Reiterate Buy with TP of RMB8.03; 1Q17 net profit +1.6x YoY / 27% QoQ
Sinopec posted 1Q17 NP of RMB17bn / EPS of RMB0.142, +158% YoY / 27%QoQ. The strong set of results is in line with our expectations. 1Q17 tracks 32%of DBe FY17E. The company generated RMB13.3bn OpCF (-61% YoY) whilerecording negative net CF of RMB13.5bn due to higher working capital with oilprice recovery and paying down debts; capex was recorded at RMB14.3bn (-19% YoY) and tracks only 13% of 17E guidance. With a strong earningsmomentum, solid dividend yield, and the Marketing Company spin-off as thecatalysts ahead, we reiterate our Buy rating.
Acquiring 50% stake of SECCO creates value and synergies
Sinopec is set to buy BP’s 50% in SECCO (a JV owned by BP/Sinopec/SPC with50%/30%/20% stake) for a consideration of USD1.68bn at 6.3x and 2.3x 2016P/E and P/B. This should enhance Sinopec’s chemicals segment’s value via ahigher return asset and creating synergies with Gaoqiao Refinery, whichsupplies feedstock to SECCO. Deal valuation is higher than Sinopec’s currentvaluation, but this is justified given SECCO’s ROE was 36.8% in 2016 (1Q17 NPimplied annualized ROE of 59%) vs. Sinopec’s chem ROE of 13% in 2016/16%in 17E. This can also help SPC (Buy), trading at 1.5x 17E P/B, to re-rate.
1Q17 operating summary: Marketing Co spin-off within the next 18 months
Marketing: Segment profit reached RMB9.2bn, up +16% QoQ and 19% YoY.Refined products sales dropped -3% QoQ but was flat YoY, so the higherprofitability was due to higher secured mark-up and strong non-fuel sales ofRMB13.5bn, +65% QoQ and 51% YoY. Also, Sinopec’s board meeting on April27 approved Marketing Company to be listed for up to 15% of total sharesoversea (after greenshoe options); the resolution is valid for 18 months.
Refining: Segment profit reached RMB16.8bn, +21% QoQ / +25% YoY. Thesurge was due to: 1) higher throughputs YoY, and 2) better diesel-to-gasolineproduction ratio at 1.13 vs 1.17/1.20 in 1Q/4Q16, where diesel productiondropped to 16.2mt. Conversely, the NDRC announced that it will stopaccepting new crude oil import use quota applications starting May 5.
Chemicals: Segment profit reached RMB8.5bn, +65% QoQ and +87% YoYmainly due to higher spreads. Sinopec chemicals EBIT/ton was +RMB1,137/tQoQ and +RMB1,281/t YoY. Synthetic resins chain saw production rise 4%QoQ and 6% YoY while Ethylene outputs were flat QoQ but +4% YoY.
E&P: Segment loss narrowed to RMB5.8bn, saving up to RMB461mn QoQ andRMB6.8bn YoY with oil ASP averaging USD42.3/bbl in 1Q17. The improvementwas due to better ASP and further cost cuts. 1Q17 oil outputs were -3% QoQand -9% YoY. However, gas volume rose by 14% QoQ and 13% YoY, with gasprices up 4% QoQ as a result of a longer period of winter gas price.
Valuation
We set our target price using sum-of-the-parts, valuing the upstream E&Pbusiness on DCF (8.2% WACC, 2% Tg) and the others on P/B vs. ROE, applying2.7x, 1.7x, and 1.6x target 17E P/B on ROEs of 23.7%, 16.0%, and 16.3% inrefining, chemical, and marketing segments, respectively.