2018 results fell short of expectations
Sinopec Guande's net profit for 2018 increased 4% year-on-year to HK$1.26 billion, lower than our expectations and market consensus expectations, mainly due to company expenses exceeding expectations. The company plans to pay a full-year dividend of HK$0.15 per share, corresponding to a 30% dividend payment rate.
Company administration fees increased 28% year over year, mainly due to increased arbitration fees for the Batam project. We expect the case to be closed in the middle of this year. From then on, the company's expenses due to litigation are expected to drop year on year.
In 2018, the company's pipeline gas transmission volume increased by 13% to 4.7 billion cubic meters, of which the gas transmission volume from liquefied natural gas (LNG) resources increased by 160% to 1.3 billion cubic meters.
Development trends
The company's crude oil terminal sector performance is expected to grow moderately in 2019, mainly due to:
1) China's crude oil imports are expected to maintain an annual growth rate of 6-8% in 2019; 2) a new pipeline at the Qingdao Terminal will be put into operation from the end of 2018; 3) Customer maintenance is expected to decrease.
The volume of handling at Rizhao Wharf is expected to increase significantly from 2020. Rizhao Terminal currently has three pipelines in the construction stage, which are expected to add 45 million tons of transportation capacity to the company's downstream customers. The three pipelines are expected to be completed by the end of 2019 or the beginning of 2020.
Natural gas sources are expected to increase further. We expect LNG resources from Qingdao to grow further in the next few years. At the same time, we expect Sinopec's Daniudi gas field to increase production by 500 million cubic meters from 4Q19, increasing the gas transmission volume of the Yuji Line after 2020.
It is probably too early to discuss whether the Yuji Line can remain in Sinopec's Guande. However, considering that the company's current stock price is below book value, we think even considering the possibility of divesting pipeline assets at book value is a good choice for the company.
Profit prediction
Considering that the company is likely to achieve moderate growth in 2019, we lowered the company's earnings per share forecast for 2019 by 24% to HK$0.56. At the same time, we have introduced the company's 2020 earnings per share forecast of HK$0.62.
Valuation and recommendations
Taking into account the lower earnings per share forecast, we maintained our “recommended” rating, but lowered the company's target price by 24% to HK$4.45. The new target price corresponds to 8 times the 2019 price-earnings ratio and 27% upside. The company's current stock price corresponds to 6 times the 2019 price-earnings ratio.
risks
Pipeline construction progress has been delayed; gas delivery has fallen short of expectations.
