We just argued yesterday that unless you acted on time, you missed out the opportunity. Shares of Chinese oil refining related companies have started to rise last week before the news of gasoline and diesel price increase broke out yesterday. As the following Google finance screenshot testifies, shares of Asia's largest refiner by capacity, Sinopec (SNP), rose 18.05% followed by the polyethylene and propylene producer Sinopec Shanghai Petrochemical (SHI). Petrochina, China's largest oil company with significant refining capacity on its own rose 7.67% during the last five days. Shares of Huaneng Power (HNP), China's largest independent power generator rose 9.8% during the same time.
As I pointed out in an email sent out to subscribers on 6/6/2008, it was the time THEN to trim YZC and get HNP, not now. The same is true for oil refiners. (details of that email is here) Excerpt from that email:
"In addition to the commentary, this is how we think investors can shield themselves from upcoming uncertain news. While Yanzhou fell power generators gained. Huaneng Power (HNP) is up 3.62% today, a reaction to the same news.
If you want to play safe China’s energy markets you may want to increase your HNP holdings and trim back on YZC. Another advice is: don’t over-react. Given the minimal impact on future cash flows of the current price reduction enforced by the local government, today’s drop may be an overreaction of the markets. If you have the nerves to sit for a few days, the market may correct itself and get back Yanzhou where it belongs. If it does, this may be the best time to swap some of your YZC holdings to HNP."
And the reason why I think it's too late to act now is this: just take a look at the chart and the red oval where it says :WATCH THIS! Pre-market trading indicates that SNP will give back all the gains from yesterday. The answer is here: the spike yesterday gave opportunity for investors to cash out while late comers will pay dearly.
We always like to look at Hong Kong trading of cross-listed blue chips to gain additional market intelligence. Sure enough, here is the news from Reuters:
HONG KONG, June 20 (Reuters) - Chinese refiners like Sinopec Corp (0386.HK: Quote, Profile, Research, Stock Buzz) surrendered gains and power producers reversed course to slide on Friday after analysts warned surprise electricity and fuel price hikes will alleviate but not resolve margin squeezes.
Shares in Asia's top oil refiners, including Sinopec Corp (SNP.N: Quote, Profile, Research, Stock Buzz) (600028.SS: Quote, Profile, Research, Stock Buzz) and PetroChina Co Ltd (0857.HK: Quote, Profile, Research, Stock Buzz) (601857.SS: Quote, Profile, Research, Stock Buzz) (PTR.N: Quote, Profile, Research, Stock Buzz) leapt nearly 6 percent before backtracking, as investors fretted that the hikes -- though larger than anticipated -- would not offset billions of dollars of refining losses.
Others decided to cash out: Sinopec had climbed 11 percent in the past week, while PetroChina had managed 4.9 percent. For article, click here
Looking at oil refiners from an analyst point of view, the 16-18 percent increase in gasoline and diesel price will not make up for the losses these companies suffer. Last time Beijing let gasoline prices to increase was back in last November, a mere 11 percent increase. This was when oil was around $80 a barrel. Since then price of oil is up 160% while compounded increase of refined prices in China are up only 29%. Do the math...
On top of this correction came an analyst upgrade from Goldman this morning. I'm sure the analyst hasn't see pre-market prices yet else would have not issued the following upgrade
RESEARCH ALERT-Goldman ups Sinopec, Shanghai Petro, Petrochina
HONG KONG, June 20 (Reuters) - Goldman Sachs upgraded Sinopec Corp (0386.HK: Quote, Profile , Research)(SNP: Quote, Profile, Research) (600028.SS: Quote, Profile , Research) to buy from neutral, Shanghai Petrochemical (0338.HK: Quote, Profile , Research)(SHI: Quote, Profile , Research) (600688.SS: Quote, Profile , Research) to buy from sell, and PetroChina (0857.HK: Quote, Profile , Research)(PTR: Quote, Profile, Research)(601857.SS: Quote, Profile , Research) to neutral from sell after announcement of a rise in domestic gasoline, diesel and jet fuel prices. "We believe the key beneficiaries of the price hike are Sinopec, Shanghai Petrochemical and to a lesser extent, PetroChina, due to their refining exposure," Goldman said in a report, adding the price hike had significantly boosted their 2008-09 earnings outlook and made valuations attractive. Reuters
And finally, here is another tool that we use on a daily basis: the Overbought/Oversold (OBOS) indicator. The following screenshot of Chinese ADR OBOS gives investors an idea what yesterday's price move means for each individual stock. (Advanced Member subscribers receive this report every morning before the market opens). The beauty of the OBOS is that it takes into account individual stock characteristics and as such helps identify the magnitude of unusual moves price moves.
For full explanation of the use of the indicator, please call us at 203-463-9416.
By looking at the indicator this morning, it is obvious that Sinopec (SNP) traded way out of her range yesterday and as such is susceptible to sizeable retreat today. Actually Sinopec is the most in danger followed by Huaneng Power. These companies are almost certain to reverse course today. Petrochina (PTR) is less vulnerable because the company started yesterday's rally from much lower when it comes to stock characteristics.
I hope you'll find these tools just as useful as we do. Wish you successful trading - Chinavestor.com
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