.489.8916%10%17%IRPC(Bt)OWOW6.697.1521%-33%-6%GAIL(INR)OWOW47347449%9%9%LG Chem(KRW)OWOW460,000460,00023%NMNMLotte Chemicals(KRW)OW-400,00023%NMNMRatingPrice Target%change in EPSSource:Morgan Stanley ResearchMorgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1February 18,2019 09:38 PM GMT Story in Charts-What Is Market Missing?Exhibit 2:After peaking in 2018 at 6MMT,we see a slowdown innew polyethylene capacity with 3-4MMT new supply in 2020/214.13.03.74.55.64.73.94.385.6%84.5%84.8%85.0%85.3%85.5%85.8%2.02.83.64.45.26.02018e2019e2020e2021e(%)Incremental Global Nameplate Polyethylene S&DIncremental PE DemandIncremental PE CapacityUtilization(RH)(mtpa)Source:IHS,Morgan Stanley Research(e)estimatesExhibit 3:With US ethane expected to rise 25%higher(than past2 years)and naphtha moderating,Asias competitiveness on thecost curve set to improve-5515253545556575010,00020,00030,00040,00050,00060,00070,00080,00090,000100,000110,000(c/lb)Cumulative 2019 Effective PE Capacity(000s mt)US Ethane(2019)EuropeNaphthaAsiaNaphtha(2019)ME Ethane(2015-18)(2015-18)We see US ethane costs rising,while AsianNaphtha costs delink from oil.Source:IHS,Morgan Stanley researchExhibit 4:Global ethylene capacity additions over 2019-20:Allethylene is not polyethylene92%81%83%62%55%64%73%82%91%100%2002-072008-132014-172018-21eIncremental PE over Incremental EthyleneHowever,over 2019-21,we see moreethylene diverted toproducts other thanPE namely MEG.leading totightening PEPast cyclessaw 80%ethylene flowinginto polyethylene,a trend marketassumes will persist into 2019(85%long cycle average)Source:IHS,Company,Morgan Stanley researchExhibit 5:Tale of two chemicals:Aromatics peaking,polyethylenemargins near trough,poised for 30%upside by 2021May-18Jul-18Sep-18200328456584712840Jan-17Feb-17Mar-17Apr-17May-17Jun-17Jul-17Aug-17Sep-17Oct-17Nov-17Dec-17Jan-18Feb-18Mar-18Apr-18May-18Jun-18Jul-18Aug-18Sep-18Oct-18Nov-18Dec-18Jan-19Feb-19Mar-19Apr-19May-19US$/tonPE-Nap(RS)PX-Nap1H19e2H19e2020e46%decline in pastyear30%upsidefromtroughSource:Datastream,Morgan Stanley Research(e)estimatesExhibit 6:Asian Chemicals:Companies with high PE exposureinclude Siam cement,PTTGC,Lotte Chemicals,Petronas Chemicalsand RelianceSource:Company,Morgan Stanley ResearchExhibit 7:Asia Chemicals:Earnings to grow 15%over 2021 for ourkey OWs as expectations find a floor in 201927%22%19%9%8%7%6%2%2%-10%-15.0%-6.0%3.0%12.0%21.0%30.0%IRPCGAILLGChemRILLotteSCCMitsubishiPTTGCPCGBSino.ShEPS CAGR(2018-21e)Source:Morgan Stanley research2 What Makes Asia Chemicals the Global Top Pick?We believe the polyethylene cycle is turning as we enter thelast leg of supply additions,which potentially could drive aninflection in PE margins(Refer Global Chemicals:Gettingahead of the curve;Turning Bullish on Asia).Asian companies,which have the highest exposure to PEglobally(a third of the of output and 40%contribution toearnings through cycles),are poised to be the biggestbeneficiaries of this shift(Exhibit 10),in our view.Ourconviction stems from our bottom-up analysis of the timingand profile of upcoming new capacity,which we believe themarket and consensus is under-appreciating.Currently,themarket is pricing in an elongated downcycle in polyethylenemargins beyond 2019.By contrast,we see the full year as astory of two halves:we expect challenges in 1H19 but seethe margin outlook improving in 2H19 as supply slows.In the Asia energy space,we raise chemical equities up in ourpreference order(preferred over integrated and upstreamoils)after being negative for nearly the past