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China Sanjiang Fine Chemicals:Bottom fishing opportunity on profit warning

研究机构:瑞银证券 研究员:Benson Chen,John Chung,Peter Gastreich 发布时间:2015-01-29

Profit warning could provide further buying opportunity

Sanjiang announced a profit warning that 2014 net profit could be down by more than70% YoY. The disappointing H214 result was due in large part to one-off inventorylosses on fuel oil at its non-core subsidiary Meifu Petrochemical and also possibly someinventory losses on ethylene at its EO (ethylene oxide) businesses too. When the oilprice starts to recover, inventory gains could be expected. We believe EO business'organic margin should have demonstrated strong HoH recovery as expected. Given amuch weaker oil price outlook for 2015E now compared to 3-4 months ago, themagnitude of earnings recovery (especially at its methanol to olefins plant) could fallshort of consensus full-year estimates. But we believe this is well expected and fullypriced in by the market and, if the market were to take the profit warning negatively,some investors might be inclined to bottom fish the stock.

EO margin to continue expanding

After a HoH improvement in H214, we expect EO business to continue climbing out ofthe trough. In addition to the significant cost savings from its new EO/EG (ethyleneglycol) joint-plant (start-up Mar/Apr 2015), management has recently decided to yieldmore EG than EO. This could create more than Rmb80mn (more than half of 2014E'swarned net profit) of incremental net profit contribution than the previous outputallocation.

MTO (methanol to olefins) to fare much better than market expectation

Our recent conversations with investors suggest that they thought MTO would be lossmaking when starting up (Mar 2015) if based on the current chemical prices. However,as propylene (60% of MTO output) price rose more than 20% from Dec 2014 trough,MTO is expected to deliver c.5% net profit margin if holding everything constant fromtoday. A recovery in oil price is likely to expand the margin further significantly.

Valuation: reiterate our Buy rating and PT of HK$5.6

We derive our PT from DCF-based UBS VCAM (10.4% WACC). We think Sanjiang'svaluations are attractive at 0.6x 2015E P/BV, a historical trough level.

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