Core profits increased by 26.3% over the same period last year. Excluding the one-time impairment of the Qinghai Damei project and its tax impact, we estimate that the company's shareholder net profit in 2021 will reach 3.007 billion yuan, an increase of 26.3% over the same period last year, thanks to the growth of income (+ 10.3%) and the improvement of gross profit margin (+ 0.3%). Taking into account the increase in commodity prices during the year and the remarkable improvement in gross profit margin, we believe that this reflects the company's continued efforts in the digitization of operations, standardization and value chain optimization.
The company's guidelines for newly signed contracts in 2022 are about 66 billion yuan, an increase of 5.0% over 2021, which is in line with our judgment that the investment prospect of the domestic oil refining and chemical industry under China's "double carbon" target is still sound.
Noteworthy trend: we believe that the company plays a key role in leading the low-carbon transformation of China's oil refining and chemical industry.
The company owns or is steadily advancing a range of technologies that make energy transformation possible, including oil conversion, new materials, hydrogen and carbon capture, storage and utilization.
Reiterate "buy" and raise the target price to HK $6.00. We believe that China Petroleum & Chemical Corp Refining and Chemical Project, whose valuation is too low or even the market value is lower than the cash on hand, is an attractive carbon reduction theme stock that is still not known by most investors. The company's dividend yield of 11.4% in 2022 is also attractive (supported by sufficient orders on hand and plenty of cash). We think the company deserves a higher valuation. Our target price of HK $6.00 is based on a price-to-earnings ratio of 7.8 times 2022 (0.5 standard deviation higher than the company's five-year historical average forward price-to-earnings ratio).
Core profits increased by 26.3% over the same period last year. The performance of China Petroleum & Chemical Corp Refining and Chemical Engineering (the "company") in 2021 was distorted by the non-recurrent impairment provision of 1.118 billion yuan for the Qinghai Damei project, resulting in a 10.6% year-on-year drop in shareholders' net profit to 2.13 billion yuan. Excluding the impairment provision and its tax impact (assuming an effective tax rate of 21.5%), we estimate that the company's shareholder net profit in 2021 will reach 3.007 billion yuan, an increase of 26.3% over the same period last year. Thanks to revenue growth (+ 10.3% year-on-year) and improvement in gross profit margin (+ 0.3% year-on-year), it is partly offset by an increase in R & D expenses (+ 9.4% year-on-year). Taking into account the increase in commodity prices during the year and the remarkable improvement in gross profit margin, we believe that this reflects the company's continued efforts in the digitization of operations, standardization and value chain optimization.
The final dividend hit an all-time high to make up for the reduction in the interim dividend. The company announced an all-time high of RMB 0.222 per share at the end of 2021 (2020:
RMB 0.187 per share) to cover the smaller mid-term dividend of RMB 0.091 per share in 2021 (2020: RMB 0.113 per share). We believe that the increase in the final dividend reflects the company's management's confidence in future earnings growth and its emphasis on shareholder returns. The total dividend in 2021 will be RMB 0.313 per share (2020:
0.300 yuan per share), which means a dividend yield of 10.2%, based on the company's average share price over the past three months.
Business outlook
The company expects the amount of newly signed contracts to continue to grow in 2022. The guidelines for the newly signed contracts of the company in 2022 are about RMB 66 billion (domestic: RMB 60 billion; overseas:
1 billion US dollars), an increase of 5.0 per cent over the new signing in 2021. This guide is in line with our judgment that the investment prospect of the domestic oil refining and chemical industry is still sound under China's "double carbon" goal.
We believe that carbon reduction should not be seen as subversive to the industry, as it is basically in line with the supply-side reforms that China has been implementing since 2015, aimed at promoting the sustainable development of the country's industrial sector. Considering the current stage of development of China's oil refining and chemical industry, we believe that industry carbon reduction is achieved more through transformation, upgrading and integration than through investment restrictions.
Driven by the continued growth in the number of newly signed contracts since 2017, the company's outstanding orders reached a record high of 111 billion yuan by the end of 2021, up from 106 billion yuan a year ago. This will support income growth in 2022.
Profit adjustment
We forecast shareholder profits of 2.782 billion yuan, 2.933 billion yuan and 3.089 billion yuan respectively from 2022 to 2024. Although we assume that gross profit margins will increase in 2022 and 2023, our profit forecasts for these two years remain basically unchanged compared with previous forecasts due to higher forecasts for R & D costs. We expand our forecast to 2024 and expect earnings to continue to grow, mainly due to continued growth in newly signed contracts and stable gross profit margins.
Valuation
Reiterate "buy" and raise the target price from HK $5.80 to HK $6.00. We believe that China Petroleum & Chemical Corp Refining and Chemical Project, whose valuation is too low (Bloomberg unanimously expects its forward price-to-earnings ratio to be 4.9 times and forward price-to-book ratio to be 0.4 times forward price-to-book ratio) and even its market capitalization is lower than the cash on hand, is still not known by most investors as an attractive carbon reduction theme stock. The company owns or is steadily advancing a range of technologies that make energy transformation possible, including oil conversion, new materials, hydrogen and energy storage. The company's dividend yield of 11.4% in 2022 is also attractive (supported by sufficient orders on hand and plenty of cash). We think the company deserves a higher valuation. Our target price of HK $6.00 is based on a price-to-earnings ratio of 7.8 times 2022, 0.5 standard deviation higher than the company's five-year historical average forward price-to-earnings ratio.