1Q results in line
In 1Q13, SPC’s net profit attributable to shareholders improvednotably (both YoY & QoQ) to Rmb173mn, or Rmb0.024/sh.
Profitability of refining and pe trochemical segments diverged. The petrochemical segment recorded higher losses in March, but the refining arm p osted decent earnings in 1Q as the oil refining Phase-VI project came on stream at end-2012. The new project enhanced its production capacity in crude deep processing, improved the mix of oil products and further optimized feedstock.
OCF improved and financial expenses plunged. OCF rose significantly both YoY and QoQ to Rmb3.2bn in 1Q as working capital management strengthened. With ample OCF, the company repaid part of bank borrowings and recorded a net financial income of Rmb28.6mn in 1Q. Looking forwards, financial expenses may pick up as SPC plans to issue up to Rmb4bn of commercial papers.
Trends to watch
Both petrochemical and refining segments under pressure in the near term , as intermediary and downstream players take a wait-and-see attitude amid recent oil prices slump and SPC’s expensive inventory will not be digested any time soon. The CICC commodity team forecasts Brent crude oil prices to average US$98/bbl in April~May, the lowest in 2013. They expect prices to go back up in 2H and hit US$108/bbl at year-end, driven by stronger demand and OPEC’s production cut.
Petrochemical headwinds persist. The timing of the p rice recovery is uncertain, probably in 2H, when oil prices rebound. The new oil products pricing mechanism could make inventory management more difficult, resulting in oversupply from distributors and intensifying competition, although it will secure decent refining margin and increase production and imports. How oil majors will respond to these negative impacts is another new uncertainty.
Valuation and recommendation
We maintain our 2013/14e EPS forecasts of Rmb0.20/Rmb0.24 and reiterate our HOLD rating for SPC-A and ACCUMULATE rating for SPC-H. We cut SPC-H’s TP to HK$3.2, implying 1.1x 2013e P/B. Although we remain cautious on 2Q results, we expect to see earnings improve in 2H as expensive inventory is absorbed. Risks Demand for energy & petrochemical product grows slowly; international oil price fluctuates; crude import cost increases; Rmb appreciation slows/depreciates; related-party transactions; and operational risks.