Prospects For Petrochemical Industry and Comparison of International Prices

Transcription

1 Industry Report China Petrochemical ADD Analyst: Hou Jixiong 86 (021) Dec 2003 Prospects For Petrochemical Industry and Comparison of International Prices Investment Highlights: It is unlikely to see crude oil prices fall dramatically in Macro economies and demand/supply relationship support oil refinery and sales as well as petrochemical industry to surge. Projected crude oil prices will maintain at US$25-28 per barrel high levels. We expect the profit from oil refinery, sales of oil products and petrochemical industries will further increase. Prices of petrochemical products may be internationalized. If RMB currency appreciates, product prices and processing profit denominated in RMB may be affected adversely. Nevertheless, a small rise of RMB currency may be offset by demands and intensive operations increases etc. There are probably some policies of launching finished oil pricing, issuing oil products licenses, trading of fueled oil futures in It is not necessary to worry about any changes of market policies in the industry. International petrochemical industry becomes more concentrated and oligopoly in the industry is inevitable. Asia Pacific, the Middle East will become new emerging markets. In the international market, current P/E ratio for crude oil companies ranges between 10x-15x and the chemical industry will push up companies PE ratios. H-share prices of PetroChina and Sinopec are relatively lower than other international peers. The PE ratio of petrochemical industry in the U.S., Japan, Taiwan etc. is over 20x. A-share PE ratio is not as same as the international PE levels. We recommend the PE for Sinopec ranges at 20x and pure petrochemical stocks range between 20x-25x levels. Nevertheless, a real PE ratio depends on a company s results and market atmosphere. Petrochemical industry in 2004 wil have favourable investment opportunities. Add investment rating is recommended. See back of report for disclaimer 1

2 Industry development for 2004 Crude oil prices are difficult to drop in Macro economy and demand/supply relationship will support oil refinery and sales as well as petrochemical industry to rise. With the expectations of domestic economy maintains boosting in 2004 and international economy booms steadily, the petrochemical industry will be heated up. China crude oil, finished oil products, petrochemical products expenses demand will continue to grow rapidly. The effects to international prices of oil products will become stronger. International oil prices may be pressured and affected by the world instability, tightening demand/supply and weakening US dollars. Nevertheless, the probability of crude oil prices going down is low. We expect the international Brent oil prices will maintain at about US$25-28 per barrel. Domestic installed capacity for oil refinery will continue to rise. Gross oil profit will be expected to rise slightly. Sales profit from oil products will increase rapidly. Petrochemical industry may have medium/high term of investment opportunities. Results are expected to grow rapidly. Favourable investment opportunities for petrochemical industry are expected in Mainland and global economy are rising. Domestic economy is kept growing and international economy may rise steadily It is generally expected that China will have a new start of fast growing in the domestic economy. We expect the PRC economy will have 8-8.5% growth rate in future years. The recovery of global economy is basically formed and the economies of the U.S., Japan and West Europe are increasing. According to the expectation of Prospects for Global Economy posted in September by IMF, growth of global economy in 2004 will rise to 4.1% from 3.2% in Therefore, petrochemical industry will be favourably supported by the booming macro economy. According to the recommendation of EIA, global crude oil expenditure volume in 2004 may rise to 1.4% from 1.3% in Growth of petrochemical product expenditures may rise to 1.5% from 1.2%. On the petrochemical products side, global demands will rise 1% and it led the expenditures on ethene to rise 1.2%. See back of report for disclaimer 2

