Regional Energy: China Refining & Petrochemical Sector

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Regional Energy Regional Energy: China Refining & Petrochemical Sector Refer to important disclosures at the end of this report

DBS Group Research . Equity U740 3 Mar 2020

U740 Feeling under the weather Analyst • COVID-19 throws a wrench in near-term demand for refined oil and

petrochemical products;U740 situation should improve in 2H2020 Pei Hwa HO +65 66823714 • Refining margins will remain depressed in the near term, but should [email protected]

see some respite in 2H2020 U740 Suvro SARKAR +65 81893144 • 2020 could mark the beginning of a protracted supply glut in the [email protected]

petrochemical sector Jason SUM +65 66823711

U740 [email protected] • Sector valuation is attractive, but not quite the time to bottom fish

U740 ed: TH/ sa: JC, PY, CS

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Regional Energy China Refining and Petrochemical Sector

Contents U740

1. China Refinery Sector Short-Term Outlook Page 04

2. China Refinery Sector Medium-Term Outlook Page 18 U740

3. China Petrochemical Sector Outlook Page 28

4. China Refining and Petrochemical Sector Valuation Page 35 U740 U740

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Regional Energy China Refining and Petrochemical Sector

Unfavourable supply-and-demand dynamics underpin our bearish outlook

Key highlights: • COVID-19 throws a wrench in near-term demand for refined oil and petrochemical products, but the situation should improve in 2H2020. We estimate that total refined oil product demand in China will fall by around 1.3-1.4mmbpd (around 10%/1.5% of China and global crude oil consumption respectively) in 1Q2020, and 0.5mmbpd in 2Q2020, as a result of COVID-19. This is predicated on the COVID-19 episode peaking in March and dissipating thereafter, with a turnaround in demand set for 2H2020, driven by easing trade tensions and robust stimulus from the Chinese

government. U740

• Chinese refineries could slip into the red amid subdued refining margins in 1H2020, but should see some respite in 2H2020. Demand concerns U740 owing to uncertainty surrounding COVID-19 will eclipse all other factors in the near term. Additionally,U740 weakness in refining margins may be aggravated by a less-than-proportionate supply response by the Chinese refineries, with export markets unlikely to provide any form of relief, given the knock-on effect of COVID-19 on their economies. Looking ahead, apart from a pick-up in demand, we expect IMO2020 to bolster refining margins in the second half of the year, particularly for the more sophisticated refineries. However, its impact will likely be inadequate to promote earnings growth for sector players in FY2020.

• Overcapacity continues to be the prevailing theme in the petrochemical sector, and it will take an extended period for the sector to rebalance itself. The sheer volume of supply growth over the next seven years, along both the aromatics and olefins chains will overwhelm the market, reduce China’s import dependency, and place immense pressure on petrochemical product spreads, in our view. In the near term, we believe the supply glut will only worsen with COVID-19 weighing on demand and China’s recently proposed ban on single-use plastics. The only positive factor we see supporting petrochemical players in the short run would be the nosedive in petrochemical feedstock prices, following the sharp pullback in crude oil U740 prices.

• Sector valuation may appear attractive, but the cheap can get cheaper; stay away for now. While valuation multiples in the sector appear to be compelling, U740we believe that they have yet to capture the full extent of COVID-19’s impact on earnings, and expect sector multiples to move higher as negative earnings revisions are pencilled in. In any case, Thai Oil is our preferred pick to ride the IMO2020 wave, due to its lower refinery operating cash cost of US$1.2-1.3/bbl (peer average – US$1.8-2.1/bbl) and lower medium-light crude intake proportion of 35% vs local peers’ 54%.

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Regional Energy China Refining and Petrochemical Sector

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U740 China Refinery Sector Short-Term Outlook

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Regional Energy China Refining and Petrochemical Sector

COVID-19 will lead to considerable demand destruction in the 1st quarter; expect gradual recovery from 2nd quarter

China’s oil demand by sector and by refined oil product

U740 China's oil demand by sector (2018) China's oil demand by product (2018)

9% Diesel 6% Transportation 26% Petrochemical 31% Gasoline 8% U740 Industrial Other light distillates 51% Construction 11% Agriculture Jet fuel Others 4% Fuel oil 22% 16% 7% Others 10%

Source: Sinopec, BP PLC, DBS Bank

• Demand in the transportation sector (gasoline, diesel and jet fuel) will be hardest hit amid extensive travel restrictions, shift towards remote working, and avoidance of travelling. Figures released by the Ministry of Transport suggest that road and air passenger volumes have bottomed, but remain significantly below 2019 at -75% y-o-y and -82% y-o-y as at 23 Feb 2020. Similarly, live congestion data indicatesU740 that road traffic continues to be thin, with average road congestion levels during peak hours down by 40% y-o-y on average in February. However, the latest live congestion data reading on 2-3 March shows that congestion levels have returned to around 75-80% of normal congestion levels.

• Industrial and construction (diesel) demand will see meaningful contractions as well, due to an extension of the Chinese New Year holidays, severe disruption in China’s supply chain network, project delays, and manpower issues – China’s manufacturing Purchasing Managers’ Index slid to a record low of 35.7 in February. While demand in the petrochemical sector (LPG and naphtha) will fall as downstream companies reduce the utilisation of their petrochemical units – according to estimates by SCI99, propylene and paraxylene operating rates have fallen to 79.9% and 71.6% from 90.4% and 75.0% respectively between the week of 17 Jan (pre-outbreak) and the week of 21 Feb.

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COVID-19 will lead to considerable demand destruction in the 1st quarter; expect gradual recovery from 2nd quarter U740 Road, Rail and Air Passenger Data in China

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Source: BloombergNEF

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COVID-19 will lead to considerable demand destruction in the 1st quarter; expect gradual recovery from 2nd quarter

Road CongestionU740 Data in China

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Note: Congestion level is an estimate of the increase in time that a journey within a city will take compared to uncongested conditions (40% congestion means that a jounrey will take 40% longer).

