Shanghai Petrochem estimates that it will post a net profit of RMB438m for 1H13 under Chinese Accounting Standards (CAS), a significant turnaround from the RMB1.19bn loss in 1H12. The improved performance is largely in line with our expectation. We leave our forecasts and ratings unchanged at this stage.
Key Points of Preliminary Results
The sharp turnaround was mainly due to the substantially improved profitability of the refining business from the loss of over RMB1bn in 1H12 to a meaningful profit in 1H13. It was also driven by the better implementation of the old refined product pricing mechanism in 1Q13 and the reform of the pricing mechanism in 2Q13.
The company raised its crude oil processing volume by 40% YoY to 7.71m tonnes in 1H13 to take full advantage of the completion of Phase 6 Project late last year.
In 2Q13, the company should have made a net profit of RMB265m under CAS, up 53% QoQ. Operating margin also improved from 0.9% in 1Q13 to 1.4% in 2Q13.
The company’s profit in 1H13 reached 53% of our full-year forecast under CAS.
Key Risks to Rating
Sharp fall in petrochemical prices.
Poor implementation of new pricing mechanism for key refined products.
Valuation
We maintain our target price for H shares at HK$3.67, still equal to 1.25x 2013E P/B. The company’s H shares currently look cheap at 0.8x 2013E P/E.
We raise our target price for A shares from RMB5.88 to RMB8.19 to take into account the proposed 5-for-10 compensation for the holders of free-float A shares in the latest A-share reform proposal offered by Sinopec (386 HK/HK$5.25; 600028 CH/RMB4.22, BUY). Other than this cum-rights adjustment, we still effectively set our target price for its A shares at a 100% premium to that of its H shares.