3 Global politics are unstable, demand/supply relationship tightens, and the US dollar weakens. These factors will prevent prices falling from highs. Pessimistic to crude oil prices but prices are difficult to fall dramatically In 2004, the Middle East problem is difficult to stabilize, Iraqi politics problem is unstable and terrorist activities continue to exist, in addition with U.S. variable attitudes to Iran, Syria and North Korea, the global political situation is relatively unstable. On supply side, crude oil inventory levels in the OECD countries remain low and the recovery of global economy may lead oil expenditures demand to rise. Therefore, the market is basically pessimistic to future international oil prices but prices are unlikely to fall further. In addition, US dollars are weakening. As a result, global crude oil in 2004 may be pressured downwards within a small percentage. We expect the IBE Brent crude oil prices may range between US$25-28 per barrel. Development of automobile and transportation industries push oil refinery volume to rise. Gross profit may be enhanced slightly. Gross profit from oil refinery may increase slightly Due to the extreme high gross profit of global oil refinery industry in 2003, gross profit from international oil refinery industry in 2004 is expected to fall but it will maintain higher than in It is mainly due to the continuing consolidation of global oil refinery industry has already absorbed large scales of capacities. Under the vigorous demand, gross profit will increase. On the domestic side, gross profit of oil refinery in 2003 was not high compared with the international levels. We expect gross profit of oil refinery will have a slight rise. On one hand, after the restructuring of two oil giants in the mainland, they can reduce cost effectively and increase marginal profit from oil refinery industry through the optimization of crude oil resources, expansion of production capacity, enhancement of utilization ratio and intensive management. On the other hand, fast growing domestic expenditures not only leads the utilization rate of oil refinery facilities to rise and also increases the growth opportunities of two giant oil groups. Sales growth of domestic automobiles in 2002 jumped 38% and the fast growing automobile sales has tightened the domestic oil product resources. We expect the domestic crude oil processing volume will have 8% above growth rate. It reflects the facilities utilization rate may continue to increase. Profit contributions from sales and distribution divisions continue to rise rapidly. Sales and distribution business still have fast growing potential Compared with oil refinery industry, the sales and distribution industry may lock the operating profit of these two oil giants. The restructuring of sales and distribution division of two oil giants benefits two companies effectively. Despite oil products retails and wholesale licenses will be granted to foreign investors and domestic enterprises faster, but the production and operation volumes from new comers will lag far behind to compete with two oil giants. See back of report for disclaimer 3

4 Profit contributions from sales and distribution business will grow rapidly. We expect the sales efficiencies of two oil giants will further improve. Sales gross profit will climb up. We expect the domestic oil product market in future will have 6% growth rate. To Sinopec, the profit growth of sales and marketing business will be on hopes to become second largest profit contributor to Sinopec, just behind the business of crude oil exploration and production. Petrochemical business will grow rapidly and the demand/supply is tightening. Prospects for long/medium term are bright. Demand/Supply relationship supports petrochemical business for long/medium term On the petrochemical products side, the advantage of lower labour cost in the PRC has not been completely reflected after the PRC s accesion in the WTO. We expect the production and export will continue to be the directive of the nation. In addition with the growth of domestic expenditures demand, demands for synthetic resin, synthetic fibre and synthetic rubber will have 12-14% rapid growth. Growth of production capacities for domestic and global petrochemical industries in 2004 is limited. Therefore, the demand/supply relationship will be tightened. Therefore, it will bring the marginal profit of petrochemical products to rise and the overall profit of petrochemical industry will increase. With more operation of ethene equipment commenced in the PRC in 2005 and 2006, the rise of market pressures in short time should not revert the demand/supply relationship. Other crucial factors affect the industry in 2004 Crude oil, oil products, petrochemical products are internationalized. It reflects RMB appreciation will pressure the industry s profit denominated in RMB. Increasing demand may partly offset the effects of RMB appreciation. RMB appreciation RMB appreciation will adversely affect the overall petrochemical industry. But the effects to subsidiary industry will be slightly different. To oil exploration and production business, RMB appreciation will affect the oil product prices in RMB directly and crash companies accounting profit. To the refinery and sales of oil products businesses, cost of international oil import will decrease but the imported oil products are still restricted by stated-owned trading and sales channels. Therefore, accounting profit of the business will be affected lesser. To the petrochemical products, imports prices depreciate, then the import volume will increase. Domestic prices will reduce. But the petrochemical imports increase will stimulate international petrochemical products prices to rise, then the profit of petrochemical product will reduce gradually for long term. In conclusion, the appreciation of RMB will affect crude oil exploration and production mostly, lesser to petrochemical products and the least effect oil products. However, it is expected the currency rate of RMB will slightly change only. So stronger demand/supply relationship may swap the effects of RMB appreciation. See back of report for disclaimer 4

