2018 results are in line with profit forecasts
CNOOC's net profit of RMB 1,379 million in 2018 was RMB 1,379 million, in line with previous forecasts. Net profit for the second half of 2018 was 627 million yuan, down 17% from the previous month. However, gross profit increased by 6 percentage points year over year, exceeding our expectations (considering the possible decline in prices of major products in 4Q18, we had anticipated a month-on-month decline in 2H18 gross margin). Management said the average price of 2H18 products remained stable month-on-month.
The company's balance sheet was very strong in 2018, with net cash reaching 7.9 billion yuan at the end of the year.
The company plans to pay a dividend of 0.15 yuan/share, with a corresponding dividend yield of 6.6%, the highest level since 2012 (the company's profit exceeded 1.8 billion yuan in 2012).
Development trends
The gross margin of 1H19 is expected to decline month-on-month, mainly considering that the average price of the product may fall month-on-month.
We expect coal and crude oil prices to fall year over year, so there is a risk that the company's gross margin in 2019 will also decline.
The impact of potential gas price increases is expected to be limited. We expect gas price increases in the off-season to have limited impact on the company, as most of the company's gas supply comes from the long-term partnership signed with the brother company CNOOC. Only Tianye Chemical in Inner Mongolia is supplied by CNPC, and there is a risk that gas prices will rise.
Dividends are expected to remain high, mainly considering the company's strong balance sheet, good cost control, and stable profit growth prospects.
Profit forecasting
The profit forecast for 2019-2020 remains unchanged, but the payout rate forecast was raised from 40% to 50%.
Valuation and advice
Maintaining the recommended rating and target price of HK$3.1, corresponding to 0.9 times the 2019 net market ratio, there is room for 21% upward from the current stock price. Currently, the company is trading 0.7 times the 2019 net market ratio.
risks
Demand for fertilisers and chemicals is weak; oil and coal prices fluctuate.