HENGYUAN (4324) - Fundamental Check of Hengyuan


 -Petrol is a necessity. Every car need petrol. The product is in great demand. HY’s business still operating good.

- HY will held its AGM on May. This will clear all the doubts, especially on the progression of Euro 4M upgrade. Once the doubts are clear, HY will gain back confidence of investors.

-Shandong Hengyuan is one of the Top 500 Chinese Chemical Enterprise and its chairman Wang is an outstanding entrepreneur. With the support of strong parent company and good leader, I am confident in HY business prospect. It has the expertise in upgrading the Euro 4M project on time. China man is very effective.

-HY secures RM1.7 billion financing from 3 major banks. It indicates that the 3 banks have check the company’s account which is good (no fraud in accounting reports) and it believe on the outlook of HY which remains positive due to improve refinery margins.

-Possible final dividends due to improving cash flows

-During the shutdown, HY will have enough storage tanks which can support the business for another 3-6 months. So business of HY won’t be affected much.

- HY latest quarter Crack spread should be improving as Singapore benchmark crack spreads have posted a strong and steady uptrend over a past six months.

-HY still earning big currently with EPS 3.0307 and PE of 2.36. It is very undervalue.

-MYR strengthening is a good news to HY. Anticipated forex gain. Strong RM may also lead to lower import cost for crude oil (buy crude oil in USD).

- Investors has low expectation to HY coming quarter result following the big selldown (low base). If the Q1 18 result is as good as previous Q4 17 result (183553k) + taxation 63743 = 247296k  or Q1 17 result  (279485k) . Then its share price will definitely rebound very fast . It drops very fast, rebound also will be very fast. Based on the crack spread data, this has high possibility.

-Worldwide benchmark for a refinery stock ranging from 10-22. Even I take the local counterpart Petronm which has PE of 6. Assume the projected EPS of HY for 2018 is only 2 (take in factors of shutdown) . So the fair price of HY should be  6x2= RM12.00 (very conservative). The share price of RM7.15 now is definitely very undervalue.

- If a company has good fundamental, the price is undervalue when

19.2 (highest price)/2= 9.6

9.6x0.85=8.16 (undervalue price based on Huliyang model)

Current price is 7.15 (at bottom range)

- Buy on maximum pessimisim to gain big will not always happen if the fundamental of the company is deteriorated, like Parkson (never ending drops). But it will happen, if the company has strong business model and strong leadership like LCTitan (rebound strongly). I believe HY will follow the latter.