20161005-三星证券-Oil_rally_to_benefit_shipbuilders_most,then_refiners_14页_517kb

Sector Update Summary

Core Content Overview

This report provides an analysis of the shipbuilding and oil refining sectors in South Korea, focusing on their performance and future outlook in light of recent OPEC production cuts and oil price increases. The document evaluates how these developments are likely to impact the financial performance and stock valuations of major companies within the sectors, such as Hyundai Heavy Industries (HHI), Daewoo Shipbuilding & Marine Engineering, SK Innovation, and S-Oil.

Main Points

Oil Refining Sector

• Market Performance: Refining shares have risen by 43% year-to-date (YTD), driven by refining margin improvements.
• Refining Margin: The Singapore complex gross refining margin increased from USD2.9/bbl in August 2016 to USD7.4/bbl, primarily due to regular maintenance and declining utilization at marginal firms.
• Impact of Oil Price Hikes: Short-term oil price increases are beneficial for refiners due to inventory valuation gains and the lagging effect of crude input costs. However, long-term refining margins are expected to remain unchanged at USD6/bbl due to supply-driven price increases potentially increasing oil producers' bargaining power.
• Company Outlook:
  • SK Innovation: Benefiting from dividend momentum and E&P business. It is rated BUY with a target price of KRW184,000.
  • S-Oil: Rated HOLD with a target price of KRW90,000.
• Key Takeaway: While short-term benefits from oil price increases are clear, the long-term outlook for refining margins remains neutral due to potential supply-side dynamics.

Shipbuilding Sector

• Market Performance: Shipbuilding shares have risen 43% YTD, despite the industry downturn and decline in offshore orders.
• Offshore Orders: Offshore orders have dropped 87% YTD, but anticipation of restructuring has driven investor sentiment.
• Impact of Oil Price Hikes:
  • Positive Effects: Oil price increases are expected to ease negative views on large shipbuilders, as they can resume work on some low-cost offshore projects.
  • Limitations: Offshore drilling rig orders are unlikely to normalize until current backlogs are cleared, and oil majors may seek price revisions that could affect shipbuilders.
• Company Outlook:
  • Hyundai Heavy Industries (HHI): Rated BUY with a target price of KRW170,000, up 21.4% from current price. HHI is considered best positioned to benefit from order momentum revival.
  • Hyundai Mipo Dockyard (HMD): Rated HOLD with a target price of KRW85,000, up 15% from current price.
• Valuation: Shares are trading below book value, suggesting potential re-rating. HHI has the most solid financials and world-class offshore competitiveness.
• Non-Shipbuilding Units: These have shown improvement in earnings, contributing to consolidated results and serving as valuation premium factors.

Key Information

Refining Sector

• OPEC Production Target: Set a lower production target than August levels, but no written agreement yet, and non-OPEC participation is uncertain.
• Refining Margin: Expected to remain at USD6/bbl due to supply-driven increases.
• Refining Shares: Up 4% YTD, with market cap reflecting positive sentiment.

Shipbuilding Sector

• Offshore Orders: At 10-year lows, with zero offshore orders since July 2015.
• Price Index: Still at 10-year lows, but restructuring anticipation is boosting share prices.
• Refund Guarantees: HHI’s creditors have resumed offering them, which is positive for order activity.
• Earnings Outlook: HHI’s refining business had strong 1H16 earnings, while its shipbuilding and offshore segments have seen improvements.

Valuation Summary

Investor Spotlight

• HHI is highlighted as the top pick due to its strong financials, offshore competitiveness, and potential for re-rating.
• Refining and Shipbuilding Valuations: Both sectors have seen improvement, with HHI below sector averages, making it a potential value play.
• Non-Shipbuilding Units: Improving earnings and increasing asset visibility may lead to spin-offs or IPOs, enhancing valuation.

Conclusion

• Oil price increases are beneficial for both sectors, though refining may see mixed long-term effects.
• Shipbuilding is more positively impacted due to restructuring anticipation and potential for re-rating.
• HHI is the top recommendation due to its strong financial position and diverse operations.
• Investor sentiment is positive for HHI and SK Innovation, while HMD and S-Oil are HOLD.