HK/China Strategy:Riding the swing in oil price

Fivereasons oil prices are likely to remainlow

    Lower oil prices provide support for shipping, airlines, chemicals and certainconsumer names

    Energy and oilfield services sectors will be hit as crude oil price falls

    Crude oil prices to remainlow in coming year

    Rising crude oil production from the US, Mexico and Libya, coupled with oil price cuts from Saudi Arabia and Kuwait amid a marked economic slowdown in Europe and lower demand from Asian countries will, in our view,cap any upward movement inoil prices in the coming year. As China imported283m MTof crude oil in 2013(CAGR: 6.4% for 2011-2013), we assume the overall economy willbenefit from lower oil prices; however, certain sectorswill feel the pinch.

    Who will benefit?

    Withsteady passenger volume growth in China and high leverage, China’sairlines stand out as clear beneficiaries of the recent decline in oil prices; shipping is another sector that will do well. Weforecast China Shipping Development (CSD, 1138HK, Outperform) and OOIL (316HK, Underperform) will see a 10% and 4% jump in profit for each 1% decline in the price of crude oil. The effect on China’s manufacturing sector is likely tobemixed,but chemicalsand consumer staples will benefit as they use crude oil or PET as key materials. Yizheng Chemical (1033HK, Not Rated) and Tibet5100(1115HK, Not Rated) are likely tobenefit.

    Who will suffer?

    The energy sector(i.e. oil and gas),will see ASPsdecline and marginsnarrow as oil prices continue to fall. Petrochina (857HK, Not Rated)and CNOOC(883HK, Not Rated)will be hurt though their subsidiaries involved in oil refining andchemicalsmay benefit. We are cautious onoilfield serviceproviders, especially thoselike SPTEnergy(1251HK, Not Rated),with significant contribution from overseas contracts. Lower margins and fewer contracts will lowertheir top and bottom lines.