two years.We are turning more bullish on stocks with higher olefinexposure and are upgrading key stocks PTTGC,PCHEM andSiam Cement to Overweight,while initiating on LotteChemicals with an OW.We adjust our earnings forecasts for2019/2020 by an average-4%/4%and expect 15%upside toconsensus estimates(Exhibit 9).Hence,we are shifting ourglobal preference,with Asia now our highest-ranked marketafter nearly two years at underweight.For 2019,we believethe last leg of earnings downgrades are behind us,butvaluations are now pricing in near trough margins(Exhibit13)as oversupply hits a peak.While the first leg of recoverywill be driven by naphtha crackers,we also see upside risksfor gas crackers in 2H19.Siam Cement(preferred pick),and Lotte Chemicals are ourtop picks in the Asia Chemicals space,followed by PTTGC,Reliance Industries,Petronas Chemicals,IRPC.MitsubishiChemicals and GAIL also benefit from higher PE prices,buthave limited earnings impact.Indorama Ventures is anindirect beneficiary of reducing supply of polyethylene.Exhibit 8:Nearly 2/3rd of capacity growth until 2021 is driven byhigher cost coal,oil and methanol producers2.11.41.02.44.01.81.21.4-0.80.30.41.1(1.0)0.82.64.46.28.020182019e2020e2021e(mtpa)GasOilCoal to OlefinsMethanol to OlefinsMixedOthers5.6MT4.7MT3.9MT4.3MT43%46%64%62%Note:Percentages indicate share of higher-cost coal,oil,methanol capacity additions in each yearSource:IHS,Company,Morgan Stanley researchExhibit 9:MS vs.Consensus:We are 15%ahead of consensus on2020 earnings on our OW names2%8%11%1%-4%-20%11%10%4%2%6%17%14%11%4%-22%10%10%9%-6%-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%SCCIRPCMitsubishiLGChemLotteChemSinopecShanghaiGAILPTTGC PchemRILMSe vs.BBG consensus2019e2020eGas-basedproducersOil-basedproducersMixedfeedSource:Bloomberg,Morgan Stanley researchExhibit 10:Asian Chemical names have the highest sensitivityglobally to US$50/t change in PE margins(8-10%)12%7%1%2%3%1%5%9%8%9%3%1%14%8%1%2%2%1%4%8%9%9%2%1%0%2%4%6%8%10%12%14%16%IRPCSCCMitsubishiMitsuiSumitomoSinopecShanghaiLGLottePetronasChemPTTGCGAILRIL2019e2020eGas-based producersOil-basedproducersMixedfeedSource:Company,Morgan Stanley Research3What is the market not fully appreciating?1)Slower supply growth in PE than the upstream capacityadditions in ethylene.We see only 60%of ethylene beingconverted to PE compared to the 90%average in the pasttwo decades(Exhibit 4).Hence,we think the market is overestimating the supply glut in 2019-21.Almost all thecompanies we rate Overweight are fully integrated or evennet short for their ethylene requirements and hence wouldactually benefit from a tighter polyethylene cycle.Theadditional ethylene shows up as a glut in global MEGmarkets,to which Asian companies have limited exposure.However,it does impact Middle East producers(Exhibit 14).2)The rising supply of US shale when processed throughglobal refining infrastructure leads to higher supply ofgasoline and naphtha.This could create a glut in naphthaand make it underperform oil prices,providing a good tailwind for Asian oil-based producers,especially in a tighteningcycle(Exhibit 11).3)Strength in co-products to add to upside:Capacityadditions to polypropylene and butadiene-which togetheraccount for nearly 50%of oil-based producers output-areslowing at a faster rate than polyethylene as most of thecapacity growth in the past 3 years has been focussed ongas feedstock(60%).In addition,of the incrementalcapacity,only 40%is geared to producing polypropyleneand butadiene.This,we believe,will act as a tail wind toAsian