2Q17 overhaul dragged down 1H17 earnings; 3Q17E set to rebound stronglySPC posted 1H17 results with net profit of RMB2.6bn （EPS of RMB0.241）， down7.8% HoH and 17.5% YoY because of a sluggish 2Q17, where net profit fell 65.3%QoQ to RMB670mn. 1H17 net profit tracked 45%/51% of DBe/consensus FY17EEPS. The results were below our expectations as a result of: 1） an overhaul thatled to worse-than-expected production volume drop, particularly in the refiningsegment; 2） crude oil processing cost per unit that increased significantly, by52% YoY, due to the overhaul with lower volume. Looking ahead, we expect SPC3Q17 to bounce back strongly with: 1） normal operations back on track aftermaintenance and 2） a pick-up in chemicals spread. Hence, we reiterate our Buyrating and believe any share price plunge provides a good entry opportunity.
　　Weak performance in both refining and chemicals on production volume drops
The refining segment’s profits dropped 34% YoY to RMB1.62bn due toheavy overhaul in 2Q that resulted in production volume drop and highercrude oil processing cost. The segment GPM remained stable at 9.2%.
　　In 1H17, production volume fell 8.4% yoy to 4.06mn tons. However, SPCimproved its diesel-to-gasoline ratio to 1.19 in 1H17 vs. 1.35 in FY16.
　　Crude oil processing cost rose 27.8% YoY to RMB34.2bn, and the averageunit cost for processing grew 52% YoY to RMB2,653/ton due to overhauland volume drop.
　　The chemical segment’s profits declined 20.3% YoY to RMB0.99bn dueto the lower production volume because of the overhaul in 2Q, in whichresins and plastics dropped by 11.8% YoY to 465 ktons in 1H17. Thesegment GPM decreased 4.6ppts to 11.7% due to higher feedstock costs,among which synthetic fibers’ performance remains the weakest linkin the segment. Synthetic fibers had turned into gross loss in 1H17 ofRMB63mn. Intermediate products posted gross profit of RMB1.55bn, up5.7% YoY; resins products recorded gross profit of RMB964mn, down28.8% YoY in 1H17.
　　Valuation and risks
　　SPC-H trades at 1.6x/7.9x FY17E P/B / P/E, representing 15%/41% discounts toits Asian peers, with dividend yield of 6% FY17E. Conversely, we believe that SPCshould trade at a premium to Asian peers on its stronger FCF yield and ROIC,while it holds net cash of RMB7.3bn. We estimate SPC’s FY17E FCF yield/ROICat 13.9%/24.6%, 98%/119% higher than its Asian peers' average. Our DCF-basedtarget price of HKD5.8 （WACC of 9.4% and COE of 10.6%） implies 2.1x/10x FY17E