Company Highlights:

China Petroleum & Chemical Corp (Sinopec) is China’s second-largest integrated oil and gas operator and the largest refining player. With strong operations across both upstream and downstream segments, Sinopec remains well-positioned in the energy transition, boasting the highest ESG rating among China’s “Big 3” oils.

Investment Recommendation:
BUY (as of 11 September 2024)
Fair Value: CNY 7.87
Current Price: CNY 6.30
Target Price: CNY 7.87
Stop-Loss Price: Not specified

Investment Thesis:

Despite recent volatility in oil prices and a sector-wide correction, Sinopec presents an attractive long-term investment opportunity. The energy sector’s downturn—driven by crude oil price fluctuations and profit-taking—has created a potential entry point for investors. Additionally, Sinopec’s forward-looking strategy, including advanced energy transition initiatives and increased cooperation with Middle Eastern producers, positions the company for future growth.

Sinopec’s dominance in China’s downstream segment, with a focus on refined products, makes it a significant player. The company also benefits from the Chinese government’s tightening control of smaller teapot refiners, which gives Sinopec a competitive edge.

Detailed Company Analysis:

1. Financial Results and Stock Impact:

   • 1H24 Net Profit: CNY 35.7 billion, a 1.7% YoY increase.
   • Sinopec’s upstream segment outperformed, while the refining and chemicals segments faced challenges due to softer domestic demand and volatile crude prices.
   • A share price correction followed the fall in crude oil prices, with Brent crude dropping from USD 78/bbl to USD 71/bbl in September 2024. The energy sector selloff hit Sinopec harder than its international peers, leading to an attractive valuation opportunity.

2. Earnings Revisions/Risks:

   • Sinopec faces risks from oil price fluctuations. Higher crude prices may pressure the margins of its downstream business, and regulatory risks, including changes in taxation or royalties, could affect profitability.
   • Delays in project startups could also impact future earnings, but the company’s robust financial position provides a cushion against short-term volatility.

3. Valuation:

   • FY24E EPS: CNY 0.59
   • FY25E EPS: CNY 0.66
   • Dividend Yield: Expected to rise from 9% in FY23 to 11.8% in FY25, making Sinopec an attractive income stock.

4. Share Price Catalysts:

   • A faster-than-expected recovery in the demand for refined products could boost Sinopec’s revenue.
   • Further reduction in upstream all-in costs would enhance profitability.
   • Increased cooperation with Middle Eastern producers could capture market share in the global petrochemical sector.

Financial Targets:

• Target Price: CNY 7.87
• Stop-Loss Price: Not specified

Recommendation Date: 11 September 2024

Broker Information: Oversea-Chinese Banking Corporation Limited (OCBC Investment Research)