5 Inflation may benefits the industry. Inflation We have seen prices of oil and petrochemical products rise dramatically in It shows the industry affected by the inflation. When we review projected inflationary effects on oil and petrochemical industries in 2004, we will cover the inflation rate and characteristics of petrochemical industries. Mild inflation rate may stimulate expenditures on oil and petrochemical products slightly and then enhance oil prices as well as profit. But, if inflation rate is too high, then expenditures structure may revert. Expected changes of policies in the industry Accordingto the signed agreement of China s accesion in the WTO, China will cease the finished oil imports quota in effective from 1 Jan 2004 and open oil products retailing market to foreign investors starting from the end of As a result, the following key market reforms may exist in 2004: The market expects policies of finished oil product pricing, retail and wholesale licenses and fueled oil futures trading market will be launched in Launch more oil pricing schemes in which prices are decided by market. It prepares for foreign oil product exporters to enter into the PRC market; Speed up licensing process to open oil products market to foreign investors. It prepares for foreign investors entering the wholesale and retailing markets; Launch fueled oil futures trading market. Domestic demand for crude oil and finished oil volumes increase but lacking international competitiveness. Fueled oil futures trading market will be the testing field to push crude oil and finished oil futures market to form up. In 2004, quota for natural rubber will be cancelled and the tariff of petrochemical products will decrease. In the coming year, the nation may cancel the export tariff rebate on crude oil and gasoline. It is inevitable to say that these policies will diminish market barriers in the PRC and enhance the competitiveness of domestic producers. Most importantly, it can improve market systems in the PRC. Internal demand increasing and enterprise improvement will offset unfavourable effects on enterprises. It may stimulate enterprises to improve continually and enhance their competitiveness. Therefore, it is not necessary to be pessimistic to the prospects of the industry and companies. Development of domestic petrochemical industry heads to the global The key characteristic of international petrochemical business is oligopoly. On the oil exploration and production side, oil resources has its own natural monopoly feature, the OPEC decides and affects the See back of report for disclaimer 5

6 International petrochemical industry becomes more concentrated and the oligopoly is the major feature in that industry. Asia Pacific and the Middle East will become new emerging global powers. international oil prices. For the oil exploration business, Exxon Mobil, Shell and BP etc. are seven largest oil producers. They also control the international oil market in certain extents. Despite the OPEC members establish their own national oil companies, but the members still need to seek for the technical, capital and market supports from the international oil giants. Recently, along with the formation and overseas listings of three major oil companies, some international oil giants are strategic shareholders to the three largest oil companies. Currently, PetroChina and Sinopec benefit from the tenders of oil fields, but their power is still far away from the western oil giants. Along with the changes of global economy, international crude oil expenditures, oil refinery, petrochemical business. Asia Pacific region becomes one of three largest global oil expenditures, oil refinery and petrochemical business centers with North America and West Europe. Presently, Asia Pacific region has owned 24% refinery capacity and 26% ethane production capacity of the world. The production volume of five largest synthetic resin, synthetic fibre and synthetic rubber has surpassed North America and becomes the first in the world. In addition, Asia Pacific is the region in which the petrochemical capacity grows the fastest in the world. Over 50% of international new investment is flowed into the Asia Pacific region. In the region of Asia Pacific, the boosting economy of the PRC also directly leads crude oil, oil refinery and petrochemical business to develop. Currently, China is the third largest oil consumption country in the world, and the fourth largest oil refinery producers and fourth largest ethene producer. Presently, China s oil refinery capacity accounted for 22.4% of Asia total capacity and accounted for 5.5% of the world. Ethene accounted for 17% of Asia s total production capacity and 4.6% of the world s capacity. China is also the largest polyolefin consumer in the world. The consumption of polyolefin accounted for 30% of total trading volume in the world. China is the largest synthetic fibre producer and consumer. The production volume and demand accounted for one quarter and one third of the world respectively. Meanwhile, China is also the fourth largest synthetic rubber producer and second largest synthetic rubber consumer. Furthermore, the Middle East is aggressively developing the natural gas business and creating ethene is the focus of developing natural gas business. Saudi Arabia, United Arab Emirates, Iran etc are having largescaled ethene projects. According to the estimation of CMAI, the ethene production capacity in the Middle East rose to million tons/year from million tons/year in It is expected the production capacity wil double 2002 s levelin Due to the limitation of local demand in the Middle East, many products of these countries may mainly export to the Asia, Europe etc. Therefore, it may affect the global petrochemical industry. However, due to the instable political situation in the Middle East, some completions of ethene production projects over there may postpone. See back of report for disclaimer 6

