We significantly raised our 2013/14/15 earnings of Sinopec Shanghai Petrochemcial today. On top of our 2013 earning upward revision by better refining margin and exchange gain, our 2014/15 earning lift was mainly attributed to the oil product upgrade to National (IV) standard
Despite the adoption of IV standard is not a new news, the consensus earning seems not factor in this implication yet, in our view. Our 2014/15 earning are 30%/36% higher than consensus.
Despite SPC is located in Shanghai where National V standard is in place and the impact of ASP hike coming from standard upgrade is not big, it actually supplies meaningful refinery/diesel products to Jiangshu/Zhejiang where standard implementation will be in place in 2014.
We raise our TP to 2.8HKD based on 1.3PB (1SD above historical average 1.1PB)
Personally, I think a swing factor depends on the management’s incentives as well. There is a long market talk about the SPC’s management incentive plan since its non-tradable stock reform this year and the plan has not been realized yet. Given the recent CPC meeting resolution (SOE holding reform), such expectation will still be in place in 2014.