Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
China Petroleum & Chem
Bloomberg: 386 HK | Reuters: 0386.HK
BUY HK$6.92 HSI : 21,769
Price Target : 12 months HK$ 7.98
Potential Catalyst: New high earnings, M&A, attractive value
Analyst
Gideon Lo CFA +852 2863 8880
gideon_lo@hk.dbsvickers.com
Price Relative
HK$
12.80
10.80
8.80
6.80
4.80
2.80
Relative Index
2005 2006 2007 2008 2009
China Petroleum & Chem (LHS) Relative HSI INDEX (RHS)
Forecasts and Valuation
FY Dec (RMB bn) 2008A 2009F 2010F 2011F
Turnover 1,452 1,265 1,734 1,954
EBITDA 81 135 163 187
Pre-tax Profit 24 79 100 118
Net Profit 30 58 73 86
Net Pft (Pre Ex.) 30 58 73 86
EPS (RMB) 0.34 0.67 0.84 0.99
EPS (HK$) 0.39 0.76 0.96 1.13
EPS Gth (%) (47.3) 93.8 26.8 17.8
Diluted EPS (HK$) 0.39 0.76 0.96 1.13
DPS (HK$) 0.14 0.23 0.29 0.34
BV Per Share (HK$) 4.30 4.83 5.50 6.29
PE (X) 17.8 9.2 7.2 6.1
PE Pre Ex. (X) 17.8 9.2 7.2 6.1
P/Cash Flow (X) 7.0 5.0 4.2 3.7
EV/EBITDA (X) 8.3 5.5 4.6 3.9
Net Div Yield (%) 2.0 3.3 4.2 4.9
P/Book Value (X) 1.6 1.4 1.3 1.1
Net Debt/Equity (X) 0.4 0.5 0.5 0.3
ROAE (%) 9.4 16.5 18.5 19.1
Earnings Rev (%): - -
Consensus EPS (HK$): 0.75 0.83 0.89
ICB Industry: Oil & Gas
ICB Sector: Oil & Gas Producers
Principal Business: The second largest vertically integrated oil
company in China
Source of all data: Company, DBSV, Bloomberg, HKEX
207
187
167
147
127
107
87
Up-cycle profit, mid-cycle value
• While crude price remains below US$80,
Sinopec remains our top pick in the sector
• The robust recovery in refining margin is set to
push up profit to record high in 2009
• Potential injection of parent’s overseas assets
will be the future earnings driver
• Its mid-cycle valuation is attractive, while the
profit has already recovered to up-cycle level
Profit will see record high in 2009. After the strongerthan-expected
earnings recovery in 1H09, we expect
Sinopec to see its profit reaching new record high of
Rmb57.7bn, up 94% y-o-y, in 2009. Though the
abnormally high 2Q profitability may not be sustainable
in 2H, Sinopec should be the first oil company in China
to revive to up-cycle earnings, riding on the
normalization of refining and chemical profitability.
Top pick at current crude price level. With the startup
contribution from its new refining and chemical
facilities in Fujian and Tianjin, as well as the Puguang Gas
projects, Sinopec will see healthy pick-up in volume
growth in 2H09 along with the sustainable growth of
economy in China. Longer term, we expect the potential
injection of parent’s overseas E&P assets will be a driver
for future earnings growth and valuation.
Mid-cycle value, up-cycle profit. Sinopec is trading at
mid-cycle PE of 9x and P/BV of 1.4x, which is not only at
a 20-30% discount to sector peers in China but also
lower than its historical average. After the recent profittaking
activities, it should be an attractive entry level
again for investors, given its promising earnings outlook.
Indeed, Sinopec’s profit visibility is the best among the
three major oil companies if the crude price maintains at
level at or below US$80 a barrel Maintain BUY.
At A Glance
Issued Capital - H shares (m shs) 16,780
- Non H shrs (m shs) 69,922
H shs as a % of Total 19
H Mkt Cap (HK$m/US$m) 116,121 / 14,983
Major Shareholders (%)
Sinopec Group 75.84
Major H Shareholders (%)
J.P. Morgan Chase 8.84
Barclays Global Investors UK Holdings 5.98
H Shares-Free Float (%) 85.18
Avg Daily Volume (m shrs) 187.4
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Refer to important disclosures at the end of this report
ed- LM / sa- SL