1H16 net profit surged by 78% YoY driven by strong refining margins
SPC posted 1H16 results, with net profit of Rmb3.15bn (EPS of Rmb0.292/sh),up 109% HoH and 78% YoY. The strong set of results is in line with ourexpectations, driven by strong refining margins on windfall profits from therefined product floor price in 1Q and inventory gains in 2Q, as well as thestrong chemicals products margins, in our view. The 1H16 net profits track 75-80% of DBe/cons.’ FY16E EPS. Excluding windfall profits of USD4.5/bbl(c.Rmb550m), 1H16 results track 62-66% of DBe/cons.’ FY16E EPS. NDRC hasnot yet provided clarification as to whether refiners can permanently keepwindfall refined profits. No interim dividends have been declared.
Refining outshined chemicals in 1H16 on refined product price floor
The refining segment’s profits were recorded at RMB2.46bn (+137% YoY)due to the crude oil cost, which dropped by 34% YoY with the refinedproduct floor pricing, leading to a record-high segment GPM at 18.8%(+10%-ppt YoY). On operations, SPC yielded higher gasoline productionwith the diesel-to-gasoline ratio improving to 1.30 in 1H16 vs. 1.38 in FY15.However, the overall refined product sales volume fell by 14% YoY despitethe flat YoY refining throughput in 1H16.
The chemicals segment’s profits surged by 29% to RMB1.24bn YoY as aresult of lower feedstock costs. Chemicals’ EBIT/ton increased by 22%HoH and 19% YoY to USD107/ton. However, the strong operation wasshadowed by synthetic fibers’ performance, where the loss widened by14% YoY to RMB227m.
Looking ahead into 2H16, we expect that both refining and chemical marginswill remain supported by ongoing fuel standard upgrades in China and tightchemicals supply-demand.
Share of profits from Shanghai Secco +103% HoH/+24% YoYThe profit contribution from Shanghai Secco (SPC holds a 20% stake inassociate income) surged by 103% HoH/24% YoY to RMB336m in 1H16 due tomargin expansion as feedstock costs fell. According to Bloomberg News on 9August, BP plans to dispose of its 50% stake in Shanghai Secco, potentially atUSD2-3bn (c.1.5-2.2x FY15 P/B), while SPC is trading at 1.4x P/B.
Reiterating Buy on strong FCF/dividend yield/ROIC
SPC-H trades at 1.4x/8.9x FY17E P/B / P/E, representing 12% and 38%discounts to its Asian peers, respectively. We believe that SPC should trade ata premium to Asian peers for its stronger FCF yield and ROIC, while it holdsnet cash of RMB3.6bn. We estimate SPC’s FY16E FCF yield and ROIC at 10.2%and 16.6%, respectively, some 73%/97% higher than its Asian peers' average.Our DCF-based target price of HKD5.0/share (WACC of 8.4% and COE of 9.4%)implies 2.1x/12x FY16E P/B / P/E. We believe that SPC’s strong balance sheetwith strong free cash flow, high dividend yields and ROIC improvement willtrigger a rerating ahead.