What's new
Sinopec Group has announced plans to dispose of its non-core assets,namely 4 Utilities & 1 Service （四供一业） by the end of 20181. Uponcompletion, we expect at least Rmb8.0bn cost savings to lift FY19Eearnings by 7.0% or above. Maintain BUY on Sinopec on the verypositive restructuring catalyst.
Comments
Non-core assets disposal required by SASAC. The non-core assetdisposal is part of the broad efforts initiated by SASAC to improve thecapital and operational efficiency of Chinese SOEs. Those non-coreassets include but are not limited to power plants, schools, hospitalsand other social services which are all overstaffed and loss making atthe moment. The hard deadline of the disposal is set at 31 Dec 2018.
At least Rmb8.0bn savings starting from FY19. Upon completion ofthe disposals, we expect the net savings could hit at least Rmb8.0bnin FY19, with majority of the savings from E&P segment.
But one-off cost expected in 4Q18. However, in order to smooth thedisposal process, we expect roughly Rmb1.0-2.0bn one-off costs（including severance） to be booked into 4Q18, not a significantamount compared to the benefits.
Re-rating on improved corporate governance. Bloated headcountand social obligation on Chinese SOEs have been weighing on thevaluation multiples of Chinese SOE including Sinopec. Thus, thedisposal could reflect improved corporate governance and thus are-rating could be expected.
Limited impact to PetroChina and CNOOC though. Similar disposalsare also under way in PetroChina, but mostly in the parent levelCNPC. CNOOC has been free of social obligations since itsincorporation. Thus impact to the two listcos is quite limited.
Valuation and recommendation
The stock is trading at 9.3x/8.5x 2018/19e P/E. As we wait for morevisibility for next few months, we tentatively maintain earningsforecast, BUY rating, and TP of HK$8.90 （20% upside） based on SOTP.
Risks
Oil price volatility; disposal delays.