Recurring NPAT beat expectations
China Petroleum & Chemical （Sinopec） announced its FY17 results:revenue +22% YoY to Rmb2,360bn and NPAT +10% YoY to Rmb51.2bnor Rmb0.42/sh. However, FY17 recurring profit, after adding backRmb16.6bn in one-off items （incl. asset impairment and disposalgains/losses）， reached Rmb68bn （+69% YoY）。 The huge positivesurprise mainly came from the refining and chemical segments, whichrealized respective EBIT of Rmb65.9bn and Rmb25.7 before assetimpairment for FY17, up 15% and 9% YoY, and 11% and 29% aboveour estimates. FY17 dividend recorded a new high of Rmb0.5/sh,implying 7.3%/9.1% yield for A-/H-shares at the current stock prices.
Trends to watch
Oil & gas prices: we assume Brent crude prices of US$68/73 perbarrel for 2018/19 and believe global supply will become moredisciplined. We also assume China’s non-residential city-gate gasprices will rise Rmb0.45/m3 over the next three years. We believedomestic gas pricing reform is imminent and will benefit upstreamplayers more.
Peak margins to last longer: the market is worried that petrochemicalmargins will suffer if new capacity from Hengli Petrochemical （Dalian）and Zhejiang Rongsheng Petrochemical comes online in 4Q18–1Q19;however, we believe margins will remain stable into 2020, thanks toglobal demand growth and China’s ban on waste plastic imports.
Inventory valuation gains: over the next two years, we expect therange of oil prices to rise to US$70-80/bbl and do not rule out thepossibility that Sinopec will record more inventory gains in FY18–19.
Strengthening expectations of a further oil price rise will likely promptdownstream petrochemical firms to restock again.
Earnings forecast
We raise our 2018/19 EPS forecasts by 7%/4% to Rmb0.65/0.71.
Valuation and recommendation
We upgrade Sinopec-A to BUY and raise its target price by 5% toRmb8.60 （12x 2019e P/E & 1.3x P/B）； and maintain our BUY ratingand HK$8.35 TP for Sinopec-H （9x 2019e P/E and 1x P/B）。
Risks
Oil price volatility, weak energy demand, overproduction.