Marketing spin-off target of 2H18; spreads rebound in 4Q
The progress of the marketing IPO has been delayed, as regulators focused onthe 19th CPC and have yet to make a decision on the pipeline company set-upand whether the product pipelines of Sinopec should be included. Sinopec hasobtained most approvals, while they are still pending from NDRC and the StateCouncil. Once the approvals are obtained, it will take 6-8 months for the IPO,which will likely take place in Hong Kong. The price war should persist in 2018 butthe worst seems behind us with marketing spreads rebounding in 4Q17. Whetherthe spreads can improve in the future depends on the government's crackdownon tax evasion by teapots. Sinopec believes its fuel business will grow in the lowsingle digits going forward, while its non-fuel business can grow much faster,with earnings growth of 60% in the last two years and also in the next two years.
The target is for non-fuel sales revenue to reach RMB100bn and achieve an OPMof 10-15% by 2020E, in which case, non-fuel will account for 1/3 of its marketingEBIT versus less than 10% now.
Refining to be more healthy in China on balanced demand-supply
Chinese demand for gasoline is expected to post a 10% CAGR in 2018E-20E,kerosene will keep double-digit growth, while diesel may witness annual growthof 2-3% after a turnaround in 2H17. The government granted more crude importquota to third-party refiners, which may not be a bad thing as that would allowthe government to track the processing volumes of each refiner to ensure theypay proper taxes. There is also the phase-out of smaller refiners and the roll-outof bigger refiners, which will help improve the outlook for GRM and utilisation.
Upstream wouldn't break even until Brent reaches USD70/bbl and more growthon gas side
Upstream will lose significantly less money thanks to the higher Brent price, but
Sinopec is benchmarked more to the Dubai crude price, which is still a USD5-6/bbl discount. Upstream oil breakeven is at USD65/bbl, therefore USD70/bbl isrequired. However, the cost of production will be reduced in 2018 because of1） potential impairments in 2017 and 2） lower DD&A, with more reserves beingwritten back from a higher oil price. Crude oil production will be roughly flat in2018, while natural gas will continue the high double-digit growth this year. Thegas business is slightly profitable in 2017 after subtracting the import losses,which totaled RMB6bn for 9M17. In 4Q17, there were no import losses, as SNPsold more LNG to targeted customers, instead of through the pipe at aroundUSD7/mmbtu. SNP doesn't procure expensive LNG from the spot market, as ithas enough long-term contracts on hand. Import losses could widen in 2018 as the company imported 6-7mt of LNG in 2017 vs. 8mt in 2018. In order to secureChina's gas supply, the company has been considering signing more long-termLNG contracts and even M&A overseas.
Capex at RMB100-110bn for 2018 with more focus on gas
The capex may increase to RMB110bn this year from RMB98.5bn in 2017 andRMB29.1bn in 9M17, implying 12% yoy growth. Given an improving outlook onthe gas side, the share of natural gas in total capex will also rise to 1/2 vs. anaverage 1/3 historically. Moreover, the company has realised the bottleneck ofthe gas business is in the midstream, therefore more money will be invested inpipelines and storage facilities.