HENGYUAN (4324) - Revisiting our warning on Hengyuan



Revisting our Post

Back on July 31st, we published a post titled "3 risks to consider before investing in Hengyuan". We highlighted the risks regarding petroleum refining companies being, 1) Earnings could be too optimistic, 2) Crack spreads are highly volatile and 3) Hengyuan Shandong's low entry price.

2nd Quarter Results Disappointment

Today, Hengyuan reported its results for the second quarter which was lower both year-on-year and quarter-on-quarter. The reasons, in a nutshell, were 2 things:

    One of its crude distillers was on temporarily shutdown for approximately 3 weeks for a planned minor turnaround maintenance in May 2017.

    There were minor turnaround maintenance expenses and additional amortisation charges arising from new software/intellectual property assets.

Our Concerns were Valid

In our earlier post, we said that "refineries require maintenance – both planned and unplanned" and "Obvious reasons why Shell disposed of its Malaysian refinery could be due its unwillingness to invest further".

Looking at the reasons for the weak quarter, it is clear that our concerns were valid, i.e. there was a plant shutdown which was unaccounted for and there are higher than expected maintenance expenses as the refinery is aged.

In fact, Petron Malaysia announced its results yesterday that fell short of some estimates as well. The culprit - 25 days shutdown in one of its plants.

It is NOT our Desire for Anyone to Lose Money

We do not take pride in being right, especially when it concerns the possibility of investors losing money. Quite the opposite, when we highlight risks, we hope that we are wrong and everyone makes money.

Our intention is merely to highlight the risks when we feel that investors have become too euphoric. This is something we hope to continue doing in the future.