Strong YoY growth slight beat our expectations
SPC posted 9M16 results with net profit of Rmb4.14bn (EPS of Rmb0.382/sh),up 84% YoY (vs. guidance of 75-90% YoY). The strong set of results slightlybeat our expectations, driven by stronger refining margins and much improvedchemicals spreads YoY. 9M16 net profit tracks 95%/76% of DBe / consensusestimates (if we include refining windfall profits in 1Q16 into our earnings,9M16 would track 84% of FY16E DBe). We do not include the refining windfallprofit in our FY16E earnings as NDRC has not yet provided clarification as towhether refiners can permanently keep it. Conversely, 3Q16 net profit surged101% YoY but dip of 47% QoQ owing to no inventory gain and Chinese GRMdrop of US$1-2/bbl. Also, 3Q16 investment income (incl. SECCO) postedstrong growth +16% QoQ which suggests strong chemical spreads continued.
A new era with strong return on net assets with net cash balance sheet
Despite having a net cash balance sheet, SPC was able to register an 18.8%return on net-assets in 9M16. With strong refining and chemicals margins,SPC recorded positive operating cash flow of RMB5.3bn and positive freecashflow (OpCF – CAPEX) of RMB4.7bn in 9M16, representing growth of 56% /60% yoy, respectively. Meanwhile SPC registered net cash ratio (net cash /equity) of 13.6% as of Sep 2016 vs a net gearing of 13.8% a year ago. Hence,we believe SPC has potential to lift its dividend payout in the future.
Revise up TP to HK$5.5/share; reiterate Buy with 38% upside potential
We lift our 2016E/17E EPS by 5% and 10% for factoring a higher GRM ofUS$7.1/bbl and US$7.3/bbl (premium to SG complex GRM of US$6.0/6.8 perbarrel). Hence, we lift our DCF-based target price of SPC-H to HK$5.5/share(from HK$5.1/share) while assuming WACC of 8.4% & CoE of 9.4%. Our SPCH’sTP implied 10.5x and 2.0x 2017E P/E and P/B, above +1SD of historicalmean. We believe our TP valuation is justified with positive outlook which SPCis to achieve 20% ROE in 2017E. Moreover, SPC-H’s TP implied P/B is at 20%discount to Gordon Growth model (ROE-g/COE-g) suggests P/B target multipleof 2.5x. SPC-H trades at 1.5x/7.7x FY17E P/B/P/E (at +1SD of historical),reflecting the positive outlook.