1H19 performance is in line with our expectations

Sinopec Guande 1H19's net profit declined 4% year over year to HK$726 million, or HK$0.2925 per share, in line with our expectations. The company paid a mid-term dividend of HK$0.08/share, an increase of 60% over the previous year. The payout rate reached 27.4%, and the dividend yield corresponding to the latest closing price was about 5%.

Crude oil terminal: 1H19's wholly-owned company Huade Petrochemical's handling volume was the same year on year, and profit fell 11% year on year; while the handling volume of the six joint ventures increased 7.6% year on year, which basically coincided with the 8.8% growth rate of China's crude oil imports in the first half of the year, achieving a 9.1% increase in investment income.

Yuji Pipeline: 1H19 gas transmission volume fell 10% to 1,924 million cubic meters, mainly due to 1) the completion and operation of Sinopec's Oancang gas pipeline, which diverted some of the LNG gas sources at the Qingdao Wharf; 2) the outsourced gas source from CNPC dropped 90 million cubic meters over the same period last year. Pipeline transportation fees fell 4% year on year to HK$0.22/m3, but under RMB caliber, the year-on-year increase was 2% to about 0.19 yuan/m3. Pipeline's overall profit declined 21% year over year to HK$166 million.

LNG carriers: The number of voyages of the 2 PNGLNG project vessels 1H19 decreased due to maintenance, and the investment income also fell by about HK$2.3 million year-on-year, but this loss will be covered by insurance in the future; the number of voyages of the 6 APLNG project vessels has increased steadily, and the return on investment has increased by 21.5% year-on-year.

Development trends

There is still no shortage of bright spots in the development prospects of the terminal business. We found that the company's terminal business still has many growth highlights in the future. For example, Huade Petrochemical and CNOOC signed a cooperation agreement with Huizhou, which we think is expected to help improve terminal utilization; Zhanjiang Wharf has received preferential tax policies and continues to expand business related to refined oil products; in the future, with the completion of supporting crude oil transportation pipelines, we believe that the terminal's throughput is expected to continue to rise; in addition, we judge that Qingdao terminal business development is expected to benefit from the implementation of the IMO2020 regulations.

The company's dividend capacity continues to improve. In recent years, as the profitability of the terminal business continues to improve, the debt ratio of terminal companies that are joint ventures of companies has continued to decline, and the ability to pay dividends has also continued to increase. The total amount of distributable cash generated by the company's operating entities in the first half of this year exceeded 560 million yuan, and we expect it to exceed 1 billion yuan for the whole year (about 800 million yuan last year). We believe the company's actual dividend level is also expected to continue to rise.

Profit forecasting and valuation

Maintaining the profit forecast and target price of HK$4.45, corresponding to 8.0 times the 2019 price-earnings ratio and 46% upside, the current stock price corresponds to 5.5 times the 2019 price-earnings ratio.

risks

The State Pipeline Network Corporation may divest the Yuji Line; the arbitration of the Batam project may have an unfavorable outcome.