7 According to the development of future petrochemical industry, it is difficult to change or move the oligopolies of oil resources and western oil giants. The fundamental change is about the market. The western oil giants will continue to participate into the new emerging markets and transfer the demand growth of emerging markets to its own profit sources. In order to maintain its competition, the western oil giants will continue to carry out mergers and acquisitions in order to expand the industry scale. For example, there are five out of ten largest ethene producers in the world are formed through merger and acquisitions. During the economic development of the Asia Pacific region, petrochemical industry wil experience a transfer from Japan Taiwan, and Singapore Korea. Presently, China is going to become a new growing engine of petrochemical industry. Enterprises in China should grasp the opportunities and cooperate with international giants with the market advantages in order to enhance market share and the techniques and management to strengthen its competition. Price comparison of international oil companies Oil is the major nutrient to the global economy and oil stocks are very crucial to global securities markets. According to the top 500 companies in 2002 in the pols of Fortune magazine, Exxon Mobil, BP, Shel, Chevron Texaco Corp., Totalfinaelf will rank No.2, 4, 8, 14 and 15. The five companies were also the top five companies in the top global 50 largest energy companies in PetroChina and Sinopec also became important power in the global oil market after their restructurings. PetroChina and Sinopec ranked No.8 and No.29 respectively in the top 50 global oil companies. For a long run, stock prices of PetroChina and Sinopec are expected to follow the international trend. Apart from the five international companies, we also include the figures of three western oil companies: Italy ENI, ConocoPhilips and America s OXY, in order to compare the prices of PetroChina s H share, Sinopec s H share and Sinopec s A share. Table 1: Price Comparison of International Oil Companies Co Name Return in Projected P/E P/B P/S one year PE (ttm) ratio ratio Price/Cash Flow Price/ EBITDA Dividend Rate See back of report for disclaimer 7 ROE Operating Profit ratio Sales Growth Rate France Total Italy ENI BP Shell Chevron ConocoPhillips America OXY Medium Value Exxon Mobil PetroChina H share Sinopec H share EPS

8 Sinopec A share Ranking of Ranking (1 is the best and 10 is the worst) Combined Stock Prices PetroChina H share Sinopec H share Sinopec A share Source: Bloomberg, GTJAS Research Institute; Price: 21 Nov 2003; Shell is including Shell Transport & Trading and Royal Dutch Petroleum two companies, but only included the first one company s figures; P/E ratio (tm) means the PE ratio for the trailing 12 months. Diagram 1: PE comparison of International Oil Companies According to the comparison of market pricing, we have the following analysis: H shares of PetroChina and Sinopec are under-estimated in certain extents. Pricing of A share of Sinopec is slightly higher but the growth rate of the company is high. Compared with the median of projected PE about 11x of eight international crude oil companies, 2.1x P/B ratio and the 4.8 EBITD ratio, H share prices of PetroChina and Sinopec are lower. Compared with the average value, H share price of PetroChina is 30% lower and Sinopec is about 20% lower than others. Chemical business would affect the pricing of companies. Petrochemical business oriented companies such as Exxon Mobil and BP, their projected PEs are about 15x, higher than the pricing of pure crude oil stocks (price of Shell is far lower because its holding company); the reason of P/E ratio of Sinopec H share is higher than PE of PetroCHina is also the same. Compared with the average value, projected PE of PetroCHina s A share is too high, and over 50% higher than the average value, and 20% higher than Exxon Mobil and BP. Nevertheless, the P/B, P/S and Price/Cashflow are basically as same as the median of the industry. The EBITDA ratio is better. We based the weighted average of P/B, P/S, Price/Cashflow, Price/EBITDA, P/E last year and projected P/Es of 11 stocks to evaluate their prices. The result reflects H share or Sinopec, H share of PetroChina, A share of Sinopec ranked the second, fifth and tenth See back of report for disclaimer 8

