1Q17 net profit up on strong product spreads & refining volume
SPC issued a positive profit alert for its 1Q17 results, and expects net profit toincrease by 60%-75% YoY to RMB1.8-2.0bn. Basic EPS is estimated to beRMB0.17-0.19/share. The 1Q17 net profit tracks 32-35% of DBe FY17E netprofit. The set of results looks better than expected whereas 1Q16 enjoyedwindfall profits of c.RMB500mn on refined products floor price but none in1Q17. The strong surge of 1Q17 net profit was driven by 1) margins expansionon products, particularly for chemicals; 2) strong refining margin refiningthroughput volume, which was up by c.10% YoY; 3) strong YoY improvementon associate income contributed by Shanghai Secco; and 4) lower financialexpenses. We reiterate our buy rating with TP of HK$5.8.
2Q17 outlook: maintenance started already till mid-May
SPC started its 45 days maintenance in late March and until mid May for bothrefining and chemicals segment. We believe QoQ refining products productionwould be lower while chemicals end products would have mild impact as SPChas started to stock up intermediate products for future use. Conversely, weexpect Chinese GRM to continue to be strong with oil prices range boundbetween US$50-60/bbl while chemicals spreads to remain strong with tightglobal supply and demand. We keep our estimates unchanged despite suchstrong 1Q17 projections on a potential softer 2Q earnings. Our FY17E EPS is21% above consensus.
Price target of HK$5.8; re-rating likely to continue with potential ROICimprovement ahead
SPC-H trades at 1.5x FY17E P/B (+25% of historical average) and 7.3x P/E,reflecting its positive outlook. Our DCF based target price of HK$5.8 (assumingWACC of 9.4% & terminal growth of 2%), implies 2.1x/10.0x FY17E P/B / P/E.We see 2.1x P/B as justifiable, reflecting its asset value at a time when theprofitability potential ahead is clearer post its listing. The implied P/B is in linewith the average P/B of its global peers although SPC’s ROIC is 168% higher.