In this briefing:
- Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom
- Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help
- Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
- Weekly Oil Views: OPEC Shrugs off Trump’s “Take It Easy” Tweet, but Crude Complies
- SGP: Ready for New Growth Cycle
1. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom
Crude has been gradually reconnecting with its supply-demand fundamentals, and the impact of highly disciplined OPEC cuts just two months into the group’s production restraint deal is becoming evident in relatively stable prices. Through much of last week, crude prices firmed and stood their ground even as global stock markets were skidding.
However, oil is not completely out of the shadows of the global economic sentiment. Crude prices were whiplashed last Friday along with the equity markets as a fresh wave of gloom and doom from the European Central Bank’s downward revision of eurozone growth projections rattled investors. Earlier in the week, China set off fresh alarm bells, by officially revising down its 2019 GDP growth target to 6-6.5%, while Premier Li Keqiang warned that the country’s economy faced a “tough struggle” ahead.
Nonetheless, benchmark Brent and WTI crude futures resisted the lows plumbed during intraday trading Friday, to close marginally higher on the week. While global oil demand growth forecasts remain tentative, supply fundamentals are clearly firming. Output from 11 of OPEC’s 14 members that agreed to collectively curb output by around 812,000 b/d starting January this year almost reached 100% of the target in February.
The race to the compliance finish line was helped by Saudi Arabia, which is slashing its output way beyond its commitment. Meanwhile, the three OPEC members exempted from the latest round of production cuts — Iran, Libya and Venezuela — are also under-delivering. That amounted to OPEC-14 production plunging by around 1.7 million b/d compared with the high of last October.
OPEC will need to be careful not to over-tighten the market, as happened through the first half of last year. We believe the group will be cautious on that front, given its experience of 2018, when it was forced to make two policy U-turns in the space of six months.
2. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help
Xinyi Solar Holdings (968 HK) is looking to raise about US$170m in its top-up placement with an upsize option of 225m shares.
The deal scored well on our framework owing to its good track record, strong earnings and price momentum. The company’s 2H 2018 result had marginally beaten estimates while the news of China potentially reversing its effort to reduce solar subsidy has helped improve the overall sentiment of Xinyi Solar. On top of that, the past deals have generally done well.
3. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
It was reported in numerous local Korean media yesterday that POSCO (005490 KS) and SK Group are leading contenders to acquire a Korean company called KCFT (KCF Technology) for about 1 trillion won. KCFT specializes in making copper foil and thin film products, especially for the lithium ion batteries sector. KCFT’s major customers include Samsung SDI, LG Chem, NEC, and Panasonic.
The KKR private equity firm is the seller of KCFT. In February 2018, KKR acquired a 100% stake of LS Mtron’s copper foil and thin film business for 300 billion won and after this acquisition, renamed it KCFT. It has been reported that should these groups (POSCO or SK) low bid for KCFT, KKR may opt for an IPO of KCFT instead.
If POSCO is able to acquire KCFT, this should help to accelerate the POSCO Group’s expansion of the rechargeable battery related materials business and enhance its vertical integration of this business. If the deal gets completed at about 1 trillion won, this would represent a P/S of about 3.3x and P/E of about 25x, using 2018 figures.
4. Weekly Oil Views: OPEC Shrugs off Trump’s “Take It Easy” Tweet, but Crude Complies
As stock-market watchers begin to pick “resistance levels” for benchmark equity indexes that have been steadily heading north amid optimism over a US-China trade deal, we wonder if Trump and his tweets are the barrier point for crude’s rally.
And if they are, what might the US president’s “pain threshold” be? For his latest shot across OPEC’s bow, it appeared to be Brent touching a three-month high just above $67/barrel.
OPEC shrugged off Trump’s gentle warning. Saudi Energy Minister and de facto leader of the oil exporters’ group, Khalid al-Falih, appeared smiling and relaxed when asked about Trump’s tweet in a CNBC interview. OPEC was indeed “taking it easy,” he said. The group and its non-OPEC collaborators were determined to rebalance the markets, but with a “very slow and measured approach,” Al-Falih said.
We believe OPEC will be careful not to over-tighten the market this time around. Perhaps Trump was being over-cautious. If a US-China trade deal is signed in the next few weeks (that may happen on March 27, The Wall Street Journal reported on Monday), global stock markets could rally further. But they will not take crude along for the entire ride.
Our Chart of the Week shows that the rebound of the past two months in global equities has already left crude’s recovery far behind. The divergence should not come as a surprise. Crude may have already priced in most of the economic impetus of a US-China trade rapprochement. Unlike the MSCI global stock market index, which is closing in on its early-October levels (before the start of the financial markets turmoil), crude is highly unlikely to get within sight of the four-year highs it touched on October 3, shortly before it hit the skids.
5. SGP: Ready for New Growth Cycle
We initiate coverage of SGP with a BUY rating and a 2019E target price of Bt14.00, derived from 10.9x PE’19E, which is +0.5 SD of its 3-year trading average. We believe that a new growth cycle is poised to act as a re-rating catalyst.
The story:
- Regional LPG player with upstream transportation network
- New businesses to drive new growth cycle
- LPG price set to bottom out
- Expected earnings to recover in 2019E
Risks:
Currency fluctuation
Raw material price fluctuation
Overseas investment failure
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