Source: BloombergNEF U740

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Regional Energy China Refining and Petrochemical Sector

U740 COVID-19 will lead to considerable demand destruction in the 1st quarter; expect gradual recovery from 2nd quarter

Air Quality Index in China’s Cities

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Note: The charts show the daily average NO2 for each city. Low levels of NO2 indicate that fewer commercial trucks are on the road. U740 Source: BloombergNEF

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Regional Energy China Refining and Petrochemical Sector

U740 COVID-19 will lead to considerable demand destruction in the 1st quarter; expect gradual recovery from 2nd quarter

Baidu’s China Migration Index

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Note: MigrationU740 index represents the inbound and outbound flow of people from Chinese cities. U740

Source: BloombergNEF U740

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U740 Regional Energy China Refining and Petrochemical Sector

COVID-19 will lead to considerable demand destruction in the 1st quarter; expect gradual recovery from 2nd quarter

U740 DBS estimates of COVID-19 impact on refined oil products Refined oil Demand in New absolute Demand in New absolute Rationale product 1Q2019 change in demand in 2Q2019 change in demand in (mmbpd) 1Q2020 (mmbpd) (mmbpd) 2Q2020 (mmbpd)

Gasoline 3.1 -0.4 3.0 -0.1 Road traffic in major cities was muted for the most part of February. Nonetheless, (-13% y-o-y) (-3% y-o-y) gasoline demand should pick up quicker than other oil products with an easing of the lockdown, as people avoid public transportation and opt for car transportation instead, though the drastic plunge in domestic passenger car sales will keep the recovery in check. Diesel 3.3 -0.5 3.1 -0.2 Industrial and construction activities were adversely impacted by the extended (-15% y-o-y) (-6% y-o-y) Chinese New Year holiday and the massive disruption in transportation and supply chain networks. However, we note that workers are starting to return to factories, and believe that operations will start trending to pre-crisis levels over the next month. Similarly, we note that major construction projects have already resumed, U740 and believe that construction activity will normalise in tandem with industrial activity. Jet fuel 0.9 -0.3 0.9 -0.15 Air passenger volume continues to be depressed, and will take time to stabilise as (-33% y-o-y) (-16% y-o-y) travel restrictions and blanket bans on Chinese passport holders by some countries will likely persist till the end of 1Q2020. However, we are confident that pent-up travel demand will materialise in 3Q20-4Q20, and expect a swift recovery in 2H2020. Naphtha 1.7 -0.15 1.7 -0.05 to 0 Downstream petrochemical companies have cut operating rates in response to and LPG (-9% y-o-y) (flat y-o-y) ailing demand, while household and commercial demand, which accounts for 50% of China’s LPG consumption, will be affected by logistical bottlenecks and U740 U740 restaurant closures. However, demand should be more resilient relative to transportation fuels, and is expected to stage a quicker turnaround in 2Q2020. Total -1.35 Total -0.5 1Q2020 2Q2020 impact impact Source: BP PLC, NDRC, DBS estimates

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U740 Regional Energy China Refining and Petrochemical Sector

COVID-19 will lead to considerable demand destruction in the 1st quarter; expect gradual recovery from 2nd quarter

U740 Timeline of new COVID-19 cases (LHS) and total number of infected people (RHS) in China and the rest of the World

16,000 2,000 90,000 8,000

1,800 14,000 80,000 7,000 China reports 1,600 70,000 12,000 new method of 6,000 counting cases 1,400 60,000 10,000 5,000 1,200 50,000 8,000 1,000 4,000 40,000 U740 800 6,000 3,000 30,000 600 4,000 2,000 20,000 400 2,000 1,000 200 10,000

- - - - 17-Jan 24-Jan 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb 17-Jan 24-Jan 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb U740 U740 China (LHS) Rest of the world (RHS) China (LHS) Rest of the world (RHS)

Source: Bloomberg Finance L.P., DBS Bank

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Regional Energy China Refining and Petrochemical Sector

Refining cuts may not be deep enough to offset the oversupply situation

China independent refineries utilisation rate and crude oil inventory level

Independent refineries operating rate (%) 75.0 • The aggregate refinery run rate in China is expected to fall to 55.6% in Feb-2020, 70.0 U740 from 71.5% in Jan-2020, according to SCI. 65.0 U740 In response to flagging demand, operating U740 60.0 rates at independent refineries plunged to 41.8% in the 3rd week of February from 55.0 64.6% in the last week of January, the 50.0 lowest level since Sep-2015. Meanwhile, the state refineries have cut their operating 45.0 rates to around c.75.0% from c.82.5% Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec three weeks ago. 2016-2019 range 4-year average 2019 2020 • However, the supply cuts might be too U740 shallow as China’s gasoline and diesel Independent refineries crude stock (mmbbls) inventories are still expected to rise to near 60 its full capacity. SCI99 expects China’s U740 Crude oil inventory Average 55 gasoline and diesel stockpiles to rise to 410mmbbls by end-Feb, representing 70% 50 of total capacity, and far above the typical 45 inventory level of 220-300mmbbls. This will 40 undoubtedly have adverse implications on refining margins, as the inventory level may 35 take one to two quarters to revert to its

30 U740 mean.

25 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Source: Bloomberg Finance L.P., DBS Bank

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Regional Energy China Refining and Petrochemical Sector

Refining cuts may not be deep enough to offset the oversupply situation

China state refineries utilisation rate and China quarter-ahead scheduled refinery outages

State refineries operating rate (%) Planned China refinery outages ('000bpd) 84.0 2,500

82.0 U740 2,000

80.0 U740 U740 78.0 1,500

76.0 1,000 74.0 500 72.0

70.0 - Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

U740 2015-2019 range 5-year average 2019 2020 2015-2019 range 5-year average 2019 2020

U740 Source: Bloomberg Finance L.P., DBS Bank

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Regional Energy China Refining and Petrochemical Sector

IMO2020 has been a dud thus far… but its effects should be more pronounced in 2H2020

Historical Singapore MGO and VLSFO prices Historical Singapore diesel crack spreads. MGO (LHS) US$/ton US$/ton US$/bbl VLSFO (LHS) 750 60 25 MGO - VLSFO spread (RHS) 700 50 40 20 U740 650 30 15 600 20 10 550 10 0 500 -10 5 450 -20 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec U740 400 -30 2015-2019 range 5-year average U740 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 2019 2020

Source: Bloomberg Finance L.P., DBS Bank

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Demand concerns will overshadow the IMO2020 impactU740 on the refined oil product market in the near term. Singapore diesel crack spreads moved lower in 4Q2019, and are now at a three and a half year low at US$8.8/bbl (as at 28 Feb 2020), despite the IMO2020 coming into force. The much anticipated IMO2020 was supposed to drive the use of marine gasoil (MGO) as a bunkering fuel, and provide a much needed uplift to refined oil product cracks and refining margins. Unfortunately, this did not quite pan out according to expectations, due to an ample supply of cheaper substitute fuel (very-low-sulfur fuel oil [VLSFO]), generally stronger preference for VLSFO owing to its technical specifications, and the sudden COVID-19 outbreak which dampened shipping activity.

Economics suggest that shipowners capable of bunkering MGO could make the switch soon. MGO is now only trading at a slight premium to VLSFO, briefly reversing the negative spread between MGO and VLSFO in Dec-2019. And with the market expected to run a small supply deficit on VLSFO in 2Q2020, we believe shipowners will be forced to take MGO, even if they favour VLSFO.

