China International Capital Corporation Limited (CICC) released a research report stating that it is maintaining its 'outperform' rating for Sinopec SEG (02386) and raising its target price by 20% to HKD 6.1. The company reported 1H24 revenue of RMB 28.6 billion, a year-on-year increase of 15%, and a net income attributable to shareholders of RMB 1.32 billion, a year-on-year increase of 0.1%, meeting the bank's expectations. The company signed new contracts worth RMB 50.1 billion in 1H24 (an increase of 33% year-on-year), of which the domestic/overseas new contract amounts were RMB 33.1 billion (a year-on-year increase of 10.6%)/USD 2.4 billion (a year-on-year increase of 117.8%), respectively. At the end of 1H24, the backlog of orders was RMB 157.775 billion, an increase of 15.8% compared to the end of 2023. The company declared a dividend of 0.15 yuan/share for 1H24, with a dividend payout ratio of 50%, significantly increasing shareholder returns compared to last year's dividend payout ratio of 38% for the same period.

CICC's main points are as follows:

The marketization process is accelerating: overseas and domestic petrochemical orders are increasing rapidly.

In 2024, the company's overseas new orders amounted to USD 2.35 billion, a year-on-year increase of 117.8%. Among them, the company announced that it had secured a Jafurah natural gas compressor EPC contract for Saudi Aramco, with a total contract value of approximately USD 0.9 billion. Overseas orders outside the Sinopec system in mainland China amounted to RMB 37.3 billion, accounting for 41%, mainly from winning the EPC contract for the Beifang Huajin Project (contract amount: RMB 5.8 billion). The bank expects that the company's full-year new orders will exceed the initial guidance of RMB 60 billion+USD 3 billion overseas. The Middle East, especially Saudi Arabia, is accelerating its petrochemical construction to enhance its industrialization capabilities, and Sinopec's overseas investment company is actively expanding overseas. The bank believes that overseas oil, gas and petrochemical projects will become the company's main growth drivers in the future.

The gross margin remained stable.

The gross margin for 1H24 was 8.7%, a decrease of 0.3 percentage points year-on-year, basically stable. The net profit margin for 1H24 was 4.6%, a decrease of 0.7 percentage points year-on-year, mainly due to exchange losses (exchange losses for 1H24 were RMB 0.007 billion) and a year-on-year increase of 18.7% in R&D expenses to RMB 0.94 billion.

Increase the interim dividend payout ratio, and the expected improvement in liquidity after re-entering the Shanghai-Hong Kong Stock Connect is expected to boost the company's valuation.

The company values shareholder returns, with a dividend payout ratio of 50% for 1H24, a year-on-year increase of 12 percentage points. Additionally, Hang Seng Index announced on August 16 that Sinopec SEG will be included in the Hong Kong Stock Connect list, and the bank expects the official implementation to take place in mid-September. The company's balance sheet is strong, with more than RMB 20 billion in cash on hand and annual interest income of more than RMB 1 billion, which is relatively stable under the downward trend of RMB interest rates. The bank believes that as the company's business becomes more market-oriented, stable dividends and bonuses will attract a certain amount of stable funds for shareholders and help improve the company's liquidity, thereby increasing the company's valuation level.

Risks include lower-than-expected new orders, execution risks for overseas projects, and dividends not meeting expectations.