1Q16 net profit up 20-22x YoY on strong margin expansions
SPC issued a positive profit alert for its 1Q16 results, and the company expectsnet profit to increase by 20x-22x YoY to RMB1.04-1.15bn from RMB52mn in1Q15, under China Accounting Standard. Basic EPS is estimated at RMB0.096-0.106/share. The 1Q16 net profit tracks 29%-32% of both ours and consensusFY16E net profit. The strong surge of 1Q16 net profit was driven by 1) marginsexpansion on products where ASPs decline less than feedstock material costdrop; 2) strong refining margin due to the introduction of refined products floorprice when crude oil price is below US$40/bbl on Jan 13, 2016; 3) strongimprovement on associate income contributed by Shanghai Secco; and 4)lower financial expenses. SPC will announce its 1Q16 results on Apr 27.
1Q16 extra-refining profit provides 15% upside to our FY16E net income
Per our analysis, the extra refining profit generated in 1Q16 would beUS$4.5/bbl or net profit of RMB550mn. However, we have not factored in theextra refining profit in our model due to the lack of clarity from NDRC onwhether refiners could keep the extra-profit. If SPC is allowed to keep the extrarefining profit prior to any new clarification announcement, the 1Q16 extrarefining profit would provide 15% upside to our FY16E net profit estimates.
Price target HK$5.0 re-rating to continue with ROIC improvement ahead
SPC-H trades at 1.6x/10x FY16E P/B / P/E (at +1SD of historical), reflecting thepositive outlook. Our DCF based target price of HK$5.0, implying 2.0x/13xFY16E P/B/P/E. We see 2.0x P/B as justifiable, reflecting its asset value at atime when profitability ahead is clearer, post its listing. The implied PB is in linewith the average PB of its peer group although SPC’s ROIC is 1.2x higher.