04 January 2008 Flash Comment

Transcription

1 04 January 2008 Flash Comment Sinopec (0386.HK) Acquisition five oil refineries and 63 gas stations Expected Return Rating : HOLD Price (03/01/08) : HK$11.62 Target Price : HK$13.10 Expected Capital Gain : 18% Expected Dividend Yield : 1.8 % Expected Total Return : 19.8% Key Data Stock Code : 0386.HK 12-month High/Low ($) : 13.4/5.386 Hang Seng Index : Issued Shares (m) : 16,780 Market Cap (HK$m) : 194,989 Average Daily Turnover (K) : 197,002 Major shareholders : China Petrochemical Group (100%) Rel. Performance - 1 month (%) - 3 months (%) - 12 months (%) : : : Chart Investment Highlights Acquisition five oil refineries and 63 gas stations The company paid Rmb 3,659 mn to acquire five oil refineries and operation right of 63 gas stations from the parent company. The cost represents 1X book value and the transition will be settled by one-off payment. According to our estimate, the cost of the acquisition is equal to 10.5X FY09E PER. Based on 8 mn tones of refining capacity and % of the refinery yield, the expected refinery throughout will reach 462,464 and 465 mn tones, respectively, in FY08-10; while gasoline, diesel and kerosene production will account to 287,288 and 289 mn tones, respectively, in FY We estimate average refinery cost to be 78,75 and 70 USD/bbl, respectively, for In line with the fluctuation of average crude oil cost, we consider that Chinese government will continue to raise the exfactory price of crude oil and oil products. Assume 1000 Rmb per ton increase in the price, we believe the acquisition will record a loss to the company in FY08, but in FY09 and FY10, there will be a marginal profit. Limited profit growth for short-term, great potential for longterm Among five oil refineries, the company will directly regulate Hangzhou, Yangzhou Petrochemical and Zhanjiang Dongxing; and other two will be charged by Yangzi petrochemical via "equity assignment agreement ". Yangzi petrochemical is a wholly owned subsidiary of the company. In addition, the sales company of the parent company will transfer the gas station s operating right to the company. Although refineries in this acquisition seem large in no., the overall refining capacity is limited. In short term, these refineries cannot help company improve production and processing capacity substantially. In FY07Q1-3, the total volume of crude oil processed of 5 refineries was 314,000 bbl, or accounted for 3.6% of the company; the total production of gasoline, diesel and kerosene was mn tons, or accounted for 3.86% of the company. In FY06, only Taizhou Petrochemicals recorded a profit. In FY07Q1-Q3, the falling of crude oil price resulted in the other four refineries recorded a positive net profit, Rmb mn. Obviously, Taizhou Petrochemical as a chemical products, its revenue influenced by market supply and demand; while the other four plants are linked with the volatility of oil prices. Therefore, the expected drop in oil prices FY09-10 will beneficial to the other four refineries. In long-term perspectives, the acquisition will enhance the total refinery processing volume of the company. Currently, the company owns 11 subsidiaries; Qingdao Refinery is one among them. In this year, the 10 million ton refinery project of Qingdao refinery will be commenced. Comparing with this case, we believe, the similar project will conduct in the future in these five refineries, either to inject new or to upgrade existing refining capacity. By then, these refineries will further boost its profit. Cyril Wang (852) cyril.wang@cash.com.hk Earnings Estimates Yr-end Dec 2005A 2006A 2007F 2008F Net Profit (Rmb mn) EPS (Rmb) Change (%) PER (X) DPS (Rmb) Yield (%) Source: the Company, Celestial Securities estimates

2 Overseas expansion will grow refining profit Currently, near 80% of crude oil production is from Shengli Oilfield, which owns a mining history over 40yrs. We believe that in the long term, the company will expand the development of new oilfields via collaboration with overseas companies so as to improve the exploitation revenue. In the end of last year, the company signed a 2 bn USD s contract with Iranian Government to co-develop Al Walan oil and gas fields. The project will commence production from FY11. By then, the company refining capacity and profitability will be further enhanced. Investment opinion: Assume the Chinese Government to increase the ex-factory price of refined oil 1,000 Rmb per ton, the refinery business might achieve a balanced budget. We set our long-term target price at 13.1 HKD, which is 15.5X P/E FY08E. Based on more refining and chemical production projects be conducted in the future, we rate "hold" on this counter. 2 Sinopec (0386.HK)

3 The shareholding structure prior to the acquisition Source: Company The shareholding structure after the acquisition Source: Company Financial Summary Total Asset Total liabilities Net Asset Shareholding Attributable Net Asset Hangzhou Oil Refinery % Qingjiang % Petrochemicals Taizhou Petrochemicals % Yangzhou Chemicals % Zhanjiang Dongxing % Gas stations % Total Actual Purchasing Price P/B 1.00 Source: the Company, Celestial Securities estimates Sinopec (0386.HK) 3

