Sinopec (SNP) reported in-line PAT, but slight miss on NP with higher MI
SNP reported 1H16 NP of RMB20bn or EPS of RMB0.165 (-22% YoY / +183%HoH), slightly missing our estimate of RMB0.18/share by 9% on higherminority interests. The reported profit after tax of RMB27bn was in line withour estimate. SNP recorded FCF of RMB46bn in 1H16, +174% YoY; SNPdeclared DPS of RMB0.079, lifting the dividend payout ratio to 48% vs. 43% in1H15. The drop in YoY performance was driven by a widening E&P loss, whilethe strong HoH performance is thanks to refining earnings (+4.8x, or +3x afterstripping out windfall profits from the implementation of a refined product floorprice). Moreover, SNP made an impairment of RMB1.3bn vs 0.15bn in 1H15.
Strong refining profits offset by widened E&P loss
E&P loss widened 11x YoY to RMB22bn. Oil production was cut 11% YoYto 154m bbls; gas production was up 10% YoY to 389bcf. Oil ASP wasdown 33% YoY to US$33/bbl (19% discount to Brent US$41/bbl). Gas ASPwas down 19% YoY to RMB1.3/cm. All-in cost was up 4% YoY toUS$54/bbl on higher DDA at +12% YoY, overshadowing the rising costdrop of 10% YoY.
Refining profit was lifted by 113% YoY to RMB33bn. GRM hit a record highat US$10.7/bbl (+41% YoY) thanks to a slower ASP drop than in thefeedstock cost, product mix optimization, and ongoing fuel upgrades. Cashcost rose by 3.6% YoY on lower run-rates and fuel upgrade expenses.
Marketing profit increased 4% YoY to RMB16bn. Non-fuel sales grew+56% HoH/+43% YoY to RMB18.5bn. Gasoline/kerosene sales volume was+12%/+7.3% YoY, while diesel and fuel oil sales were cut -1.2%/-7.9% YoY.Diesel’s retail sales were -7.4% YoY. Cash operating cost was up 2.6% YoY(down 7% HoH) on rising rental expenses and maintenance fees.
Chemicals profit was down 4% YoY to RMB9.7bn: Ethylene EBIT/ton wasup by 4% HoH but down by 4% HoH at RMB1,767/ton. Among this, salesvolume of synthetic fibers and synthetic rubbers fell by 14%/1% YoY.
2H16 guidance: cut oil production; rebound on refining throughput
SNP gave 2H16 guidance: in E&P, crude oil/gas production to grow by-5%/+8% HoH to 147m bbls/421bcf; refining throughput to rebound at +4%HoH to 120m tons; marketing sales volume to keep dropping by -3% HoH to84m tons; ethylene production to stay flat (+1% HoH) at 5.54m tons.
Valuation and risks
We derive our PT of HK$7.56/share by applying SOTP, valuing E&P with DCF(WACC of 8.4%, terminal rate of 2%) and downstream segments with P/B vs.ROE. Our PT implies 1.1x 16E P/B (below +1SD of historical mean). We believea higher multiple is justified as SNP’s ROIC should double by 2018 (11.4%).Risks: Failure to fully pass through feedstock cost, volatility of oil & gas prices,and changes to oil & gas reform.