Incident: On the evening of January 28, 2024, Sinopec released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved operating income of 2366.541 billion yuan, a year-on-year decrease of 4.19%; realized net profit of 44.247 billion yuan, a year-on-year decrease of 16.46%; realized net profit after deduction of 43.967 billion yuan, a year-on-year decrease of 12.55%; and achieved basic earnings per share of 0.37 yuan, a year-on-year decrease of 17.19%.

Among them, in the third quarter, the company achieved operating income of 790.41 billion yuan, down 9.80% year on year and 0.54% month on month; realized net profit of 8.544 billion yuan, down 52.15% year on year and 50.86% month on month; realized net profit after deduction of 8.385 billion yuan, down 49.56% year on year and 51.80% month on month; achieved basic earnings per share of 0.07 yuan, down 52.89% year on month.

Comment:

Oil prices fell in the third quarter+gross profit of petrochemical products narrowed, and the company's performance declined somewhat. On the oil price side, international oil prices fluctuated in the first three quarters of 2024. In the first half of the year, oil prices showed a steady trend of falling back after rising; entering the third quarter, the peak driving season in the northern hemisphere supported the rise in international oil prices, followed by a seasonal decline in oil demand, compounded by the weakening of the global macroeconomic situation, slowing geographical concerns, and international oil prices fluctuated downward. The average Brent oil price in the first three quarters of 2024 was 81.6 US dollars/barrel, which is basically the same as the same period last year. The average in the third quarter was 78.7 US dollars/barrel. Affected by falling oil prices in the third quarter, the company's inventory earnings declined sharply year on year. Looking at profit by sector, the company's exploration and development, refining, marketing, and chemical sectors achieved operating income of 427, 6.6, 17.2, and -4.9 billion yuan in the first three quarters, +35, -12.4, -7.1, and -2.1 billion yuan; the third quarter achieved operating income of 136, -0.5, 2.6, and -1.7 billion yuan, respectively, -2, -8.1, -4.7, and -2.3 billion yuan year-on-year, -15, -0.6, -4, and -0.1 billion yuan. Overall, the company's upstream sector benefited from increased storage and production efficiency in the first three quarters, and operating income further increased year-on-year. The third quarter was affected by falling oil prices, and operating income declined slightly; while the downstream refining and marketing sector was affected by narrowing gross profit and weak demand for some products, compounded by the rapid decline in oil prices in the third quarter, cost side support collapsed, and the overall operating income of the downstream sector weakened.

The results of stabilizing oil and increasing gas have been remarkable, and the sharp rise in price has boosted the performance growth of the upstream sector. In the first three quarters of 2024, the company's upstream sector strengthened high-quality exploration and efficiency development, and the results of increasing storage and production and efficiency were outstanding. In terms of increasing storage, major breakthroughs have been made in exploration of shale gas in the Sichuan Basin and the Beibu Gulf Basin New Area Zone, and the construction of the Shengli Jiyang Shale Oil National Demonstration Zone is progressing efficiently. In terms of increased production, oil and gas equivalent production was 386 million barrels in the first three quarters, up 2.6% year on year. Among them, crude oil production was 211 million barrels, up 0.3% year on year, and natural gas production was 175 million barrels of oil equivalent, up 5.6% year on year. In terms of efficiency, the company continues to promote the optimization of exploration and development costs. In the first three quarters, the company's oil and gas cash operating costs were 15 US dollars/barrel, down 0.3 US dollars/barrel from the previous year. Looking at the actual price of oil and gas, the realized price of the company's crude oil in the first three quarters was 76.6 US dollars/barrel, an increase of 1% over the previous year, and the actual price of natural gas was 1.88 yuan/square meter, an increase of 7% over the previous year.

Weakness on the demand side dragged down the gross profit of refining and chemical products, and the company strengthened product structure optimization and cost reduction. In the refining sector, the company's crude oil processing volume in the first three quarters of 2024 was 191 million tons, down -1.6% year on year, and refined oil production was 117 million tons, down 0.8% year on year. The main increase came from gasoline and aviation coal. Affected by weak demand for diesel, the company optimized and adjusted processing load and product structure to increase production of marketable products such as gasoline and aviation coal, and reduce diesel production. As the company strengthened cost control, the company's refining cash operating cost in the first three quarters was 3.69 US dollars/barrel, a year-on-year decrease of 8%. However, due to weakening overall demand for refined oil products combined with a rapid drop in oil prices in the third quarter, the company's gross refining profit for the first three quarters was 5.65 US dollars/barrel, a year-on-year decline of nearly 20%. In the refined oil sales segment, the company's total sales volume of refined oil products in the first three quarters was 0.182 billion tons, up 0.6% year on year. Among them, the total sales volume of domestic refined oil products was 0.138 billion tons, down 3.2% year on year. The company further developed overseas markets, and refined oil exports increased 15% over the same period last year. In the chemical sector, the boom in the chemical sector was relatively weak in the first three quarters. The company rationally optimized the production capacity structure, operated profitable devices at high loads, and arranged negative marginal efficiency devices to reduce load and shut down operations. From a production perspective, the company reduced the output of ethylene, synthetic resin, and synthetic rubber in the first three quarters, increasing production volume in the chemical fiber sector. The company achieved 10.04 million tons of ethylene production in the first three quarters, down 5.8% year on year, and production of synthetic fiber monomers and polymers was 7.38 million tons, up 24.1% year on year. In terms of cost pressure reduction, the total processing cost per unit in the first three quarters of the company's chemical sector was 1,321 yuan/ton, a year-on-year decrease of 10%. The production cost of chemical products was further optimized to meet the challenges of the industry's boom cycle.

The refining and chemical industry's clearance is expected to accelerate, and the competitive advantage of industry leaders may be strengthened. According to the guidance of the National Development and Reform Commission, domestic crude oil processing capacity will be limited to 1 billion tons by 2025, and 10 million ton refining enterprises will account for about 55% of production capacity. According to Jinlianchuang data, the total domestic refining energy as of 2023 is 0.953 billion tons, which is about 47 million tons of incremental space from the specified upper limit. The refining and chemical integration projects and renovation and expansion projects under construction and to be built before 2025 are about 69 million tons. We believe that the process of eliminating small-scale refineries is expected to accelerate in the future, and the industry may enter an era of stock competition. Currently, the main drag on the company's performance in the short term is the refining and chemical sector. As an industry leader, the company has advantages in the entire industry chain, and has continued to optimize production costs in recent years. At the same time, it has high flexibility in capacity restructuring, diversification of raw materials, production and marketing collaboration. In the context of the supply-side peak of the industry and deepening structural adjustments, the company's leading competitive advantage is expected to be further strengthened.

Profit forecast and investment rating: We expect the company's 2024-2026 net profit to be 607.92 billion yuan, 637.02 billion yuan, and 69.520 billion yuan, respectively, and EPS (diluted) of 0.50, 0.52 and 0.57 yuan/share, respectively, corresponding to the closing price on October 28, 2024, and 12.89, 12.30 and 11.27 times PE, respectively. We are optimistic about the company's cost reduction and efficiency and the advantages of the entire industry chain. Combined, the supply and demand pattern of the industry is expected to improve further. We maintain the company's “buy” rating.

Risk factors: risk of large fluctuations in crude oil prices; risk of the company's new production capacity falling short of expectations; risk of downstream demand recovery falling short of expectations; risk of sales substitution of new energy vehicles