The long order backlog will ensure steady growth for Sinopec Engineering (SEG) in the next couple of years. The domestic demand from building new petrochemical plants and green energy transition is abundant. After its overseas new orders tripled in 2023, we expect SEG to make further progress in developing overseas market. Its huge cash pile will continue to generate decent interest income to reduce earnings volatility and enable the company to keep high payout. We initiate coverage with a BUY with target price at HK$7.00.
Key Factors for Rating
The value of SEG's new orders grew 11% YoY to RMB80.3bn in 2023, the highest level in ten years. The coverage of order backlog to turnover increased to 2.4x by end-2023, ensuring growth in turnover and profit in the next couple of years.
While the company conservatively guides for 2% YoY growth in the value of new orders in 2024, the value of new orders jumped 80% YoY to RMB33.8bn in 1Q24, already achieved 41% of its full-year target.
While the demand for building new oil refineries in China looks limited, the room for building new petrochemical plants remains abundant with self-sufficiency rate in terms of ethylene equivalent was just 67.4% in 2023. Chemical plants with total ethylene capacity of 18.2m tpa are already under construction and we expect SEG to secure further new orders from these projects.
The transition to green energy also offers new market opportunities for SEG. It has built the largest green hydrogen production line so far in China and we expect it to get the orders for two even bigger plants from Sinopec Group. In addition, it has also secured a new order to build a plant for green methanol which is in high demand amid the green transition of marine fuel.
The value of new orders in overseas market almost tripled YoY to US$2.98bn in 2023. As it has successfully developed FEED and PMC business in Saudi Arabia and secured orders for design and consulting in four other countries, SEG is well- positioned to make further progress in overseas market.
SEG's shares offer high dividend yield of 7.9%-9.3% for 2024-26E. It is especially attractive considering it is a subsidiary of a SOE under China's central government.
Key Risks for Rating
Decline in gross margin.
Sharp rise in R&D expenses.
Valuation
We set our target valuation based on 6.5% average dividend yield for 2024-26E.
Our target price HK$7.00 is equal to 10.9x 2024E P/E.
