Raising global oil price forecasts
Following our upgrade to UBS Brent crude oil price forecasts from US$42.4/bbl toUS$46.1/bbl (16E) and from US$55/bbl to US$60/bbl (17E), we are raising our pre-exEPS estimates for Sinopec by 10% in each of 2016E and 2017E to Rmb0.27/sh andRmb0.50/sh, respectively. We make no major changes to our other major operatingassumptions and continue to assume Brent crude oil prices of US$70/bbl (18E) andUS$75/bbl (19E). While volatility in oil prices and share prices is inevitable, we continueto view risks skewed to the up-side over the next 1-3 years.
Good fundamentals, oil price leverage, and deep value
Sinopec is our top pick among China oil and chemical sector stocks. We believe thecompany represents an attractive combination of good fundamentals, oil price leverageand deep value. We view Sinopec's refining business as a cash cow where margins willbenefit from a mismatch in product price / oil cost adjustments as prices rise; marketingas having good exposure to gasoline demand and option on convenience store growth;petrochemical exposed to an extended olefin up-cycle; and finally an E&P business thatgives operational leverage to rising oil prices and large natural gas reserves potential.
Stock looking cheap if assuming US$60/bbl Brent in 2017E
If assuming US$60/bbl Brent (17E), Sinopec is trading on EV/DACF of 4.1x (vs. 5-yr avg6.7x and 10-yr avg 7.9x); EV/EBITDA of 3.5x (vs. 5-yr avg 4.8x and 10-yr avg 5.8x);P/CEPS of 3.3x (vs. 5-yr avg 4.3x and 10-yr avg 4.9x); PE of 9.2x (vs. 5-yr avg 10.6x and10-yr avg 11.3x); and PB of 0.7x (vs. 5-yr avg 1.1x and 10-yr avg 1.3x).
Valuation: Raise price target to HK$7.9/sh from HK$7.7/sh
Our price target is set at a 25% discount to our NAV estimate (downstream segmentspegged to peer multiples of 6-9x EV/EBITDA, E&P at US$75/bbl Brent, 10% WACC).