德银-亚洲-能源化工行业-2018亚洲石油化工业展望：供应周期延长，非PE更胜一筹-20171221-84页_3mb

Asia Petrochemical Industry Outlook: 2018 Summary

Core Content

This report provides an outlook for the Asian petrochemical industry in 2018, highlighting the positive trends and investment opportunities in the sector. The key themes include supply discipline, non-PE (non-ethylene) strength, and environmental constraints driving upcycle in certain product areas.

The report outlines the investment thesis, which is centered on the prolonged peak cycle due to supply-side discipline, with strong spreads expected to continue in 2018 and 2019. It also discusses the divergence in PE and non-PE utilization rates, and environmental regulations in China that are expected to impact production and utilization rates in the chlor-alkali chain.

Main Points

1. Industry Outlook

• Positive Outlook: The petrochemical sector is expected to perform well in 2018 with a 12% sector earnings growth.
• Prolonged Peak Cycle: The peak cycle is likely to continue, with weighted spreads remaining high.
• Supply Discipline: Project delays and cancellations are expected to disrupt supply and support the cycle.
• Environmental Measures: These are expected to reduce utilization rates in certain areas, particularly in the chlor-alkali chain, and eliminate inefficient capacity.
• Non-PE Strength: Non-ethylene products are expected to outperform due to limited new capacity additions, especially from gas-ethane-based sources.

2. Key Themes

• Ethylene Cycle Softening: Ethylene utilization rate is expected to decline slightly but remain healthy.
• Non-PE Strengthening: The non-PE cycle is expected to tighten supply/demand balance, with synthetic rubber and PVC leading the way.
• Environmental Constraints: These are expected to boost utilization rates in the chlor-alkali chain, particularly in China, where 44% of global PVC/caustic soda capacity is carbide-based.

3. Top Picks

• LG Chem (051910.KS): Buy rating with KRW480,000 target price. Diversified exposure to non-PE products with 20% upside potential.
• Kumho Petrochemical (011780.KS): Buy rating with KRW110,000 target price. Strong synthetic rubber exposure with 16% CAGR expected.
• IRPC (IRPC.BK): Buy rating with THB7.9 target price. Expected to improve operational performance.
• SPC-H (0338.HK): Buy rating with HK$5.2 target price. Strong dividend yield and FCF yield with stable refining margins.

Key Information

Utilization Rates and Spreads

• Ethylene Utilization: Expected to drop to 89% in 2018E and 88% in 2019E, with spreads remaining high.
• Non-PE Utilization: Expected to increase by 1.5% YoY in 2018E, with synthetic rubber leading the growth at +4.3% YoY.
• PVC and Caustic Soda: Expected to see utilization rate improvements of 6% between 2018 and 2020E, with spreads rising by US$180/ton and US$95/ton, respectively.

Environmental Impact

• China's Plastic Waste Ban: Expected to boost demand for non-PE products and increase utilization rates.
• Chlor-Alkali Chain: Environmental regulations are expected to reduce utilization rates and eliminate inefficient capacity, potentially suspending 36% of global capacity.

Risks

• Downside Risks: Volatility in crude oil prices, lower-than-expected GDP growth, and unforeseen geopolitical changes.
• Upside Risks: Continuous delays in new capacity, stronger OECD downstream demand recovery, and unexpected mergers and acquisitions.

Summary of Company Exposure

Valuation and Ratings

Conclusion

The report concludes that non-PE products are expected to outperform in 2018 due to limited new capacity additions and increased demand. Environmental regulations in China are expected to boost utilization rates in the chlor-alkali chain. Synthetic rubber and PVC are highlighted as the best-performing products, with strong spreads and high growth potential.

Overall, the investment thesis is bullish, with a 15% sector earnings growth forecast and 15% stock performance expected in the next 12 months. The top picks are LG Chem, Kumho Petrochemical, IRPC, and SPC-H, all with Buy ratings.