Results in the first half of 2018 are in line with expectations

CNOOC reported results for the first half of 2018: net profit rose 159 per cent year-on-year to 752 million yuan, slightly higher than the high end of previous guidance. Excluding 60 million yuan in one-time income (mainly from the sale of Yichang mining), recurrent net profit rose 124% year-on-year to 692 million yuan. The comprehensive gross profit margin increased by 8 percentage points to 24% compared with the same period last year, and the gross profit margins of urea, phosphate fertilizer and methanol increased by 13%, 5% and 5% respectively. Sales of major products fell 8% year-on-year, mainly because factories in Fukushima I and Hainan II were overhauled as planned.

Trend of development

The high level of urea and methanol will continue in the second half of the year. We expect methanol prices to remain high in the second half of the year and continue to be one of the company's main sources of profit, mainly due to stable crude oil price prospects and strong demand for MTO and methanol fuel. At the same time, compared with the market, we are more optimistic about urea prices in the second half of the year, mainly considering the strengthening of environmental regulation and the shortage of natural gas supply in winter. We believe that the overall utilization rate of the domestic urea industry will remain at a low level.

The product structure continues to improve. NPK production rose 134 per cent to 117000 tons in the first half compared with the same period last year. We expect full-year production to easily exceed the original management guidance of 150000 tons, and the improvement in product structure is expected to continue to support the improvement in profit margins of phosphate fertilizer and NPK operations.

Restart the POM plant or contribute additional profits. Amano POM sells for about 13-14,000 yuan per ton, with a net profit of 4000 yuan per ton. The company guides sales of 9000 tons of POM,2018 in the second half of the year and is expected to contribute 36 million yuan to net profit.

Profit forecast

We maintain profit forecasts and target prices.

Valuation and suggestion

The current share price corresponds to 0.7 times 2018 and 2019 market-to-book ratios. We maintain our target price of HK $3.3, which corresponds to 0.9 times 2018 and 2019 market-to-book ratios and 19% upside from the current share price. Maintain the recommended rating.

Risk.

Demand for fertiliser is weak; oil and coal prices fluctuate.