naphtha(oil)based producer margins in 2020/21.Will gas crackers benefit?Investors believe gas crackers areoil plays and do not have as much leverage to highermargins(as compared to naphtha-based crackers).Webelieve rising margins will benefit gas crackers as theyincrease PE prices,which are currently benchmarked toUS$55/bbl oil.Oil prices would need to fall belowUS$50/bbl to negate the impact of improving globalutilization rates to PE prices.Also,with naphtha marginsnear historical lows,we believe the risk reward remainsconstructive for PE prices.Exhibit 11:We expect Asia naphtha margins to recover faster thangas margins as naphtha becomes more competitive versus gas(0.0)(2.5)(0.5)(4.3)(5.0)(5.0)(3.5)18.420.124.233.035.035.035.015.020.025.030.035.040.0(6.0)(4.5)(3.0)(1.5)0.020152016201720182019e2020e2021e(USc/gal)(US$/bbl)Naphtha cracksEthane price(RH)Source:Company data,Bloomberg,Morgan Stanley Research estimatesExhibit 12:We estimate Asian chemical returns to trough in 2019and inflect by 250bps over 202111.412.713.76.09.212.415.618.822.0200520062007200820092010201120122013201420152016201720182019e2020e2021e(%)Asian Chemicals RoEAsian RoE averageAverage RoE(2005-16)Average RoE(2017-21)RoE cycle averageRoE inflecting 250bpsover 2021 from 2019lowsSource:Company,Bloomberg,Morgan Stanley Research estimatesExhibit 13:EV/EBITDA of 7.5x is trading near-1SD levels pricing anelongated down cycle in margins based on sustained intensity ofnew supply6.07.08.09.010.011.0Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19EV/EBITDA(x)+1x SD=9.9x-1x SD=7.8xAvg.=8.8xSource:Datastream,Bloomberg,Morgan Stanley research4The upstream chemicals sector(PE)saw considerableoversupply in the past two years and stocks haveunderperformed significantly against most of othersub-sectors.Valuations have de-rated to 1SD belowaverage on a bearish earnings outlook as consensusearnings expectations have been reset downwards bynearly 30%in response to an expanding PE supplyglut.PE accounts for nearly 40%of profits for Asianplayers and hence is key to their earnings outlook.Summary of Key Stock Calls and Changes1)Siam Cement:We upgrade Siam Cement to Overweightfrom Equal-weight.We expect significant upside for SCC asmargins recover in 2H19 supported by a turnaround incement demand,chemical margins potentially rounding acorner and greater discipline in capital allocation.We raiseour earnings forecasts by 3%to factor in higher PE marginassumptions for the operations in Thailand,associatecompany Chandra Asri in Indonesia as well as highermargins for its cement operations in Indonesia.Our newprice target of Bt552/share implies 22%upside.See SiamCement-Why the Global Top Pick?2)Lotte Chemical-Improving company fundamentals:Weare bullish on Lotte Chemicals evolving fundamentals onthe back of various diversification strategies in feedstock,operation base and product mix.The imminent start up ofUS ECC(1.0mn tpa ethylene and 0.7mn tpa MEG)in 1Q19should boost olefins earnings(W900bn in annual revenuewith 20%OPM),and penetration into different productsand regions to support the companys long term growthstory.As the largest olefin producer in Korea,we think LotteChemical is most levered to the global chemical demandrecovery in 2H19 and would advise investors to buy aheadof the cycle.Valuation is also attractive at 0.7x P/B(on12.3%2019e ROE)which is more than 1SD below thehistorical average since 2011.See Lotte Chemical-MostLevered to the UpcycleExhibit 14:With a potential glut in MEG in 2019-21,Asiancompanies have limited exposure