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Regional Energy China Refining and Petrochemical Sector

IMO2020 has been a dud thus far… but its effects should be more pronounced in 2H2020

U740 Brent and Dubai crude oil price spread VLCC Freight Rate from Arab Gulf to Japan

US$/bbl US$/bbl 6 U740 4 5 U740 3 4

3 2 2 U740 1 1

0 0 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec U740 2014-2019 range 6-year average 2014-2019 range 6-year average 2018 2019 2018 2019 2020 2020

Source: Bloomberg Finance L.P.,, DBS Bank

Complex refineries in China will benefit from widening heavy-light crude differentials as simple refineries with insufficient desulphurisation and cracking capabilities seek lighter and sweeter grades of crude oil to minimise their yield of HSFO and produce more IMO2020-compliant fuel oil. However, this will be capped by unplannedoutages in the Middle East, and potentially deeper OPEC+ cuts (a large proportion of heavier crude oil production is in the Middle East).

Gasoline cracks should receive some support as refineries alter their production yield to produce more VLSFO blends (as low-sulphur feedstock such as VGO, which can be upgraded to gasoline or diesel, is diverted away to bunker blending), but stay under stress from waning demand; jet cracks should enjoy some upside as well, as the blending of jet fuel feedstock with HSFO will directly decrease jet fuel supply. U740

However, freight costs could rise again on limited supply and take a toll on refining margins. VLCC freight rates between the Arab Gulf and Japan had come down to US$1.3/bbl as at 7 Feb amid COVID-19 weakness, since peaking at US$7.5/bbl after the US slapped sanctions on Chinese shipping giant COSCO. U740Despite the lifting of sanctions on the Chinese vessels, supply will remain tight due to a slowdown in new deliveries (VLCC existing orderbook/fleet ratio of 8.2%) and as the fitting of scrubbers on vessels will keep them out of the supply equation.

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Gross refining margins in China and Singapore

U740 China Gross Refining Margin

US$/bbl U740 14.0

U740 12.0

10.0

U740 8.0

6.0

U740 4.0

2.0

0.0 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19

NOC refining margin range China gross refining margin

Source: Bloomberg Finance L.P., DBS Bank

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Gross refining margins in China and Singapore

U740 Singapore Product Cracks and Gross Refining Margin

Singapore Gasoline Crack (US$/bbl) Singapore Kerosene Crack (US$/bbl)

20.0 U740 20.0

15.0 17.0

10.0 14.0

5.0 11.0

0.0 8.0 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec 5.0 -5.0 U740 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec 2015-2019 range 5-year average 2015-2019 range 5-year average 2019 2020 2019 2020

Singapore HydrocrackingU740 Margin (US$/bbl) Singapore Hydroskimming Margin (US$/bbl) 25.0 20.0 20.0 15.0 15.0 10.0 U740 10.0 5.0 5.0 0.0 0.0 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec -5.0 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec -5.0 -10.0 -10.0 U740 2015-2019 range 5-year average -15.0 U740 2019 2020 2015-2019 range 5-year average U740 2019 2020

Source: Bloomberg Finance L.P., DBS Bank

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China Refinery SectorU740 Medium-Term Outlook

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China’s refinery capacity is expectedU740 to grow at a slower pace over the next few years

China’s refinery capacity and utilisation from 2010

U740 U740 • China’s total refining capacity stood at U740 mmbpd China crude distillation capacity (LHS) around 16.2mmbpd and 17.0mmbpd 18.0 100% in 2018 and 2019 respectively. Overall utilisation rate (RHS) 95% • Over the past few years, the country’s 17.0 refining utilisation has consistently been 90% below the global average of >80%, 16.0 due to the breakneck growth in 85% production capacity, especially from 15.0 teapot refineries. 80% U740 • Capacity growth going forward, will be 14.0 75% U740 more moderate, as the absence of new teapots and rationalisation of smaller 70% 13.0 and less efficient teapots will offset 65% new mega refineries coming online. 12.0 60% • Utilisation will fall to around 71% in 2020, as refineries cut operating rates 11.0 55% in response to COVID-19, and gradually improve from 2021. 10.0 U740 50% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E2020F2021F

Source: BP PLC, SinopecU740, DBS Bank

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New mega refineries are scheduledU740 to come on stream over the next few years

New refining capacity coming on stream from 2019-2022

U740 U740 • Over 2.6mmbpd (15% of China’s '000bpd U740 refining capacity as at 2019) of new 1,000 refining capacity, largely from new mega 800 independent refineries (crude distillation 600 capacities exceeding 400bpd) are slated to come on stream from 2020-2022 and 400 exacerbate the supply glut. 200 - • Not only are these refineries considerably 2019 2020 2021 2022 larger than the average refinery, they Sinopec PetroChina Sinochem Zhejiang Hengli Shenghong U740 also take in heavier and sour grades of U740 crude oil, and boast significantly higher '000bpd yields of higher-value gasoline, jet fuel 500 100% and petrochemical feedstocks. Hence, 400 80% they are more able to tolerate subdued product prices, compared to the teapots. 300 60%

200 40% • Furthermore, they are mostly located in 100 20% the Eastern coastal areas, with strategic U740 0 0% access to the rest of Asia, which means Hengli Zhejiang Shenghong Southern China China's national that export markets will likely come Petrochemical average under pressure as well.

YieldU740 of petrochemical feedstock (RHS) Yield of refined crude oil products (RHS) Refining capacity (LHS) U740 Source: Sinopec, company announcements, DBS Bank

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Regional Energy U740 China Refining and Petrochemical Sector

However, we should finally see more teapot closures and consolidation amongst the smaller players…

Comparison and breakdown of China’s refining sector

Total refining capacity (LHS) mmbpd '000bpd • Teapot refineries dominated refining capacity additions 21.0 Average capacity per refinery (RHS) 250 U740 in China from 2014-2018, accounting for 61% of new 18.0 200 capacity during the period. 15.0 12.0 150 • In 2018, the average capacity per refinery in China was 9.0 100 at 87,000b/d, which was only half of the global average. 6.0 50 3.0 • The teapots have been surprisingly resilient thus far, - - despite the government’s efforts in closing consumption US China Russia India Japan tax loopholes from 2018 and severe competition from state-run refiners and newly completed super- Count of refineries by refinery capacity China refining capacity market share (2018) independent refineries.

