Full-year net profit for 2019 will decline 47-50 per cent year-on-year. CNOOC issued a profit forecast. Net profit for 2019 is expected to fall 47-50 per cent year-on-year to 6.85-725 million yuan. The company's performance is lower than our forecast, we think it is mainly because the product price is lower than expected.

The full-year profit forecast corresponds to a net profit of RMB 1.86-226 million in the second half of 2019, a month-on-month drop of 55-63 per cent compared with the core net profit in the first half of 2019. We expect that the average ex-factory prices of urea and methanol will drop by 7% and 12% respectively in the second half of the year, and the corresponding gross profit margin will drop by 34% and 63% respectively.

We believe that the main reasons for the decline in urea and methanol prices in the second half of the year are: 1) the decline in domestic demand in agricultural, industrial and chemical industries; 2) the decline in international crude oil prices; and 3) the increase in industry-wide output affected by the expansion of new capacity and the increase in operating rate.

We believe that the company's factory operation is sound in the second half of the year, and we do not expect a large one-time loss or equipment impairment at the end of the year. However, we do not rule out the possibility that the company may provide for some financial impairment, resulting in lower-than-expected results.

Pay attention to the main points

Focus on dividends. Although the company's performance is not as good as our forecast, we think the stock price has basically reflected. If the company maintains a high dividend ratio, we think it may give a positive boost to the stock price. Given the company's strong balance sheet and rising dividend ratios over the past three years, we expect the investment logic of the company's high dividend yield to remain valid and the downside risk of the stock price is limited.

Valuation and suggestion

We have lowered the price assumptions of major products and lowered our earnings per share forecasts for 2019-2020 by 31% and 30% to 0.16 yuan and 0.17 yuan respectively. We introduce a profit forecast of 0.20 yuan per share in 2021. We cut our target price by 25% to HK $2.10, corresponding to 0.6 times 2020 price-to-book ratio, which has 29% upside from the current share price. Currently, CNOOC Chemical Trading is trading at 0.4 times 2020 market-to-book ratio. We maintain an outperforming industry rating.

Risk

Demand is weak; oil and coal prices fluctuate wildly.