The net profit of Shanghai Petrochem jumped 1.8x QoQ to RMB173m in 1Q13 under Chinese Accounting Standards (CAS). Gross margin also improved from 2.9% in 4Q12 to 3.9% in 1Q13. We expect the company’s profitability to further recover in the future. Since our downgrade in late March, the price of the company’s H shares has fallen 20%. We upgrade our call from HOLD to BUY on its H shares as they look attractive again at the current level.
Key Points of Results.
Shanghai Petrochem’s net profit in 1Q13 reached RMB173m under CAS, in line with its previous guidance of RMB170m and a big turnaround from a net loss of RMB190m in 1Q13..
Compared with 4Q12, the company’s net profit jumped 1.8x QoQ. Gross margin improved from 2.9% to 3.9% and turnover grew 21% QoQ.Key Factors for Rating.
The company’s refining business recorded a profit in 1Q13. The reform of the pricing mechanism for key refined products should further protect the margin of its refining business in future. The company targets to raise its crude oil processing volume by 39% YoY in 2013 following the full completion of Phase 6 Project last year. We expect the refining business, which should command better margin than the petrochemical business, to account for 52% of its turnover, up from 44% in 2012..
H shares look attractive again at 0.96x 2013E P/E. A shares still trade at excessive valuations but we reiterate HOLD call based on market practice..
Key Risks to Rating.
Sharp fall in petrochemical prices..
Poor implementation of the new refined product pricing mechanism..
Valuation.
We leave our target price for H shares at HK$3.67, still equal to 1.25x 2013E P/B. .
We also maintain our target price for A shares at RMB5.88, or at a 100% premium to that of H shares.