9 respectively. Only two stocks are cheaper compared with other international companies. A share of Sinopec is the second highest in price, just behind Exxon Mobil. PetroChina s dividend payout ratio and operating profit ratio are the highest in the industry and the growth of Sinopec is favourable. Sales growth rate is 6.5%, higher than the median. The figures analysis mentioned above did not include and consider the diferences between companies busines natures, busines strategies and management etc. Historical figures supported oil stocks trading at 15-20x PE. The following diagram shows the historic prices and PE ratios of Exxon Mobil. It concluded the 15-year market performance from 1988 to now. Exxon Mobil has been mostly trading at 15x above. During the bull markets in the U.S. during 1994 to 1999, its price and PE ratios ran ahead and had recorded 35x highest. Diagram 2: Historic Prices and P/E of Exxon Mobil We have reviewed historic PEs of other international oil giant companies, but the merger and acquisitions among companies and the temporary losses may affect the completeness of these historic figures. Anyway, you stil find Exxon s PE mostly traded around 15-20x. Matured petrochemical companies are mostly operating in diversified business and petrochemical companies in emerging markets are operating in one single business. Price Comparison of International Petrochemical Companies The U.S., Europe and Japan are the top three largest chemical industry in the global market. The industry tends to be matured and the Asia Pacific regions including Korea, Taiwan, China, South America such as Brazil, Russia and Middle East etc. are the emerging chemical markets. Different enterprises in different development stages will form different features. Compared with the emerging markets, the chemical industry of the U.S., Europe and Japan are relatively well developed and the industry leaders mostly operate in a diversified chemical industry, including DOW Chemical, Dupont, BASF, Bayer etc. See back of report for disclaimer 9

10 as wel as Japan s Mitsubishi Chemical, Mitsui Chemical etc. And the business of the chemical enterprises in the emerging markets is mostly in a single division. For instance, there are many specialized chemical companies in Taiwan. So we pick three types of chemical companies for comparing the international prices: petrochemical, plastic chemical and diversified chemical companies. We divide the companies into different regions and use the median in different regions to be the pricing median in the region. The result is as follows: Table 2: Price Comparison of International Petrochemical Companies Country No. of Return Companies on year P/E Projected PE P/B P/S Price/Cash Flow Price/EBI TDA Dividend rate ROE Operating Profit rate Sales Growth rate China Japan U.S Taiwan India Britain Germany Thailand Brazil HK Korea International Petrochemical Companies DOW Chemical BASF Formosa Petrochemical Companies in the PRC Yangzi Sinopec Shanghai A share Qilu Petro Ranking (1 is the best, and 11 is the worst) China Yangzi Sinopec Shanghai A share Qilu Petro Source: Bloomberg, GTJAS Research Institute; Price: 2003/11/21; PE ttm represents the PE ratio of trailing 12 months. Diagram 3: Comparison of Projected PEs for International Petrochemical Stocks See back of report for disclaimer 10

11 Concluding all pricing median in different regions, we have the following conclusions: Petrochemical companies in the U.S., Japan and Taiwan have above 20x PEs but the PEs in emerging markets are lower. PE level in A share market is too high. According to the PEs, well developed markets will have higher PEs than the emerging markets. Among all well-developed markets, Japan ranks the highest in terms of the PE ratio and its PE ttm achieved to 33.7x, compared to 24x of projected PE. PE level in the U.S. is 23x; PE level for West Europe including Germany and Britain is about 15x. PE ratio in the emerging markets is lower, slightly above 10x. Some countries have extremely low PEs such as Korea, compared to Taiwan s 20x above PE ratio. A share companies bubble is serious. The companies ROA, sales growth rate, marginal profit etc. reflect the companies basic profitability is average, but their stock prices are higher. PE, PB and PS are the highest and the PE achieves to 46.7x. It shows prices of domestic companies are over-estimated and we unlikely record negative returns for this year. We only listed three international companies, DOW Chemical, BASF and Formasa. The PE ttm of these companies are 52.0, 24.4 and 25.0, projected PE are 31.5, 20.1 and 17.3x. It reflects the profit of international petrochemical industry is expected to rise higher. According to the PE ratios, the well-developed markets of the U.S. and West Europe are higher but their sales growth rates are smaller. Formasa has 11% sales growth and reflects the power in the Asia Pacific region. Compared with the U.S., Japan and Taiwan companies, prices of Yangzi Petro, Qilu Petro and Sinopec Shanghai are more reasonable. Companies in the PRC will have higher growth potential. We pick three A-share value investments, Yangzi Petro, Qilu Petro and Sinopec Shanghai, their PEs are still lower than others in the U.S., Japan and Taiwan markets. But according to their P/B, PS and Price/Cash flow, Price/EBITDA indicators, they are more expensive than the U.S., Japan and Taiwan markets. It is because the three companies operations in 2003 changed a lot compared to Yangzi Petro, Sinopec Shanghai finished the capacity expansion of ethene in 2002 and Qilu Petro made a loss due to the poor management. According to the sales growth rate, the growth rates of three companies are very high and the rise will enhance the values in the U.S., Japan and Taiwan markets. In conclusion, excluding the risks in countries, these three companies have the same investment value as other companies in well developed countries. International stock market supports the 20x PE level for petrochemical stocks. We also reviewed the historical prices of foreign markets. Based on those companies with strong operating and stable profitability, a median of 20x is confirmed. DOW Chemical maintained 15-20x PE prices during the bull markets in the US from It even ranked above 25x recently. PE of Formosa ranged between 20-30x; and the PE ratio of Korea s Honam was lower, but stil ranged over 10x and recorded over 20x highest. In conclusion, PE ratios of these companies will be enhanced under a bull market or for a long term. See back of report for disclaimer 11

