FY16 net profit surged 82% YoY, driven by refining and chemicalsSPC posted FY16 results, with net profit of RMB5.97bn （EPS of Rmb0.55/sh），up 82% YoY. 4Q16 net profit was up 78% QoQ/79%YoY. The strong set ofresults is in line with our expectations and was driven by strong refiningmargins from the refined product floor price in 1Q16, inventory gains in 2Q16and 4Q16, and strong chemicals margins. We have always expected a higherpayout, but SPC surprised us with a 12%-pt uplift at 45% （vs. our estimate of40%） by declaring a dividend of RMB0.25/sh, implying 6.5% yield for SPC-H.
　　With resilient refining and chemicals spreads likely to continue, we expectstrong free cash flows ahead to offer upside to dividend yields; reiterating Buy.
　　Event headline
　　Brilliance in refining and chemicals segmentsRefining: The refining segment’s profits were RMB3.81bn （+105% YoY）， ascrude oil costs dropped with the windfall refined product profit owing to floorpricing implemented in 1Q16, which led to a record-high segment EBIT marginof USD6.68/bbl （+143% YoY）。 On operations, SPC yielded higher gasolineproduction, with the diesel-to-gasoline ratio improving to 1.0 in FY16 vs. 1.38in FY15. Refined product sales volume fell 13% YoY despite a YoY throughputcut of just 3% （or -8% YoY excluding subcontracted usage）， implying a likelyinventory build-up, which we view as beneficial under the oil price up-cycle.
　　Chemicals: The chemicals segment’s profits surged to RMB2.84bn, up 56%YoY, as a result of lower feedstock costs plus a tight supply/demand situation.
　　Chemicals’ EBIT/ton rose 40% YoY to USD123/ton. Despite the outstandingperformance of intermediate chemicals and resins, synthetic fibers remainedsluggish, as expected. Offsetting the per-ton EBIT loss of synthetic fibers atUSD451/ton, Chemicals EBIT/t was up 40% YoY to USD123/ton. Below theEBIT line, the ramp-up of SECCO （SPC’s 20% associate） yielded an impressiveinvestment return at RMB751m （+72% YoY）。 Looking ahead, we expect theuptrend in the intermediate chemicals and resins divisions to continue, given ahealthy supply/demand profile, while synthetic fibers could remain a drag dueto a severe oversupply in China.
　　Strong refining and chemicals spreads likely to continue in 1Q17Per our analysis, Chinese refining GRM QTD averaged USD10.8/bbl （4% QoQ），while ethylene spreads QTD recovered by 18% QoQ due to potential delays onnew US ethane crackers commissions. Conversely, the SPC-H share price hascorrected by 14% since its peak on concerns on margins drops and SPC’s 45-day petrochemicals maintenance. However, we expect SPC end-product salesvolume to have a small impact only as SPC starts to accumulate intermediatechemical feedstock. We also expect 2Q17E chemicals margins to remainstrong due to massive outages （837ktpa in 2Q17E vs. 311ktpa in 1Q17E）。
　　Valuation and risks
　　SPC-H trades at 1.6x/7.2x FY17E P/B and P/E. Our DCF-based target price ofHKD5.8, based on 9.4% WACC and 2% terminal growth rate, implies 2.0x/9.2xof average FY17-18E P/B and P/E, which are above +1SD of the historicalmean. We believe our target price valuation and Buy rating are justifiedbecause 1） the implied valuation is 20% discounted to the Gordon GrowthModel’s suggested P/B valuation of 2.5x for FY17-18; 2） positive outlook with23%+ ROIC through FY18E; and 3） the strong FY17/18E free cash flow yieldsof 10.8%/12.5% and a surprise uplift in FY16 payouts suggest potential higherdividend yield.
　　Key risks: 1） oil price volatility without concurrent adjustments in refinedproduct prices; 2） unexpected demand growth in refined/chemical products; 3）RMB fluctuations.