The company's recent situation

On August 18, 2023, the 13th meeting of the fourth board of directors of Sinopec Refining and Chemical Engineering reviewed and approved the “Proposal on the Implementation Plan for Share Repurchase”. According to the repurchase authorization and related motions, the company repurchased H shares for the first time on October 19, 2023. The Hong Kong Stock Exchange Limited repurchased 443,000 H shares within the price range of HK$3.66 per share and the lowest price of HK$3.56 per share. The total purchase amount for this repurchase of H shares was HK$1,588,819.5.

reviews

A solid balance sheet and steady cash flow support ongoing repurchases. By the end of 2022, the company had net cash of about 20 billion yuan, operating cash flow of 6.8 billion yuan, market capitalization of about 135 billion yuan, and a balance ratio of 62%. We believe the company has a good balance sheet and cash flow to support continuous repurchases.

Repurchase starts, returns to shareholders. The company announced the opening of the first repurchase on October 19, totaling 443,000 shares, with a total amount of HK$1.95 million, accounting for about 27% of the day's trading volume. We believe this will be a significant return to shareholders.

New orders are expected to remain the same year on year throughout the year. Domestic: Sinopec plans to add about 10 million tons of ethylene production capacity and carry out overhaul/renovation of 5-6 million tons of ethylene projects from 2023-2025 (we judge that the total capital expenditure is expected to exceed 200 billion yuan). As a company within the same system as Sinopec, we think there is a high probability that Sinopec will undertake refining and chemical projects. Overseas: 1) The total number of new overseas orders completed by 1H23 (including new contracts that have been won but not included) exceeds 2.4 billion US dollars (exceeding the company's guidance for new overseas orders of 1.5 billion US dollars in 2023 at the beginning of this year); 2) We believe that in the context of a sharp increase in oil demand in the Middle East in the global market (due to geopolitical conflict) and the Southeast Asian economy continuing to pick up both domestic demand and exports (there is a marked increase in willingness to increase production capacity), the company will accelerate the pace of developing overseas markets, focus on countries along the “Belt and Road”, and overseas orders are expected to increase further.

The boom in chemical construction remains high. With the rapid recovery of the Chinese economy, strong demand for Chinese chemical construction, and a large number of projects within the system, we expect the high level of industry prosperity to remain high in 2023, and at least until 2025. Furthermore, we judge that projects within the system can give the company better cash flow, and that EPC accounts for a relatively high proportion, and that the total project profit is superior to external private enterprise projects.

Profit forecasting and valuation

Maintaining the 2023/24 profit forecast, outperforming industry rating, and HK$4.5 target price unchanged, corresponding to 7 times the 2023 price-earnings ratio and 6 times the 2024 price-earnings ratio, there is 25% upside from the current stock price.

We judge that the company's dividend yield will remain at a high level of 10% or more on 2023/24, and the valuation is attractive. The current stock price corresponds to 6 times the 2023 price-earnings ratio and 5 times the 2024 price-earnings ratio.

risks

New orders, gross profit margin, and dividends fell short of expectations.