2H19 performance is in line with our expectations
CNOOC Petrochemical announced its 2019 results: its net profit was 703 million yuan, down 49% from the same period last year, falling within the range of 6.85-725 million yuan previously forecast by the company. 2H19 achieved a net profit of 205 million yuan, down 67% from the same period last year, in line with our expectations. The company's 2H19 annual profit fell sharply compared with the same period last year, mainly due to a sharp drop in methanol prices, causing 2H19's gross profit margin to fall 9 percentage points to 16%, of which methanol gross profit margin fell 21 percentage points to 18%.
Although the company's performance in 2019 was seriously dragged down by product price factors, there are still many bright spots at the operating level, which to a certain extent offset the price disadvantages: 1) Urea production and sales reached a record high, of which 2H19 urea sales increased by 24% to 1.43 million tons compared with the same period last year, mainly due to the fact that the upstream gas supply was more adequate than in previous years last winter, and the operating rate of Amano Chemical and other plants was significantly higher than in previous years. 2) the sales volume of high value-added compound fertilizer (NPK) further increased by 75000 tons compared with the same period last year, reaching a record high, and the compound fertilizer market expansion effect is good; 3) the C line of the polymethanol (POM) plant restarts, driving the production and sales of POM to increase compared with the same period last year.
By the end of 2019, the company's balance sheet remained strong, mainly due to the company's cautious capital expenditure strategy in recent years, with net cash on hand reaching 6.71 billion yuan, down 15 per cent from a year earlier.
The company plans to pay a dividend of 0.15 yuan per share, which is basically the same as that in 2018, and the dividend yield corresponding to the latest closing price is as high as 13%.
Trend of development
Gross margin may be difficult to return to previous highs in the short term. Historically, the fluctuation of the company's gross profit margin is highly related to the oil price, mainly because the price of its main products, especially methanol, is highly linked to the oil price. Considering that international oil prices have fallen sharply to low levels since the beginning of this year due to the breakdown of OPEC+ negotiations, we expect that international oil prices and methanol prices may be difficult to recover in the short term, and the competitiveness of gas-to-methanol plants may be greatly weakened.
The investment logic of high dividends still exists. However, even under the more moderate gross margin assumption (we expect the annual gross margin for 2020-21E to be 17-19% compared with 18% for .2019A), we expect the company to make a profit of about 700 million yuan over the next two years, while the company's strong balance sheet is still expected to support the company to maintain a dividend payout ratio of 50% or more.
Profit forecast and valuation
Keep the profit forecast for 2020-21 unchanged, and maintain the target price of HK $2.10, corresponding to 0.6 times the 2020 market-to-book ratio and 66% upside. Maintain the "outperform industry" rating. The current share price corresponds to 0.3 times 2020 market-to-net ratio.
Risk.
Oil prices have remained low for a long time; demand is weak.