Key points of investment
Sinopec Guande is Sinopec's oil storage logistics and natural gas transportation platform. The company operates operations such as handling, storage and transportation of petroleum and petrochemical products, pipeline transportation of natural gas, and shipping of LNG. It has 7 crude oil terminals, a natural gas pipeline (Yuji Line), 2 LNG shipping projects (8 ships), and 3 overseas warehousing projects.
Industry opinion: (1) We expect China's crude oil imports to stabilize after maintaining growth for a certain period of time. The growth rate of China's crude oil imports will begin to decline in 2018-2020, but it is expected to remain above 5% per year. In 2020-2030, domestic crude oil production is expected to be stable, and external dependence may continue to be above 70%. (2) China's natural gas industry still has a lot of room for development, and the reform of the pipeline network is ongoing. In the long run, China's natural gas consumption space is huge, and by 2035, China's natural gas consumption is expected to double compared to 2017. The industry is currently undergoing reforms, and the establishment of the National Pipeline Company is expected to have initial results in the first half of 2019.
The company's crude oil terminal is expected to make stable profits. Crude oil imports from the company's terminals account for more than 50% of the country's total crude oil imports. It is expected that this business will first maintain a slight increase and then remain stable due to industry characteristics. The main contribution during the growth period comes from the increase in demand brought about by the expansion of refining production capacity in Shandong.
The new gas field+pipeline expansion is expected to increase the profit of the Yuji Line. In September 2017, the Yuji Line's pipeline price adjustments for the new three years were implemented. Beginning in 2019, it is expected that it will benefit from the gas volume contribution of the new Dongsheng gas field and the increase in annual pipeline transportation capacity (4 billion square meters to 5 billion square meters).
The LNG carrier business continues to contribute to increased profits. The two LNG projects in which the company has participated have already put into operation 8 LNG carriers. Future interest payments will decrease year by year, and the investment income of the company's LNG ship project will increase year by year.
The company's debt ratio is currently low, future capital expenditure is limited, and there is room for improvement in the dividend rate. The company's debt ratio as of 2018H1 was 30.3%, and the payout rate in 2017 was 24.7%. We believe that as the company's various businesses enter a mature stage, there is room for improvement in future payout rates.
For the first time, Sinopec's Guande was covered with a “buy” rating. The DCF valuation received a target price of HK$4.46, corresponding to 0.9 times PB in 2018. Currently, the company's valuation is low, so it is recommended to pay active attention.
Risk warning: 1. Pipeline divestment pricing is lower than expected; 2. Demand for refining in Shandong is declining; 3. Asset impairment of Indonesian project assets; 4. Dividends fall short of expectations