4 15 Refinery Capacity U740 ('000 bpd) 24% • But the government is determined to introduce sector 54 >400 35% reforms to eliminate ineffiencies. The government has 200-400 mandated Shandong refineries with CDU capacity below 49 60kbpd and 100kbpd to be shut down by 2022 and 100-200 8% 2025 respectively. These smaller refineries are U740 40-100 encouraged to consolidate and develop larger and more <40 7% modern facilities – the Shandong government is backing a plan for nine independent refineries with a combined U740 26% CDU capacity of 500kbpd to shutter their existing plants 70 Sinopec PetroChina to build the first phase of Yulong Petrochemical CNOOC Other state-owned (400kbpd) in Yantai City by 2022. Independents

Source: Sinopec, company announcements, DBS Bank

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Regional Energy U740 China Refining and Petrochemical Sector

However, we should finally see more teapot closures and consolidation amongst the smaller players…

• New regulations by the government stipulate that greenfield refineries must be integrated with a petrochemical plant and have a minimum atmospheric distillation capacity of 200kbpd, which radically raises the barriers to entry. U740

• More rigid enforcement of consumption tax regulations and new tax collection mechanisms have made it more challenging for teapots to avoid hefty taxes.

• Refining margins have been drifting down since the second half of 2018, fuelled by a culmination of increased teapot refinery runs, several new mega refinery startups, sluggish demand growth due to the trade war, and now fears surrounding COVID-19.

• With limited liquidity in the system, prolonged softness in refining margins will lead to more teapots shutting operations over the next few years; around 2.1mmbpd of outdated plants could be shut down between 2019 and 2025, according to Sinopec.

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U740 Growth in gasoline and diesel demand has been gradually tapering

Historical consumption trends of gasoline and diesel in China

Passenger vehicle sales ('000 units) U740 mmbpd U740 • An expanding vehicle population will bolster 8,000 2.80 New passenger vehicle sales (LHS) U740 gasoline demand. Gasoline demand 2.60 7,000 tumbled in 2019 on the back of a slump in 2.40 6,000 GasolineU740 consumption (RHS) Chinese passenger vehicle (PV) sales. 2.20 5,000 However, we believe the auto market has Growth in gasoline 2.00 4,000 consumption has been reached its trough and should rebound after 1.80 3,000 slowing down COVID-19 blows over, albeit at a measured 1.60 2,000 pace. Despite persistently weaker PV sales, 1.40 the Chinese vehicle population is still 1,000 1.20 growing, and should support stable but - 1.00 lower gasoline demand growth over the medium term.

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Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19

Sep-08

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 • Turnaround in industrial output growth [RHS] Diesel consumption (y-o-y change) 25% 20% following a dial back in trade tensions could bolster diesel demand. COVID-19 will lead 20% [LHS] Industrial output growth (y-o-y) 18% to muted industrial and manufacturing 15% Diesel demand growth has been negative in six out of 16% activity over the next two quarters, and 10% the past eight quarters 14% consequently drive down diesel demand. 5% Beyond that, the IMO2020 is anticipated to 12% 0% drive demand for diesel bunkering in 10% 2H2020; a further de-escalation of trade -5%

8% tensions between China and US, or even

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19

-10% Sep-08

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-08 rollback of tariffs could stimulate a -15% 6% resurgence in industrial activity. -20% 4%

Source: Bloomberg Finance L.P., DBS Bank

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U740 Regional Energy China Refining and Petrochemical Sector

U740 Crude oil demand in the transportation sector will peak at around the mid-2020s

Car ownership and fuel efficiency trends

Car ownership concentration (no. cars/1,000 ppl) • Gasoline demand is supported by China’s low U740 USA & Canada (2018) 800 U740 passenger vehicle ownership concentration, which 700 U740 is still significantly below the more developed 600 countries, like US and Japan. The ratio is U740 Europe & Japan (2018) anticipated to expand from 147 cars/1,000 people 500 in 2018 to around 350 cars/1,000 people in 2050, 400 after accounting for China’s indigenous crude oil 300 reserves and population density, according to Hong Kong & Singapore (2018) China 200 Sinopec.

100 • Gasoline substitution, either by natural gas and 0 hydrogen fuel powered vehicles or electric 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 vehicles, will take time to gain traction. Electric U740 vehicles only comprised a little over 1% of China’s Fuel efficiency (liters/100km) PV fleet as at end-2018. EV fleet growth will be 10.0 measured as the share of EV sales as a proportion of annual automobile sales is projected to hit 20% 9.0 by 2025, and 40% by 2030, according to China’s 8.0 Ministry of Industry and Information Technology.

7.0 • Of course, increasing efficiency of gasoline 6.0 powered PVs will put a lid on demand growth. Fuel consumption rate of vehicles in China is 5.0 expected to decline from around 6.9l/100km to 4.0 4.5l/100km by 2025, meaning that gasoline 2005 2010 2015 2020 2025 consumption will fall by around 35% then. China US

Source: Bloomberg Finance L.P., DBS Bank

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Crude oil demand in the transportation sector will peak at around the mid-2020s

Historical sales of diesel-powered trucks, buses and tractors; China’s electric bus fleet growth projections

'000 units sold • Sales of diesel powered vehicles 3,000 appears to have plateaued, as the 2,500 sales quantity for all categories but heavy-duty trucks declined for a 2,000 U740 second consecutive year in 2019 1,500 due to a slowdown in industrial 1,000 growth and government policies favouring electric vehicles and 500 natural-gas powered vehicles. - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 • Woodmac projects that the e-bus population will increase rapidly to Heavy-duty trucks Medium-duty trucks Other trucks Heavy-duty buses Other buses Tractors 1.3m units in 2025, from 0.4m in 2018. This will result in Number of e-buses in China ('000 units) substantially lower diesel demand – 1,400 U740 every 1,000 battery-powered buses U740 on the road could displace about U740 1,200 500 barrels a day of diesel fuel, 1,000 according to Bloomberg, signifying that electric buses will slash U740 800 domestic diesel consumption by 600 0.4-0.5mmbpd (13-15% of 2018’s level) from 2020-2025. 400

200 U740

- 2018 2019 2020 2021 2022 2023 2024 2025 Source: Bloomberg Finance L.P., WoodMac, DBS Bank

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Pent-up air travel demand to unfold in 2H2020; longer-term jet fuel demand outlook remains positive

Historical consumption trends of jet fuel and projected RPK growth of flights to/from China

40% • COVID-19 will undoubtedly have a Jet fuel consumption (y-o-y change) profoundly negative impact on near-term Passenger aviation turnover (y-o-y change) 30% consumption (elaborated above), but the medium- to long-term prospects continue U740 to be bright, underpinned by increased 20% passenger volumes on the back of China’s burgeoning middle class, and an 10% improvement in domestic airport infrastructure. 0% • According to Boeing, China is projected to

-10% be the world’s largest aviation market by

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-08 2028, with Intra-China routes overtaking Intra-North America in terms of passenger Revenue passenger kms volume. Demand for inter-regional travel 4,500 U740 from China is also anticipated to skyrocket. Intra-China 4,000 U740 China-Southeast Asia U740 3,500 • However, build-out of high speed rail China-Europe could impede growth in domestic aviation 3,000 China-North America traffic. China plans to build about 25,000 U740 2,500 China-Northeast Asia miles of high-speed rail connecting 80% 2,000 of the country’s major cities. Domestic flights account for around 50% of jet fuel 1,500 consumption, hence this will dampen jet 1,000 fuel demand in the medium term. U740 500 - 2008 2018 2028 2038

