1H24 results are in line with our expectations. Mid-term dividends exceed expectations

The company announced 1H24 results: revenue was 28.6 billion yuan, +15% year-on-year; net profit to mother was 1.32 billion yuan, +0.1% year-on-year. The performance was in line with our expectations.

The volume of new contracts signed by 1H24 was 50.1 billion yuan (up 33% year over year), of which the volume of new domestic and overseas contracts was 33.1 billion yuan (+10.6% year over year)/2.4 billion US dollars (+117.8% year over year), respectively.

As of the end of 1H24, the volume of contracts in hand was $157.775 billion, up 15.8% from the end of '23.

1H24 announced a dividend of 0.15 yuan/share, with a dividend ratio of 50%. Compared with the 38% dividend ratio in the same period last year, it significantly increased shareholder returns.

Development trends

The pace of marketization has accelerated: new orders from overseas and domestic petrochemicals have increased rapidly. In 2024, the company signed a new overseas order of 2.35 billion US dollars, or +117.8%. Among them, the company announcement revealed that the representative order was Saudi Aramco's Jafurah gas expansion phase III gas compression EPC contract, with a total contract amount of about 0.9 billion US dollars. Domestic orders outside the Sinopec system were 37.3 billion yuan, accounting for 41%, mainly for the North Huajin project (contract amount 5.8 billion yuan). We expect new orders signed throughout the year to exceed the 60 billion domestic yuan+3 billion overseas dollar guideline at the beginning of the year. Overseas, especially the Middle East, are speeding up chemical construction to enhance the country's industrialization capabilities, and Sinopec's offshore investment company is also actively expanding overseas. We believe that overseas oil and gas/chemical projects will become the company's main growth point in the future.

Gross profit margins have remained stable. 1H24 gross margin was 8.7%, -0.3ppt year on year, and remained stable; 1H24 net margin was 4.6%, -0.7ppt year on year, mainly due to exchange losses (1H24 exchange loss of 0.007 billion yuan) and R&D expenses increased 18.7% year over year to 0.94 billion yuan.

Increase the mid-term dividend payout ratio. Reentering the Shanghai-Hong Kong Stock Connect is expected to increase the valuation due to improved liquidity. The company values shareholder returns. 1H24's dividend payout ratio is 50%, +12ppt year over year. Meanwhile, the Hang Seng Index announcement on 8.16 announced that Sinopec's refining and chemical project was included in the Hong Kong Stock Connect list. We expect it to be officially implemented in mid-September. The company has a strong balance sheet, more than 20 billion yuan in cash on hand, and interest income is stable at more than 1 billion yuan per year. Under the downward trend in RMB interest rates, the return on interest within the group is relatively stable. We believe that as the company's business becomes more market-based, stable dividends and dividends will attract a certain amount of stable capital as shareholders, help improve the company's liquidity, and are expected to raise the company's valuation level.

Profit forecasting and valuation

We kept our 2024/25 profit forecast basically unchanged, but considering the increase in valuation brought about by the company's entry into Hong Kong Stock Connect and increased dividends, we raised our target price by 20% to HK$6.1, which corresponds to 9/8 times the 2024/25 price-earnings ratio and 9% upward space. The current share price is trading at 8/7 times the 2024/25 price-earnings ratio. Keep the “outperforming the industry” rating unchanged.

risks

New orders fall short of expectations, risks such as execution of overseas projects, etc., and dividends fall short of expectations.