A refining and chemical engineering giant under the Sinopec Group, has excellent financial performance. The company is controlled by Sinopec Group and is a major engineering service provider and technology patent provider for the refining and chemical engineering market. 57% of the company's revenue in 2023 came from the business of Sinopec Group and its contacts. The company's balance ratio remains around 60%, and there is almost no interest-bearing debt. In 2023, the company generated financial revenue of 1,091 billion yuan, accounting for 39% of profit before tax. Against the backdrop of vigorous development of overseas markets, the company's performance and valuation are expected to continue to rise.

The scale of the business is outstanding, covering the entire refining and chemical engineering industry chain, and the competitive advantage in the industry is remarkable. The company's business scale is outstanding, and its subsidiaries occupy three of the top ten domestic petrochemical engineering enterprises. The company provides four businesses, including design/consulting and technical licensing services, general engineering contracting services, construction services, and equipment manufacturing, covering the entire refining and chemical engineering industry chain. The company focuses on the main business of refining and chemical engineering. Compared with China Chemical and CNPC Engineering, the company's revenue center and gross margin are superior to competitors' corresponding businesses.

Seizing new opportunities in domestic and overseas markets, the number of new overseas orders has increased, and the company can be expected to grow. (1) In the domestic market, refining capacity expansion is nearing its end. Production capacity for chemicals represented by ethylene is still at its peak. Sinopec's total refining+chemical capital expenditure fell slightly by 4% in 2023 and remained relatively high. During the “14th Five-Year Plan” period, it still has reserves for large-scale projects such as Tahe Ethylene and Yueyang Ethylene, which is expected to support the steady growth of the company's domestic contract amount. (2) In overseas markets, Sinopec Group deepens “Belt and Road” cooperation. The company has fully benefited from platform advantages, and the prospects for receiving orders in the Middle East market are broad. The number of new overseas contracts signed by the company in 2023 was 21.4 billion yuan, a sharp increase of 198% over the previous year. The company focused on the “Belt and Road” route. As a number of new EPC contracts such as the Saudi Amiral Project advance, the company's overseas business is expected to usher in rapid growth.

The company has the characteristics of high profit+high dividend+undervaluation, and the valuation is expected to increase in the context of state-owned enterprise reform. The company's valuation has long been lower than that of A-share petrochemical engineering companies, but its profitability is stable. The company's ROE in 2023 was 7.6%, which is at a higher level compared to A-share peers. The company maintains high dividends, with a dividend payment rate of 65% in 2023, and a dividend rate of 9.9%, while the dividend rate of A-share companies is generally below 3%.

We believe that the company has the characteristics of high profitability and high dividends. In the context of deepening reform of state-owned enterprises and improving the operating quality of state-owned enterprises through the “one profit, five rate” assessment, the company is expected to boost valuation and drive value revaluation.

Profit forecasting, valuation and rating: The company relies on Sinopec Group's resource advantages and continues to explore overseas markets. Performance is expected to usher in rapid growth. The company's undervaluation+high dividend value is prominent in the context of state-owned enterprise reform. We expect the company's operating income for 24-26 to be 592, 64.1, and 68.1 billion yuan, respectively, and net profit to mother of 26.38 billion yuan, 29.15, and 3.182 billion yuan, respectively. The corresponding EPS is 0.60, 0.66, and 0.72 yuan/share, respectively. Combining relative valuation and absolute valuation methods, we believe that the company's current stock price is undervalued. We gave the company 0.8 times PB for 24 years, and the corresponding target price was HK$6.22. For the first time, we covered it and gave the company a “buy” rating.

Risk warning: risk of fluctuations in refining and chemical industry prosperity, project progress falling short of expectations, overseas market risk, exchange rate risk.