What's new
Sinopec has had a stellar run YTD on the back of solid FCF generationand expectations of a decent dividend yield, which investors crave ina volatile market environment. With Brent breaking above US$80/bbl,investors have grown concerned over its refining margins due toexisting NDRC policy. We do not believe it is time to panic. We alsothink 3Q18 earnings could beat market expectations. Maintain BUY.
Comments
NDRC looks at a basket of crudes, not just Brent. Under NDRC policyissued in 2013, refining margins marginally diminish once oil pricesexceed US$80/bbl. However, the NDRC looks at a basket of crudes,not just Brent. Thus, we probably need to see at least US$85/bblBrent for the basket to average US$80/bbl, and for the NDRC to stepin and further regulate refining margins. It’s not time to panic yet.
Surging wholesale fuel prices a positive for Sinopec. Wholesalegasoline and diesel prices have surged in 3Q18 on tight fuel supplydue to fuel spec upgrades and refinery maintenance, but retail priceshave remained relatively stable due to tepid end-user demand.Narrowing spreads are positive for Sinopec, as: 1） they should helpthe firm enhance wholesale margins in its marketing division, whichstill generates 30% of its volume from wholesaling; and 2） theyshould allow Sinopec to take market share from independent fuelstations, which live on the wholesale/retail spread.
3Q18 earnings could beat market expectations. Albeit a low oil beta,Sinopec benefits from higher oil prices as well. We believe 3Q18results will improve from a high-base 2Q18, beating marketexpectations on inventory gains （less than in 2Q18 though）， a strongaromatics margin and a better marketing margin. This could lead toupward revisions of FY18 consensus EPS forecasts.
Valuation and recommendation
We maintain our earnings forecasts and target price of HK$8.90,based on a SOTP valuation and offering 16% upside. The stock istrading at 9.7x 2018e and 8.8x 2019e P/E.
Risks
Oil price risk; petrochemical margin risk