1H18 results in line expectation
Sinopec posted its best interim results since listing, with 1H18 resultsup 52% YoY to Rmb42.4bn, in line with its profit alert. 2Q18 earningswere Rmb23.1bn, up 115% YoY and 20% QoQ.
Rmb5.0-6.0bn inventory gains estimated in 2Q18, on the back ofhigher oil price, based on our estimate.
Interim payout at 46%, but not relevant. The company proposedRmb0.16 Interim DPS, implying 46% payout ratio, in line with ourexpectation. It is not relevant due to the cap on interim payout ratioaccording to its Articles of Association and we maintain our FY18payout ratio forecast of 85%.
Trends to watch
3Q18 earnings likely to be around Rmb20bn. Operational wise, 3Q18is likely to be a re-run of 2Q18, but minus the inventory gains but pluscost reduction at its corporate level. All considered, we expect 3Q18earnings to hit around Rmb20bn should oil price stays around today’slevel.
Non-core business disposal on track. According to theannouncement regarding connected transaction, its non-corebusiness disposal is right on track as we highlighted in our previousnote. Upon completion, we expect the disposal to save Rmb7.0-8.0bnoperating costs.
Rental cost inflation could be a risk factor. It is also worth noting thatthe land rental cost of its fuel stations and refineries, has been raisedby 30% from Rmb10.8bn per year to Rmb14.0bn by its parent SinopecGroup, and it could lead to some cost pressure in our view.
Earnings forecast
We maintain our earnings forecast.
Valuation and recommendation
The stock is trading at 9.5x/8.6x 2018/19e P/E. Maintain TP ofHK$8.90 on SOTP, implying 18% upside.
Risks
Oil and gas price volatility; further deterioration in fuel price war