Special dividend equivalent to 100% payout ratio, but implying only 1.7% yieldPetroChina reported 1H17 net profit of RMB12.7bn or RMB0.07/sh （20% YoY,73%HoH） vs. our estimate of RMB11bn or RMB0.06/sh, beating ourexpectations. The E&P segment returned to profit due to higher oil prices, butthe result would have been even stronger had PTR kept costs in check, withall-in-cost rising by c.USD5/boe yoy. The company announced a dividend ofRMB0.069/sh （equivalent to 100% payout）， but at 1.7% yield, it was notnoteworthy. Yet, the strong cashflow of PTR means that more dividends couldbe paid in 2H if oil prices remain steady. PTR also highlighted that a furthersell-down of its pipeline was not imminent, removing a catalyst for the stock.
　　E&P: Segment operating profit was RMB6.9bn （vs. -RMB2.4bn in 1H16），primarily due to higher realized crude prices US$49.68/bbl, while gas pricerealization also rose by 9.4% YoY to RMB1.23/cm on higher domestic demand.
　　Although lifting cost reduced 4.1% YoY to USD10.85/boe due to cost controlmeasures, all-in-cost increased to $47.15/boe, primarily due to increase inother operating expenses. E&P capex increased 15% YoY, but lowerinvestments since FY15 have affected production growth. In 1H17, Crudeproduction fell by 7.4% YoY. Yet, the company has been focusing on gasproduction, up 4.4% YoY, in order to cater to growing domestic demand.
　　R&C: Segment operating profit declined 42% to RMB15.8bn, primarily due tolower refining GRM from inventory losses. Refining EBIT was at RMB9.2bn,down 57% yoy, while Chemicals EBIT was at RMB6.0bn, up 10.3% yoy.
　　Refining throughput declined to 475.2mmbbl in 1H17, primarily due tomaintenance activity at four refineries out of the five refineries scheduled forFY17. However, with higher expected refinery utilization and fewermaintenance shut-downs planned in 2H17, PTR believes it can achieve itsannual target of 1,016mmbbl. While inventory changes affected GRM, opexcontinued to decline in refining, down 7.2% yoy.
　　Marketing: Segment profit increased by 23% YoY to RMB5.7bn, driven by nonfuelbusiness margins. Fuel marketing margins continued stay low due tocompetition. Non-fuel business generated RMB9.2bn in revenue and~RMB1.0bn in profit in 1H17. Going forward, Petrochina is expected to focuson non-fuel growth business in service stations.
　　Gas pipeline: The segment reported a loss of RMB11.9bn, primarily due tolosses from sales of imported natural gas （-RMB7.6bn） and LNG （-RMB5.7bn）。
　　However, gas distribution business produced ~RMB14bn vs. RMB11.5bn in1H16 due to higher transmission volumes.
　　Valuation
　　We value PetroChina using SOTP, valuing upstream and gas pipelines withDCF （8.5% WACC and 2% terminal growth） and downstream with P/B vs. ROE,to which we apply a 1.6x/0.5x target 17E P/B on ROEs of 13.9%/4.7% for therefining & chemicals/marketing segments. Risks: policy changes, cost inflation.