Sinopec: A stable state-owned enterprise with high dividends. The company is a leading petrochemical integration enterprise controlled by the State Assets Administration Commission. Unlike the other two barrels of oil, the company's business focuses on middle and downstream refining and refined oil product sales. The performance went through the oil price cycle. The 2001-2022 revenue and net profit CAGR were about 12% and 8%, respectively. ROE performance increased steadily, and the ROE center was about 11% from 2001 to 2022. At the same time, the company values shareholder returns, and the 2022 dividend rate reached a high level of over 8%.
Profit Thinking: Can performance be maintained?
Exploration: Volume and price increases steadily. In the context of autonomous and controllable national energy security, in terms of volume, the company achieved oil and gas equivalent production of 376.15 million barrels in the first three quarters of 2023, +3.6% over the same period last year. Driven by increased storage and production, subsequent production increases can be expected. On the price side, we expect Brent oil prices to continue to fluctuate strongly in the range of 70-85 US dollars/barrel in the future; on the cost side, the company has deep technical reserves in the field of exploration and development, and with the detailed development of old oil fields and the continuous development of new oil fields, the company's barrel oil costs are expected to decline. Volume increases and prices have been steady, and the company's overall exploration business has maintained a high level of profit.
Refining: Profits are stable. As can be seen from the review, based on the pricing mechanism for refined oil products of the National Development and Reform Commission, when barrels of oil are 40-80 US dollars, the gross margin of the company's refining business remains above 20%, and the oil price tolerance is higher than the industry average. Currently, the company has 17 10 million ton refineries, with a total refining energy of 285 million tons/year, a domestic market share of over 30%, and a deep moat in terms of scale, technology, and capital. Domestic energy refining is almost a red line+overseas energy revolution deepens, and the mismatch between supply and demand favors the cracking price difference of refined oil products remains medium to high.
Chemical industry: improving quality and upgrading. In the short term, traditional chemicals are still in a period of high production capacity, and the price difference falls into the relative bottom range due to pressure on the supply side; in the medium to long term, under stricter approval for ethylene production capacity, the company now has 11 million-ton ethylene production capacity, with outstanding stock asset advantages; Zhenhai Refining and Chemical, a high-quality project under construction by the company, is expected to be gradually put into operation within the next three years, and new materials with high added value, such as POE and EVA, continue to break through, and the internal structure of the chemical business continues to be optimized.
Sales: Batch zero increase. Sales of refined oil products are an important source of revenue contribution for the company. With macroeconomic expectations improving, consumption of refined oil products is expected to continue to grow, driving a steady increase in overall sales. Furthermore, as can be seen from the review, the zero-batch price spread has stabilized during the period of high oil price fluctuations. Based on the current global crude oil supply and demand pattern, we believe that the zero-batch price spread is expected to remain within a reasonable range in the future. The non-oil business relies on its own gas stations to establish a complete sales network. Easyjet convenience stores have blossomed in many locations across the country, and profit performance has been stable and improving.
Valuation Thoughts: How about room for improvement?
Essentially, intrinsic value has increased: in the new round of deepening reforms of central enterprises, based on the assessment goals of “one profit, five rate” and “market value management”, the company is the vanguard of domestic transformation and upgrading, reform and innovation, improving corporate governance capabilities and lean management vitality efficiency in terms of management, and vigorously promoting the development of products with high added value and technological innovation in production.
Global refining and chemical asset valuation benchmark: According to Wind, as of February 8, the PB (MRQ) of the company (A/H) was 0.89x/0.56x, respectively, lower than leading domestic private refining and chemical companies and international petrochemical giants. On the one hand, the intrinsic value of the company's own assets continues to rise; on the other hand, under the constraints of the domestic 1 billion ton refining red line, the company's existing refinery assets with strong competitive strength are more likely to highlight scarcity after this round of industry reshuffle, and the valuation should receive a corresponding premium.
Combined with incentives from the policy side, the company's overall valuation is expected to return to a rational level.
High dividends reinforce asset defense value: In a low interest rate market environment, the company's dividend performance has crossed the cycle. Since 2014, the dividend payment rate has remained above 50%, and the 2022 dividend rate has exceeded 8%. Based on the closing price on February 8, the company's (A/H) dividend ratio (TTM) is 5.7%/9.2%, respectively, which is significantly higher than the current 10-year Treasury yield of 2.4%. In addition, the company attaches importance to shareholder returns. Under measures such as increasing shareholders' holdings+domestic and foreign repurchases, the dividend rate level is expected to continue to rise, demonstrating the company's confidence in long-term development.
Profit forecast and valuation: We expect the company's net profit to be 728.63, 784.18, and 84.305 billion yuan in 2023-2025, respectively, +9.9%, +7.6%, and +7.5% year-on-year, and EPS of 0.61, 0.66, and 0.71 yuan respectively. Based on the closing price on February 8, 2024, the corresponding PE is 9.8x, 9.1x, and 8.5x, respectively, and the corresponding PB is 0.9x, 0.8x, and 0.8x, respectively. The company is an integrated international giant focusing on the middle and lower reaches. The high oil price environment guarantees profits. The low interest rate market environment reflects the strong defensive value of high-dividend assets. Empowered by technology, the company's internal asset structure is continuously optimized, and the company's valuation is expected to be reshaped under policy catalysis. First coverage, giving a “buy” rating.
Risk warning: economic downturn, demand falls short of expectations, large fluctuations in oil prices, project construction progress falls short of expectations, exchange rate fluctuations, untimely information updates, etc.