Fri, Sep 02, 2005 - Page 11 News List

FPC a top stock pick, analyst says

STOCK MARKET Morgan Stanley recommended Formosa Petrochemical, along with three telecoms companies, citing their sustained profitability

By Amber Chung  /  STAFF REPORTER

Formosa Petrochemical Corp (台塑石化), the nation's second largest oil refiner, along with a group of telecommunication players, were listed as Morgan Stanley's key stock recommendations in Taiwan, on their continued profitability amid skyrocketing oil prices.

"Although local gasoline prices have not risen in line with global oil prices, due to the government's "soft" restriction, the company's profitability remains reasonably strong," Morgan Stanley's Taiwan strategist Dickson Ho (何資文) said in a report released on Wednesday.

The company exports 50 percent of its refinery products, which can still generate decent margins, Ho said, adding that Formosa Petrochemical's refining capacity will expand 11 percent year-on-year in the first quarter of next year, and 8 percent in 2007.

"Given its quality and expanding refining capacity, and the current tight refining supply in the region, we maintain FPC as one of our key recommendations in Taiwan," the analyst said.

Morgan Stanley also recommended telecom operators Chunghwa Telecom Co (中華電信), Taiwan Mobile Corp (台灣大哥大) and Far EastTone Telecommunications Co (遠傳電信) as attractive investments, as high oil prices are unlikely to dilute profitability much in the coming year, and high yields should provide downside protection, the report said.

Economic outlook

However, the US securities house appeared to be less optimistic about the nation's economic outlook as oil prices continue to hit record-high levels. Taiwan is an energy importing country.

"Rising oil prices could have a negative impact on Taiwan's fundamentals in two ways," Ho said.

The prices could dampen the growth of private consumption if the government ceases to subsidize domestic energy prices, and they could hurt export-oriented sectors if high oil prices create a slowdown in global demand, he said.

Taiwan's energy consumption has increased by a compound aggregate growth rate of 5.1 percent, slightly faster than GDP growth of 4.3 percent in the last 10 years, according to Morgan Stanley's figures.

The jump in international energy prices caused the cost of aggregate imports of petroleum, coal and natural gas to rise to 7.1 percent of Taiwan's GDP in the first half of this year, compared to 3.6 percent three years ago, the securities house said.

Energy imports, meanwhile, rose to account for 12.6 percent of total imports, up from 8.9 percent, over the same time, Morgan Stanley said, adding that they expected rising oil prices to drive both percentages higher in the second half of this year.

Consumption

Oil prices could also hit private consumption. Since the cost of electricity, gas and gasoline account for 8 percent of household expenditures, a 10 percent increase in energy prices could knock 0.8 percent off household expenditures in the future, compared to 3 percent growth in private consumption in the first half, Ho said.

A slowdown in demand growth from high energy prices could have a greater effect on the industrial sector's performance than rising costs from the price increases, he said.

The analyst, therefore, suggested that switching to a more defensive investment strategy could be necessary if the government changes its energy-pricing policy, or if oil prices remain high and start to slow consumption in the developed world.

Chunghwa Telecom and Far EasTone shares closed up 1.9 percent and 0.49 percent at NT$61 and NT$41.2 while Taiwan Mobile closed down 0.98 percent at NT$30.4 on Wednesday on the Taiwan Stock Exchange. The market was closed yesterday because of a typhoon.

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