Recurrent profits are lower than expected
CNOOC announced FY17 annual results: revenue rose 15% year-on-year to 9.8 billion yuan; net profit 50 million yuan (FY16 annual loss of 216 million yuan), or 0.01 yuan per share.
The recurrent net profit is 579 million yuan (excluding the impact of 529 million yuan one-time items, including 443 million yuan in impairment loss, 48 million yuan in exchange loss and 37 million yuan in inventory decline), which is 31% lower than our expectation. mainly because we overestimated the urea gross profit margin by 6.7 percentage points. By the end of 2017, net cash rose 26 per cent year-on-year to 6.1 billion yuan, accounting for 46 per cent of the company's shareholders' equity. The management plans to pay a special dividend of 0.07 yuan per share, with a dividend yield of 642% and a dividend yield of about 4%.
Trend of development
Utilization may decline in 2018: although the operation of the Amano urea plant was affected by natural gas shortages last winter, the company's urea capacity utilization increased by 8 percentage points to 96% in 2017 compared with the same period last year. We expect the utilization rate of urea capacity to drop to about 89% this year, mainly because there may also be a shortage of natural gas supply this winter and the Hainan plant plans to carry out maintenance.
Improve the product structure of compound fertilizer: the output of high-profit compound fertilizer in FY17 increased from 38000 tons in FY 16 to 100000 tons. Management expects compound fertilizer production to exceed 150000 tons this year.
Natural gas supply: Dongfang 13-2 gas field is expected to start supplying gas to Hainan plants from the fourth quarter of 2018, and the cost of natural gas is expected to fall. In the long run, we expect the new gas source to help the company rebuild its low-cost advantage.
Gradual increase in cash: the company's earnings before interest, tax, depreciation and amortisation (EBITDA) rose 153% year-on-year to about 2.1 billion yuan (only 1.7 times EV/EBITDA at current share prices) in FY17. We expect EBITDA to be further raised to the level of 24-2.8 billion yuan in the next two years. Net cash is expected to exceed 8 billion yuan by the end of 2019.
Profit forecast
Considering the lower-than-expected increase in urea gross profit margin and the maintenance plan for 2018, we cut our earnings per share forecast by 16% to 0.18 yuan in 2018. The introduction of 2019 earnings per share is expected to be 0.23 yuan.
Valuation and suggestion
The current share price corresponds to 0.59 times 2018 market-to-book ratio and 0.56 times 2019 market-to-book ratio. We lowered our target price by 12% to HK $2.8, corresponding to 0.75 times 2018 market-to-book ratio and 0.71 times 2019 market-to-book ratio, which is 29% upside from the current share price. Maintain the recommendation.
Risk.
Price fluctuations; weak demand; overcapacity; natural gas shortage.