4 Financial Analysis Hangzhou Oil Refinery Qingjiang Petrochemical Taizhou Petrochemical Yangzhou Chemicals Zhanjiang Dongxing Gas Stations FY05 FY06 07Q1-3 FY05 FY06 07Q1-3 FY05 FY06 07Q1-3 FY05 FY06 07Q1-3 FY05 FY06 07Q1-3 FY05 FY06 07Q1-3 Total asset turnover N.A % N.A. N.A % N.A. N.A % N.A. N.A % N.A. N.A % N.A. N.A. 8.2% N.A. Equity turnover N.A % N.A. N.A % N.A. N.A % N.A. N.A % N.A. N.A % N.A. N.A. 8.8% N.A. PBT margin -3.2% -4.5% -2.2% 2.4% -0.4% 3.6% 1.4% 1.1% 3.4% 0.6% -2.9% 0.4% -1.4% -1.5% 1.1% 2.3% -0.7% -3.3% ROE N.A % N.A. N.A. -3.3% N.A. N.A. 6.9% N.A. N.A % N.A. N.A % N.A. N.A. -0.1% Net Margin -3.3% -4.5% 0.9% 1.7% -0.3% 2.7% 1.0% 1.2% 3.3% 0.4% -2.9% 1.1% -1.3% -1.3% 1.0% 1.6% -0.7% -3.3% Total liabilities/total Assets 57.4% 75.5% 71.3% 65.7% 72.1% 66.9% 48.5% 48.2% 39.5% 56.5% 71.0% 65.8% 80.9% 81.6% 81.7% 5.4% 8.2% 6.3% Total liabilities/shareholders' equity 167.7% 498.5% 339.2% 191.7% 259.0% 201.9% 127.0% 101.0% 65.2% 129.7% 244.7% 192.3% 424.5% 442.9% 446.6% 5.7% 9.0% 6.7% BS Total Assets , , , , , , Total Current liabilities , , , Total Non-current liabilities , Total liabilities , , , Shareholders' equity , , Minority interest Total equity , , Total liabilities and equity , , , , , , IS Revenue Profit before tax (76.0) (166.7) (52.5) 80.4 (16.0) (35.0) 4.1 (120.6) (173.5) (0.4) (2.6) Profit after tax (77.7) (166.5) (11.3) (35.0) 11.2 (111.2) (153.5) (0.4) (2.6) Minority interest 0.8 (0.7) (7.6) (9.3) Total asset turnover (77.7) (166.5) (11.3) (35.0) 11.2 (111.2) (153.5) (0.4) (2.6) Equity turnover (75.1) (165.1) (8.8) 80.6 (8.2) (10.2) (33.7) 15.7 (295.9) (271.8) 65.7 N.A. N.A. N.A. Source: Celestial Securities estimates Financial Estimate 07Q1-3 FY08F FY09F FY10F (mn tons) (mn tons) (mn tons) (mn tons) Assumption Annual Integrated Processing Capability Crude Oil Production Volume (gasoline, kerosene and diesel) Total production Refinery yield N.A. 93.7% 94.0% 94.3% ASP (rmb/tonne) 2, , , ,550.0 ASP (USD/bbl) Cost (Rmb/tonne) 2, , , ,447.2 Cost (USD/bbl) Exchange rate (Rmb/USD) Revenue 16, , , ,775.5 Cost (16,057.5) (30,511.9) (28,603.3) (25,999.8) Net Profit (1,652.3) EPS (0.0191) Shares outstanding (mn shares) 86, , , ,702.4 Net Margin 1.47% -5.73% 1.20% 2.90% PER Acquisition cost (Rmb mn) 3, Corresponding PER N.A. N.A Source: Celestial Securities estimates 4 Sinopec (0386.HK)

5 Historical Weekly PER Pe Ratio Mean +1SD -1SD Jan-00 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Dec-04 Apr-05 Jul-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Source: Bloomberg Historical Weekly P/B Ratio Px To Book Ratio Mean +1SD -1SD Jan-00 Mar-03 Jun-03 Sep-03 Dec-03 Feb-04 May-04 Aug-04 Nov-04 Jan-05 Apr-05 Jul-05 Oct-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Feb-07 May-07 Aug-07 Nov-07 Source: Bloomberg Sinopec (0386.HK) 5

6 Our Rating System Stock Buy Accumulate Hold Reduce Sell Expected to outperform the benchmark index by >15% over the next six months Expected to outperform the benchmark index by 5 15 % over the next six moths Expected to outperform or underperform the benchmark index by <5% over the six months Expected to underperform the benchmark index by 5 15% over the next six months Expected to underperform the benchmark index by >15% over the next six months Industry Outperform Fundamentals/valuations of most stocks in the sector are expected to be improving over the next six months. Marketperform Fundamentals/valuations of most stocks in the sector are expected to be steady, neither improving nor deteriorating, over the next six months. Underperform Fundamentals/valuations of most stocks in the sector are expected to be deteriorating over the next six months. Selective Fundamentals/valuations of the stocks in the sector are expected to be diverging over the next six months. Head Office: 21/F, Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel: (852) Fax: (852) The above information is provided and distributed by Celestial Securities Limited ( CSL ). CSL is a licensed corporation under the Securities and Futures Ordinance. The document is for information purpose only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates ( CASH ) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document will be subject to change without further notice. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee. 6 Sinopec (0386.HK)