China Petroleum & Chemical Corporation : Sinopec (386.HK)(386)
- 1Q11 net profit attributable to equity shareholders was up by 24.5% to RMB20.5 billion. 2Q11 is likely to be marginally profitable due to the high oil prices in April and May, and the RMB770-800/tonne subsidy for each extra gasoline produced.
- Refinery losses are expected to peak in 2Q11, and we lower our estimated eps by RMB9.5 cents to RMB84.2 cents in FY11.
- Starting from July, lowered import duties for fuel would improve refinery margin slightly; thus, boosting 2H11 profitability. NDRC confirms the new oil pricing mechanism may give Sinopec, PetroChina and CNOOC a higher voice.
- We give Sinopec a `HOLD` rating with a slightly lowered target price of HK$8.16
1Q11 Operating results
1Q11 net profit attributable to equity shareholders was RMB20.5 billion, up by 24.5% yoy, according to both ASBE and IFRS. Refinery throughput increased 7.4% yoy to 54.3 million tones. We expect the throughput to continue going up in 2Q11 despite the high oil prices; thus, squeezing the refinery margin further. Since March, Sinopec had to provide RMB770-800 subsidies for each ton of extra gasoline produced in order to keep the supply. We believe the refinery loss will be peaked in 2Q11, and we lower our estimated eps by RMB9.5 cents to RMB84.2 cents in FY11.
1Q11 Crude oil production was 78mmbbL, down by 5.8% yoy and 2.4% qoq respectively. Total production of natural gas jumped by 29.8% yoy, yet, it was still slightly down by 0.1% qoq, reaching 128.1bcf. Average realized oil and natural gas prices were RMB4007/tonne and RMB1269/kcf, respectively, representing their historical high.
At the beginning of 2011, Sinopec set its capex target to be RMB124.1 billion (with RMB121.3 billion in the major segments), up by 11% from FY10. Sinopec spent RMB13.97 in the first quarter, representing only 11.3% of its full year target.
2Q11 outlook: tough road gets tougher for refinery
According to China Customs statistics, China imported a total of 85 million tones of crude oil, with an average import price of US$101/bbl (US$717.1/ton). The importing volume increased further in May, mounting to 5.07mmbbl/day, or up by 5.3% mom. We believe the current refining margin is lower than –US$12/bbl. For Sinopec to breakeven, we estimate the fuel prices on average need to increase by approximately RMB1647/ton. Amid the refinery maintenance peak season, one of Sinopec's 1.4 million tons yearly production coking unit will be shut down for 2 weeks in July, while refinery throughput will drop by approximately 7% mom in July to 205kbpd. Sinopec, along with PetroChina, will likely have its refinery maintenance peak in early 3Q11.
Import tariffs on refined oil products were cut down since July 1st. Duties for diesel and kerosene will be cut to zero, and fuel duty will be down to 1 percent. According to people with knowledge, the actual reduction in fuel duty is RMB107/ton. The lowered duty will help PetroChina and all other refiners to lower the cost of imports. We believe that approximately 20 to 30% of the losses from the refining sector will be compensated. Even with the lowered duties from import fuels, GRM is expected to remain negative in 2H11.
NDRC said to consider giving SOEs a louder voice in product oil pricing mechanism
NDRC revealed in mid June that the reform on the product oil pricing mechanism will likely give the three major SOEs, namely Sinopec, PetroChina and CNOOC, a louder voice. It is quoted that such reform will likely happen by the end of 2011, while no detailed timetable was given. We believe that margins will be improved if Sinopec will actually be given a certain degree of pricing power; however, we see such freedom as a `proposal` stage in 2011. There is a good distance between the proposal and the implementation. Back in 2010, NDRC said that the pricing mechanism needed to be more market-orientated, which means shortening the interval of adjustment from the current 22 days to 10 days. It just hasn`t happened yet. Given the current inflation pressure, we do not count the improvement in pricing mechanism into our valuation model.
2010-2015 TARGETS:
In the following five years, crude oil production is expected to remain flat as more attention is shifted to the natural gas division. Sinopec is aiming to increase its natural gas production from 12.5bcm in 2010 to 20-24bcm by 2015, representing a CAGR of 13.9%, which is the fastest segment growth within the Company. We believe that clean energies will potentially enjoy more favorable government policies in the 12th five-year plan. Ethylene production is another spot light catcher, as the capacity is expected to expand to a high-end of 14 million tones per year by 2015, up by 53.8% from 2010.
Valuation
We give Sinopec a `HOLD` rating with a 12-months target price of HK$8.16. Our target price is based on the 2011e p/e of 7.4x, approximately the mean value of its historical forward p/e. E&P segment is based on the assumption that average oil price in 2011 will be US$95/bbl. We downgrade our earnings attributable to shareholders in the refining division to negative, whereas refinery contributed RMB0.12/share in FY10.
Risks
Refining is under great pressure from the high crude oil prices. If the government does not raise the refined products` prices, losses could be widened in the refining segment. A lack of cost control would hurt margins. A sudden drop in oil prices would hurt the E&P segment, and the higher profit from the refining division may not be able to compensate the loss. Adverse government policies, ie windfall taxes and price caps for refined products, would further deteriorate Sinopec's earning ability. The potential slowdown of China's growth rate and oil/oil proucts demand could also post downward risk to the Company.
PEER COMPARISON
FINANCIAL STATEMENT
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