Source: Bloomberg Finance L.P., Boeing, DBS Bank

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U740 Regional Energy China Refining and Petrochemical Sector

Massive petrochemical capacity additions to buoy demand for LPG and naphtha

Historical consumption trends of ethyleneU740 and naphtha in China; projected new petrochemical capacity in China

U740 Naphtha consumption (LHS) mmbpd Mn tons • New naphtha-based ethylene plants Ethylene production (RHS) 1.0 6.0 and propane dehydrogenation (PDH) 0.9 plants in China will fuel demand for 0.8 5.0 U740 naphtha and LPG. The next few years 0.7 4.0 0.6 U740 will see a wave of new capacity 0.5 3.0 coming on stream, following 0.4 substantial investments in both the 2.0 0.3 U740 olefins and aromatics chains – China 0.2 1.0 will add 5.8mtpa of ethylene and 0.1 5.75mtpa propylene capacity in 2020, 0.0 0.0 accounting for 47% and 75% of

global additions respectively, while PX

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-08 capacity will increase by 5mtpa (+29% y-o-y), after growing by 36% y-o-y in 2019, according to New capacity ('000 tons per annum) Woodmac. 6,000 5,000 • However, LPG demand will remain under pressure as the residential 4,000 sector which accounts for nearly 60% 3,000 of total demand will have to struggle to fend off deeper natural gas 2,000 penetration and cheaper domestic 1,000 gas prices. - 2019 2020 2021 PDH plants Ethane/LPG based steam crackers Naphtha-based steam crackers

Source: Bloomberg Finance L.P., ICIS, company announcements, DBS Bank

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U740

China Petrochemical Sector Outlook

U740

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U740

The long-term outlook on petrochemical demand is favourable in China…

Per capita consumption of major plastics in China against other countries;U740 global textile demand projection

2015 major plastics demand (kg/capita) • Long runway for China’s plastics demand. As 120 at 2015, China’s per capita consumption of 100 plastic was only 43kg/capita, which is considerably below the 80-100kg/capita in 80 U740 developed economies, signifying that there is 60 great potential for stronger penetration. 40 Developed countries consume up to 20 times 20 as much plastics and up to 10 times as much fertilisers as developing countries in Asia, 0 which means these countries present Korea Canada United Western Japan China Mexico Brazil India Africa States Europe promising export opportunities.

Global textile demand (million tons) • Upbeat global textile demand outlook to drive 5-year 140.0 sustained growth for the aromatics chain. CAGR China is the world’s largest consumer of 120.0 U740 1-2% polyester fibres (raw materials include PX, MEG and PTA), accounting for around 66% of 100.0 U740 2-3% global consumption. Looking ahead, the 80.0 aromatics chain will benefit from the fast 4-5% growth of synthetic fibres in the textile sector, 60.0 which is projected to grow at a 4-5% CAGR 40.0 from 2018-2023. Chinese petrochemical companies also stand to gain from China’s 20.0 relatively low final consumer demand/capita, 5-6% which is at around 15kg/capita, compared to 0.0 2000 2005 2010 2015 2018 2023 39kg and 25kg per capita in the US and Europe respectively. Wood-based fibers Synthetic fibers Cotton Other natural fibers & wool

Source: IEA, The Fiber Year Consulting, DBS Bank

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The long-term outlook on petrochemical demand is favourable in China…

U740 Projected growth in China’s e-commerce and food delivery market

U740 China's total e-commerce sales (RMB Tn) Retail e-commerce sales (LHS) 4,500 y-o-y change (RHS) 70% • Retail e-commerce sales in 4,000 % of total retail sales (RHS) China is anticipated to soar 60% at a 22% CAGR between 3,500 50% 2018 and 2023; we project 3,000 the food delivery market to U740 2,500 40% grow at a 16% CAGR from 2,000 30% 2019-2022. These two 1,500 factors will greatly boost 20% the demand for polymers 1,000 10% that are used in the 500 packaging of apparels, - 0% food and other products. 2018 2019 2020 2021 2022 2023

China's food delivery transaction volume (RMB Bn) 1,050 25% • Specialty chemicals should Transaction volume (LHS) also see solid demand 900 growth, at around 6.0% U740 20% Penetration rate (RHS) CAGR from 2018-2023, 750 down slightly from an 8- 600 U740 15% 10% annual growth rate in the past few years, U740 450 10% according to IHS Markit. 300 5% 150

- 0% 2018A 2019E 2020FU740 2021F 2022F Source: e-Marketer, Trustdata, DBS Bank

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…but it will not be adequate to absorb the tidal wave of new supply in the short-medium term…

China petrochemical capacity growth between 2018 and 2025

• Majority of new refinery capacity coming on stream Benzene Butadiene Ethylene mtpa is configured to maximise the production of petrochemical products, rather than conventional 350 Methanol Paraxylene Propylene transportation fuels. CAGR

(2018- 2025) • This is compounded by the upgrading of refineries, 300 such as the construction of steam crackers and 7.3% catalytic reformers at existing sites.

250 U740 • Supply glut will overwhelm polyolefin and aromatics 17.7% demand growth in the short term. The growth in 200 domestic polyethylene and polypropylene capacity is expected to accelerate to 24.2% and 9.4% in 2020, 2.7% from 6.4% and 5.0% in 2019 respectively, far

150 U740 exceeding the 3-5% projected reduction in demand, 11.1% and shrink China’s import dependency. Likewise, polyester demand is likely to register minimal growth 100 in 2020, owing to the weaker macroeconomic 7.6% outlook and impact from COVID-19. U740 50 • In the medium term, ethylene and paraxylene (the 7.7% primary olefin and aromatic basic building blocks), are expected to surge at a >10% CAGR from 2018- - 2025, and outstrip downstream capacity additions, 2018 2019 2020 2025 suggesting that oversupply will continue to bog down the sector.