12 DOW Chemical stepped out from stable PEs during and the growth of results pushed prices to go higher. Diagram 4: Historical Prices and PE of DOW Chemical PE of Formasa traded above 20x for long time. Diagram 5: Historical Prices and PE of Taiwan s Formosa Pricing in Korea market is low, but Honam had traded above 15x PE. Diagram 6: Historical Prices and PE of Korea s Honam Share Price Analysis for A-share Petrochemical stocks Through the price comparison of international oil companies, 15x is confirmed to be the median. Through the price comparison of international petrochemical companies, 20x is confirmed to be the median. Can the projection be applied to A share companies? Of course not. According to the PE projection, the computation of PE levels for companies which operate continuously and grow stable, are: See back of report for disclaimer 12

13 Projected PE = (Dividend Rate) / (ROE Growth rate) As a result, there are at least three PE pricing differences: PE levels for A-share market will be adjusted according to ROE, growth rate, operating capabilities and historical dividends. Restrictions on capital liquidity and market segregation will have different ROE How to differentiate the ROEs of domestic capital and global capital? Based on the condition in 2002, we conclude the following figures: (1) ROE of America s Dow Index is 12.8% and the Shanghai Stock Exchange 180 Index is 7.2%; (2) ROE for international oil enterprises is and 9.6% for Sinopec; we believe the ROE for overseas markets are positively correlated to profitability of enterprises; (3) Overseas investment banks require Chinese companies having 14-15% ROE in general and the existing projected ROE on domestic companies is about 9%. The figures mentioned above reflect the ROE of overseas enterprises is about 1.5x of domestic ROE. As a result, even there is a zero sales growth rate, the PE in the mainland will further increase 1.5x over the PE in the global market. Therefore, we are very concerned about the pressures of the launch of QDII. It brings an opportunity to have a higher ROE for domestic capital. And it will push the ROE for domestic stock market to rise, but the premium of ROE in mainland market will be reduced. When the domestic markets completely go in line with the international markets, then the restrictions on capital liquidity may be diminished totally, but it will take a long time. Different growth rates in different economic conditions Above 8% economic growth potential in China, over 6% growth of oil consumption demand and over 10% growth of petrochemical products have indicated the growth potential of domestic petrochemical companies surpassing international companies. The increase of growth rate will enhance the PE pricing standard of domestic companies. Maintain the capabilities of operation and dividend distribution A stable dividend policy is a kind of return to shareholders. If a company has not dividend policy, an investor is entitled to share remaining value after its liquidation. With the value investment is widely accepted by the market and the market improvement, dividend policies of value investment companies shouldfulfil investors interest. If a company s return of capital expenses is higher than a company s ROE, then dividend distribution can help a company s value to rise. Otherwise, it will harm a company s value. According to the existing situation, over 10% for ROA for the petrochemical industry has surpassed the required ROE from investors. See back of report for disclaimer 13

