Earnings expected to grow 50% in 1H18, in line with expectationAccording to the preannouncement, 1H18 earnings are expected togrow by 50% YoY in 1H18, reaching Rmb40.6bn under CAS （ChinaAccounting Standard）， largely in line with our and marketexpectation.
Trends to watch
E&P to break even in 2Q18. Based on our esitmate, E&P segmentmanaged to turn around in 2Q18, recording Rmb2.5bn EBIT.
Refining profits helped by inventory gains. Refining segment isexpected to record Rmb20.5bn EBIT in 2Q18, 7% growth on the QoQbasis. However, given the Rmb5.0-6.0bn estimated inventory gains in2Q18 on the back of higher oil prices, we think the underlyingrefining margins may actually decline versus 1Q18 level.
Pechem earnings to further soften in 2Q18. We expect pechem EBITto further slide by roughly 15% in 2Q18 on a QoQ basis, in line withthe sector trend and we expect pechem margins to furtherdeteriorate into 2H18.
Fuel marketing still struggling. We expect its marketing segment topost lower profits in 2Q18 on a QoQ basis, with the unit crippled byChina’s tepid fuel demand and ongoing fuel price war.
No impairments in 2Q18. Apart from the one-off impact frominventory movement, we don’t expect any impairment charges in2Q18.
Interim dividend payout at 49%. We expect the company to pay 50%dividend based on CAS earnings. However, given IFRS earnings havebeen historically higher than CAS numbers, thus the dividend payoutunder IFRS is expected to be around 49%.
Valuation and recommendation
Maintain EPS forecasts and BUY rating and leave TP unchanged atHK$8.90 based on SOTP, implying 23% upside.
Risks
Oil and gas price volatility; further deterioration in fuel price war.