Source: Bloomberg Finance L.P., DBS Bank

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Announced start-ups of ethylene capacity Announced start-ups of paraxylene capacity Company Nameplate Announced Technology Company Nameplate capacity Announced start-up capacity (ktpa) start-up timing (ktpa) timing Yulin Energy & Chemical 400 Q1 2019 CTO Fujian Fuhaichuang 800 1Q 2019 SP chemicals 650 Q3 2019 Steam cracker Sinochem Hongrun 800 2Q 2019 Qinghai Damei Coal Industry 300 2H 2019 CTO Sinopec Hainan 1,000 Q3 2019 Ningxia Baofeng 300 2H 2019 MTO U740 Hengli Petrochemical 4500 Q3 2019 Jiutai Energy 250 Q1 2019 MTO Hengyi Petrochemical 1500 4Q 2019 Nanjing Chengzhi Clean Energy 240 3Q 2019 MTO Total capacity addition in 2019 8,600ktpa/+62% y-o-y Jilin Connell Chemical Industry 135 3Q 2019 MTO Zhejiang Petrochemical 4000 1Q 2020 Baofeng Energy 300 Q3 2019 MTO Sinochem Quanzhou 800 4Q 2020 Zhong'an Lianhe Coal Chemical 350 2H 2019 CTO Zhongjin Petrochemical 2000 2020 Total capacity addition in 2019 2,925ktpa/+12% y-o-y Total capacity addition in 2020 4,800ktpa/+21% y-o-y Shanxi Coking Coal 300 2020 CTO Sinopec Jiujiang 890 2021 Hengli Petrochemical 1,500 2020 Steam cracker Total capacity addition in 2021 890ktpa/+3% y-o-y Wanhua Chemical 1,000 2020 Steam cracker

Zhejiang Petrochemical (Phase l) 1,400 2020 Steam cracker Source: ICIS, company announcements, DBS Bank Ltd Sinopec Zhongke Refinery & Petrochemical 800 2020 Steam cracker Tianjin Bohai Chemical Group 300 2020 MTO Sinopec Wuhan 300 2020 Steam cracker China's PE and PP capacity forecast (mtpa) 40.0 30% Ningbo Huatai Shengfu Polymer Material 600 2020 Steam cracker 35.0 Sinopec Sabic Tianjin 300 3Q 2020 Steam cracker 25% U740 30.0 20% Sinochem Quanzhou Petrochemical 1,000 4Q 2020 Steam cracker 25.0 U740 Liaoning Bora Petrochemical 1,000 4Q 2020 Steam cracker 20.0 15% Total capacity addition in 2020 U740 8,500ktpa/+31% y-o-y 15.0 10% Zhejiang Satellite Petrochemical (Phase l) 1,250 2021 Steam cracker 10.0 U740 5% Fujian Gulei Petrochemical 800 1H 2021 Steam cracker 5.0 Sinopec Guizhou Zhijin 300 2021 CTO 0.0 0% PetroChina Lanzhou Company 800 2021 Steam cracker 2018 2019 2020 2021 PE capacity (LHS) PP capacity (LHS) Total capacity addition in 2021 3,150ktpa/+9% y-o-y PE y-o-y growth (RHS) PP y-o-y growth (RHS) Source: ICIS, company announcements, DBS Bank Ltd

Source: Woodmac, DBS Bank

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…leading to further spread compression across both the olefin and aromatics chains

Product spreads Reference 2015 2016 2017 2018 2019 2019/2018 2020E (US$/ton) y-o-y change Basic/intermediate olefins Ethylene (C2) – Japan Spot Ethylene & Japan Spot Naphtha 571 655 642 579 311 (46.3%) naphtha MEG (C2) – China Spot MEG & Japan Spot Naphtha 440 422 549 467 155 (66.8%) naphtha U740 MEG (C2) – China Spot MEG & Japan Spot Ethylene 307 190 365 367 181 (50.6%) ethylene Propylene (C3) – China Spot Propylene & Japan Spot Naphtha 336 356 422 458 377 (17.6%) naphtha Butadiene (C4) – South Korea Spot Butadiene & Japan Spot 392 787 963 791 516 (34.7%) naphtha Naphtha Basic/intermediate aromatics PX – naphtha China Spot Paraxylene & Japan Spot Naphtha 475 537 529 660 549 (16.8%) 470 PX – xylene China Spot Paraxylene & China Spot Xylene 79 167 207 322 247 (23.5%) Benzene - China Spot Benzene & Japan Spot Naphtha 319 401 489 340 210 (38.4%) naphtha U740 PTA – naphtha China Spot PTA & Japan Spot Naphtha 243 292 262 353 292 (17.3%) 250 PTA – PX China Spot PTA & China Spot PX 96 75 84 127 110 (13.1%) Styrene - naphtha China Spot Styrene & Japan Spot Naphtha 839 854 976 978 657 (32.8%) Styrene – benzene China Spot Styrene, China Spot Benzene and 380 317 362 488 363 (25.6%) – ethylene Japan Spot Ethylene U740 Polyolefins PE – naphtha Average China Spot LLDPE, HDPE and Korea 960 950 889 800 611 (23.6%) 520 LDPE & Japan Spot Naphtha U740 PP – naphtha China Spot PP & Japan Spot Naphtha 824 778 816 828 755 (8.8%) 650 PE – ethylene Average China Spot LLDPE, HDPE and Korea 346 262 210 180 266 47.9% LDPE & Japan Spot Ethylene PP – propylene China Spot PP & China Spot Propylene 471 407 376 348 360 3.3% Other polymers Polystyrene – Average Spot Far East Asia High Impact and 759 812 883 873 696 (20.2%) U740 U740 naphtha General Purpose PS less Japan Spot Naphtha PET – naphtha China Spot PET & Japan Spot Naphtha 654 658 671 820 563 (31.3%) Polyester – China Spot Polyester Filament & Japan Spot 208 266 285 286 258 (9.8%) 225 naphtha Naphtha PVC – naphtha China Spot PVC & Japan Spot Naphtha 349 488 457 399 443 11.0% Polystyrene – Average Spot Far East Asia High Impact and 167 159 149 172 216 25.5% styrene General Purpose PS less Japan Spot Styrene PET – MEG – PTA China Spot PET, China Spot MEG & China Spot 184 174 147 223 147 (34.4%) PTA PVC – ethylene China Spot PVC less Japan Spot Ethylene 302 356 380 410 547 33.4% Source: Bloomberg Finance L.P., DBS Bank

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Strong near-term headwinds to curb petrochemical demand and impose more stress on product spreads

• The ban on single-use plastics in China will create a considerable drag on plastics demand. The NDRC announced in January 2020, a five-year plan to ban single-use plastics in China. The plan will be implemented in three phases, in 2020, 2022 and U7402025 – by end-2020, plastic bags and tableware will be banned in all major cities, and then banned in all other areas in 2022, while the ban will only be effective for markets selling fresh produce in 2025. Other items, such as plastic utensils and plastic courier packages are also covered in the ban.

• ICIS believes that demand for polyethylene (PE), the primary feedstock for plastic packaging bags, could fall by as much as 3.1m tonnes (c.9.0% of China’s demand in 2019). Meanwhile, the ban on packaging boxes used for takeaway/food deliveries, could remove as much as 1.2m tonnes (c. 4.0% of China’s demand in 2019) of polypropylene (PP) consumption.

