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:
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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.
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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.
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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.
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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)
