9M16 net profit up 75-90% yoy on continuous margin expansion
SPC issued a positive profit alert for its 9M16 results, noting that the net profitwill increase by 75-90% yoy to RMB3.9-4.3bn from RMB2.2bn in 9M15, underthe CAS Standard. This is due to strong China GRM and chemical spreads,where China GRM averaged US$11.7/bbl and the Ethylene spread averagedUS$740/ton, +36%/15% yoy. Basic EPS is estimated at RMB0.36-0.40. Basedon our calculation, SPC 3Q16 net profit would accelerate and could book netprofit growth of c.65-136% yoy in 3Q16 vs. 78% yoy in 1H16. The strong surgeof 3Q16 net profit was driven by: 1) stronger chemical spreads, including anaverage ethylene spread of US$773/ton in 3Q, +3.4% qoq; 2) inventory gainsduring the oil price recovery in 2Q16; and 3) potential improvement inassociate income contributed by Shanghai Secco due to stronger chemicalspreads.
Strong GRM and healthy chemical spreads continue
We expect China GRM to maintain between US$7/bbl and US$8/bbl in thestable oil price recovery environment ahead. In chemicals, we expect spreadsto remain strong despite the peaking of P/E chain spreads in 2016E, while thenon-P/E chain will likely continue to rise because of the constraints of the newcapacity (mainly gas chemical). Hence, we continue to like SPC for having adiversified production profile.
Valuation and price target
SPC-H trades at 1.4x/7.7x FY17E P/B/P/E (at +1SD of historical), reflecting thepositive outlook. Our DCF-based target price of HK$5.1, implying 1.9x/10.9xFY17E P/B/P/E, is in line with the average P/B of the regional peer group.