• An additional 1.5-2.0m (4-6% of China’s demand in 2019) tonnes of PE and 1-1.5m tonnes PP demand (3-5% of China’s demand in 2019) could be affected by COVIDU740-19. Increased demand for plastics used in the medical sector will be grossly insufficient to compensate for lost demand for plastics in other sectors as medical grade plastics only (like high density PE blow moulding used in medicine bottles and medical products, and PP used in masks, injection syringes and protective gear) account only for a small portion of consumption.

• The widespread COVID-19 induced supply chain disruption will form a significant drag on polyesterU740 demand. This is further exacerbated by the fact that Hubei, and much of central China, is a key production base for the textile sector, meaning that China’s primary source for the intake of fibre and fabric is severely constrained. Weak polyester demandU740 is expected to trickle upstream to its raw materials, MEG and PTA, and intensify inventory build-ups along the polyester chain.

• Expect more downside in petrochemical product prices from hereon. Along the olefins chain, prices for polyethylene and polypropylene have sank by 8% and 12% YTD respectively, while along the aromatics chain, MEG and PTA prices are down by 12% and 14% YTD respectively. PetrochemicalU740 product prices should U740continue trending downwards over the next two quarters, as a structurally feeble market will struggle to digest new capacities coming on stream (barring a larger-than-expected operating cut at petrochemical units), but product spreads will receive support from the collapse in naphtha prices, which has dived 22% YTD.

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U740 U740 U740

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China Refining and Petrochemical Sector Valuation

U740 U740

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U740

SectorU740 valuation is cheap, but not quite time to bottom fish.

• Sector valuation is in the doldrums, but it is not time to accumulate. On a price-to-book basis, Sinopec, PetroChina and Sinopec Shanghai PC (SPC) U740 are all trading at -2STD from their respective five-year averages, while the leading independents, Hengyi, Hengli, Rongsheng, Tongkun are trading at -1STD from their respective five-year averages. However, current trough valuations in the sector do not justify accumulation as we believe that current consensus earnings estimates do not reflect the full extent of COVID-19’s impact, and anticipate earnings to be revised downwards aggressively. U740

U740 • Current dividend yields are mostly unsustainable. Sinopec, PetroChinaU740 and SPC currently have dividend yields between 5-8%, but again, we expect their dividend yields to compress in tandem with earnings. The two integrated NOCs, Sinopec and PetroChina will have to increase their gearing

(though not a concern given their modest financial leverage)U740 and reduce dividend distributions to shareholders concurrently to finance their ambitious capital spending plans.

• Expect volatility to persist in the sector; bias is still skewed to the downside. In the short-run, we believe that we will continue seeing wild price swings in the sector, owing to uncertainty around the longevity and magnitude of the COVID-19 episode. We are staying on the sidelines for now, as we await for more clarity on COVID-19’s impact on demand, and the Chinese government’s response to counteract the economic damage inflicted by the virus.

• Thai oil is our top pick in the sector for now. We believe investors can turn their attention to Thai Oil once the dust settles, as it is best positioned to ride the IMO2020 wave, due to its i) lower refinery operating cash cost of US$1.2-1.3/bbl (peer average – US$1.8-2.1/bbl), ii) lower medium-light crude intake proportion of 35% vs local peers’ 54% and iii) solid operating track record.

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U740

Regional Refining and Petrochemical Sector Valuation

China median P/B

3.6x

3.3x

3.0x

2.7x U740

2.4x

2.1x

1.8x

1.5x

U740 U740 1.2x U740 0.9x

0.6x U740 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

China median PB Average +1 SD +2 SD -1 SD -2 SD

Source: Bloomberg Finance L.P., DBS Bank

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U740

Regional Refining and Petrochemical Sector Valuation

FY20F Return on Equity 30% Hengli

25%

U740 BPCL 20% Hengyi HPCL Rongsheng Tongkun

Cosmo 15% Formosa Petchem Indian Oil Kumho Reliance Idemitsu Indorama 10% U740 Nan Ya Formosa Plastics JXTG U740 S-OIL SK Chem U740 SPRC Korea Petchem LG Chem Thai Oil Formosa Chemicals 5% Lotte Chem IRPC SPC PetroChinaU740 PTTGC Bangchak Hanwha SK Innovation Sinopec FY20F P/BV 0% 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x

Source: Bloomberg Finance L.P., DBS Bank

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Regional Refining and Petrochemical Sector Valuation

U740 Div U740 P/E EV/EBITDA P/B Return on Equity Yield Net D/E Market Cap Company Bloomberg Ticker (US$m) CY20F CY21F CY20F CY21F CY20F CY21F CY20F CY21F CY20F Current China Sinopec Corp 386 HK EQUITY 77,351 8.5x 7.4x 3.3x 2.9x 0.6x 0.6x 7% 8% 8% Cash PetroChina 857 HK EQUITY 127,409 10.4x 8.9x 4.2x 4.1x 0.4x 0.4x 4% 5% 5% 0.2x Hengyi Petrochemical 000703 CH EQUITY 5,693 8.4x 7.4x 6.6x 5.5x 1.5x 1.3x 18% 18% 4% 1.0x Hengli Petrochemical 600346 CH EQUITY 15,426 8.2x 7.2x 6.1x 5.1x 2.2x 1.7x 28% 25% 4% 2.4x Tongkun Group 601233 CH EQUITY 3,639 6.9x 5.8x 4.4x 3.7x 1.2x 1.0x 17% 17% 2% 0.5x Rongsheng Petrochemical 002493 CH EQUITY 9,679 13.3x 9.8x 9.8x 6.7x 2.3x 1.9x 17% 20% 2% 1.5x Sinopec Shanghai Petrochemical 338 HK EQUITY 5,353 9.2x 9.2x 7.1x 7.9x 0.6x 0.6x 7% 7% 7% Cash China median: 8.5x 7.4x 6.1x 5.1x 1.2x 1.0x 17% 17% 4% 1.0x India Reliance RIL IN EQUITY 116,130 13.4x 11.4x 9.1x 7.6x 1.7x 1.5x 13% 14% 1% 0.5x Indian Oil IOCL IN EQUITY 13,726 6.3x 5.7x 5.8x 5.5x 0.8x 0.7x 13% 14% 7% 0.7x Bharat Petroleum BPCL IN EQUITY 12,752 10.0x 9.4x 8.8x 8.4x 1.8x 1.7x 19% 18% 4% 0.9x Hidustan Petroleum HPCL IN EQUITY 4,151 4.7x 4.2x 6.2x 5.3x 0.8x 0.8x 18% 18% 7% 0.7x India median: 8.1x U740 7.5x 7.5x 6.5x 1.3x 1.1x 15% 16% 6% 0.7x Korea Lotte Chemical 011170 KS EQUITY 5,294 8.5x 7.0x 4.7x 4.1x 0.5x 0.4x 6% 7% 4% 0.0x S-Oil Corp 010950 KS EQUITY 6,289 11.4x 8.9x 8.0x 6.8x 1.1x 1.0x 10% 11% 3% 0.9x SK Innovation 096770 KS EQUITY 8,815 11.8x 9.0x 7.8x 6.6x 0.6x 0.6x 5% 6% 4% 0.2x SK Chemicals 011790 KS EQUITY 1,628 11.5x 11.7x 8.7x 7.3x 1.1x 1.0x 10% 9% 2% 0.8x LG Chem 051910 KS EQUITY 22,040 31.4x 20.2x 9.8x 8.0x 1.6x 1.5x 5% 7% 1% 0.2x Hanwha Solutions 009830 KS EQUITY 2,407 8.1x 6.8x 8.3x 7.6x 0.5x 0.4x 6% 7% 2% 0.7x Korea Petrochem 006650 KS EQUITY 463 5.4x 4.5x 2.1x 1.7x 0.3x 0.3x 6% 7% 4% 0.0x Kumho Petrochem 011780 KS EQUITY 1,545 6.6x 5.7x 4.9x 4.1x 0.7x 0.6x 10% 11% 2% 0.5x Korea median: 9.9x 8.0x 7.9x 6.7x 0.6x 0.6x 6% 7% 3% 0.3x