14 Recommend Sinopec with 20x PEs. Petrochemical stocks are priced at 20-25x PE. It depends on a company s results, and market atmosphere. If we apply the international pricing and PE pricing factors to the enterprises, we will recommend Sinopec which has 20x PE. Currently, H share of Sinopec traded at 12x PE and its ROE may push it to 18x. In addition, the high growth potential of companies, high reputation for mainland enterprises and premium of market liquidity etc. will continue to push up the company s valuation. Petrochemical industry in China is still expanding and the valuation of petrochemical industry may climb up to 25x PE in bull markets. We recommend the median PE pricing for Yangzi Petro, Sinopec Shanghai, Qilu Petro ranging between 20-25x. Their growing potentials may support them to becomeleaders of the mainland s petrochemical industry and have 30x PE levels. Due to the lack of companies complete business and constraint of international insights, we conservatively estimate the companies to have 20-25x PE. Nevertheless, we still believe growing results wil lead companies stock prices to rise and bring investors rich returns. Growing potentials of companies under the expansion of the industry Some say to buy or sell stocks of a cyclical industry when it gains the highest and has lowest PE, it will be the best opportunity to gain most. But, it is not true. The question is how to know when a company gains highest profit and how much profit the company will gain at most? Especially, it is impossible to have a correct projection when the industries are expanding. In addition, according to the historical prices of the companies, we could see the rising PEs pushing prices higher. Presently, petrochemical industry continues to rise without any reversion and stock prices are lower, so they are good opportunities for investment. The industry will rise in 2004 and the growth of companies may be higher than expected. According to the projection of petrochemical industry for 2004, the rising market may lead to surpass the expectation. The following table lists out major factors to affect the companies and results: Table 3: Changes of Petrochemical listed companies results Major Assumptions and Changes Projected EPS for 2004 Sinopec Prudent Expectation: Crude oil price US$25/b RMB0.22/shr Optimistic Expectation: Crude oil price US$28/b RMB0.26/shr Yangzi Petro: Basic Expectation: RMB0.72/shr Combined gross profit margin changes RMB100 Change RMb0.09/shr Polyolefin plastic gross profit changes RMB100 Change RMB 0.025/shr Sinopec Shanghai Basic Expectation: RMB0.26/shr Combined gross profit margin changes RMB100 Change RMB0.03/shr Gross profit of polyolefin plastic changes RMB100 Change RMB0.009/shr Combined gross profit of synthetic fibre changes Change RMB0.03/shr RMB1000 Qilu Petro Basic Expectation: RMB0.36/shr Polyolefin, PVC plastic gross profit changes RMB100 Change RMB0.023/shr (Note: Gross profit represents selling prices minus cost and production capacity is projected. The projected figures are for reference only) See back of report for disclaimer 14

15 GTJAS Investment Rating Standards for the Stock Sector: ADD: the sector index will outperform the market in 6-month NEUTRAL: the sector index will be in line with the market in 6-month REDUCE: the sector index will underperform the market in 6-month GTJAS Investment Rating Standards for the Stock: ADD: the stock price will rise 10% or above in 6-month NEUTRAL: the stock price will move -10% to 10% in 6-month REDUCE: the stock price will decrease over 10% in 6-month Research Report Disclaimers Editor: Christine Yim This report is only subject to GTJAS (HK) Ltd. Co. be circulated to specified clients and other professionals for reference information. Neither the information nor any opinions contained in this report constitutes a solicitation or offer by the Group to buy or sell. The GTJAS (HK) Ltd. Co., fellow subsidiaries, associates or other affiliates (the "Group") may become placing agent, lead manger, sponsor or underwriter or invest on any specific stock. This report may not be reproduced, distributed or circulated to other specified viewership, otherwise, it may violate certain of Securities Ordinances. Please also note that in relation to information provided, by GTJAS (HK) Ltd. Co. (GTJAS), we endeavour to ensure the accuracy and reliability of the information provided but do not guarantee its accuracy or reliability and accept no liability (whether in tort or contract or otherwise) for any loss or damage arising from any inaccuracies or omissions. The report may contain some subjective and prospective assumptions and judgements on future politics and economy without certainties. Investors should thoroughly understand the purposes and risks of equities and derivatives investment therein. Before making the investment, if necessary, investors should consult the professionals and then make a prudential investment decision. See back of report for disclaimer 15