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Regional Refining and Petrochemical Sector Valuation U740 U740 U740

U740 Return on Div P/E EV/EBITDA P/B Equity Yield Net D/E Market Cap CY20 CY21 CY20 Company Bloomberg Ticker (US$m) CY20F CY21F F F F CY21F CY20F CY21F CY20F Current Japan Idemitsu Kosan 5019 JP EQUITY 7,451 6.2x 5.8x 6.1x 6.0x 0.6x 0.5x 10% 11% 6% 1.0x JXTG Holdings 5020 JP EQUITY 13,009 6.5x 6.1x 6.1x 6.2x 0.5x 0.5x 8% 8% 5% 0.6x Cosmo Energy 5021 JP EQUITY 1,437 3.6x 3.4x 6.2x 6.0x 0.5x 0.4x 14% 13% 5% 1.9x Japan median: 6.2x 5.8x 6.1x 6.0x 0.5x 0.5x 10% 11% 5% 1.0x Taiwan Formosa Chemicals & Fibre 1326 TT EQUITY 15,746 16.8x 18.0x 13.7x 14.0x 1.3x 1.3x 7% 7% 4% Cash Nan Ya Plastics 1303 TT EQUITY 17,729 18.0x 16.1x 17.6x 16.7x 1.4x 1.4x 8% 9% 4% 0.0x Formosa Petrochemical 6505 TT EQUITY 26,856 18.2x 17.5x 11.2x 10.5x 2.4x 2.3x 14% 13% 4% Cash U740 Formosa Plastics 1301 TT EQUITY 18,981 14.1x 13.7x 18.2x 17.3x 1.6x 1.5x 12% 11% 5% Cash Taiwan median: 17.4x 16.8x 15.7x 15.3x 1.5x 1.4x 10% 10% 4% 0.0x Thailand Indorama IVL TB EQUITY 4,645 10.0x 8.1x 7.6x 7.2x 1.0x 0.9x 11% 11% 4% 0.9x Bangchak Corp BCP TB EQUITY 1,037 9.4x 8.3x 7.4x 7.0x 0.6x 0.6x 7% 7% 6% 0.7x U740 IRPC IRPC TB EQUITY 1,430 14.2x 9.9x 6.8x 5.7x 0.5x 0.5x 4% 5% 4% 0.7x PTT Global Chem PTTGC TB EQUITY 5,889 10.8x 8.7x 6.7x 5.7x 0.6x 0.6x 6% 7% 5% 0.3x Star Petroleum Refining SPRC TB EQUITY 1,090 12.0x 8.9x 4.9x 3.9x 1.0x 0.9x 9% 10% 5% 0.2x Thai Oil TOP TB EQUITY 2,807 9.6x 8.2x 8.1x 8.5x 0.7x 0.7x 8% 8% 5% 0.3x U740 Thailand median: 10.4x 8.5x 7.1x 6.4x 0.7x 0.6x 7% 8% 5% 0.5x

Aggregated median: 9.8x 8.5x 6.9x 6.4x 0.8x 0.7x 10% 10% 4% 0.5x

Source: Bloomberg Finance L.P., DBS Bank U740

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DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends

Completed Date: 3 Mar 2020 07:36:39 (SGT) Dissemination Date: 3 Mar 2020 18:03:54 (SGT)

Sources for all charts and tables are DBS Bank unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd.. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible 2 for the content of this research report or his associate does not have financial interests in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective U740 investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. U740

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have proprietary positions in China Petroleum & Chem (Sinopec), PetroChina, Indorama Ventures, Bangchak Petroleum Pcl, IRPC PCL, PTT Global Chemical, Thai Oil PCL, recommended in this report as of 31 Jan 2020.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services:

3. DBSVUSA does not have its own investment banking or research department,U740 nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first U740 page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

RESTRICTIONS ON DISTRIBUTION U740 General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946.

DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws.

Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Bank (Hong Kong) Limited, a registered institution registered with the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). DBS Bank Ltd., Hong Kong Branch is a limited liability company incorporated in Singapore.

This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities. DBS Bank Ltd., Hong Kong Branch is a limited liability company incorporated in Singapore. U740

U740 For any query regarding the materials herein, please contact Carol Wu (Reg No. AH8283) at [email protected]

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Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603- 2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject

companies. U740

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the U740 report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand byU740 DBS Vickers Securities (Thailand) Co Ltd.

United Kingdom This report is produced by DBS Vickers (Hong Kong) Limited which is regulated by the Hong Kong Securities and Futures Commission.

This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608 - 610, 6th Floor, Gate Precinct Building 5, PO Box 506538, DIFC, Dubai, International United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as Financial Centre defined in the DFSA rulebook) and no other person may act upon it.

United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by Emirates the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial

situation, or needs of individual clients. You should contact your relationship managerU740 or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This U740 report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

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United States This report was prepared by DBS Vickers (Hong Kong) Limited (''DBSVHK''). DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a- 6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as jurisdictions defined in the laws and regulations of such jurisdictions.

DBS Regional Research Offices

HONG KONG MALAYSIA SINGAPORE U740 DBS (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 13th Floor One Island East, 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 18 Westlands Road, Capital Square, Marina Bay Financial Centre Tower 3 Quarry Bay, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 U740 Fax: 852 2521 1812 Tel.: 603 2604U740 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E

INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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