FY20 sustainable business profits are in line with our expectations

China Petroleum & Chemical Corp Guande disclosed FY20's net profit of HK $2.3 billion, a year-on-year increase of 79 per cent. Of this total, the one-time sale income of Yuji line is about HK $1.1 billion before tax, and the net income after tax and exchange rate adjustment is HK $880 million; the operating profit of Yuji line in 9M20 is HK $150 million; and FY20's continuing operating profit is HK $1.27 billion (an increase of 16.7% over the same period last year), which is in line with our expectations.

The company announced that the dividend per share of FY20 remained at HK $0.20 (HK $0.08 for the interim period and HK $0.12 for the final period), which was exactly the same as that of FY19, but the dividend payout ratio was lower. Although management guidelines will not give special dividends after the sale of Yuji line, we believe that FY20 dividends are still lower than market expectations, taking into account the continued growth of sustainable business profits.

Trend of development

The proceeds from pipeline sales are mainly used to reduce leverage. Instead of raising dividends, the company chose to use the cash sold on Yuji line to reduce leverage, paid off HK $2.5 billion of short-term interest-bearing debt, reduced its debt ratio from 22.2% of FY19 to 8.1% of FY20, and put its balance sheet in a net cash state. According to management guidelines, leverage reduction is not an end, but a temporary move in the event of a short-term failure to find a suitable M & A target. We believe that if there is a suitable target, the company can seek low-cost shareholder loans to arrange financing at any time.

The next step will focus on mergers and acquisitions, especially opportunities within the group. After the divestiture of Yuji line, we expect the company to start looking for extension M & An opportunities in the next step, and may focus on the company's main terminals and warehousing areas. We think that more M & An opportunities in the medium term may come from within China Petroleum & Chemical Corp Group. At the same time, we expect the company to continue to look for high-quality targets overseas, such as the Middle East or Central Asia, and focus on the main business.

Crude oil throughput is expected to grow by 3.0% in FY21. Due to the impact and transmission effect of the epidemic on crude oil consumption, FY20's overall terminal crude oil throughput increased by 0.7% compared with the same period last year (split, Huizhou + 2.8% year-on-year, joint venture terminal + 0.6% year-on-year), and the growth rate slowed down.

Looking ahead to FY21, we expect crude oil throughput growth to accelerate to 3.0% year-on-year.

Return to a more focused public utility development model. After the divestiture of the Yuji line, the company will focus more on the crude oil terminal business. We believe that this kind of business model is essentially close to public utilities, and the long-term profit growth comes from the operational leverage brought about by volume growth on the premise that the regulated crude oil unit handling charges are stable. Considering that the company's business will be more focused in the future, we believe that the larger group discounts under the previous segment valuation method are expected to be erased, resulting in an increase in the company's valuation.

Profit forecast and valuation

The FY21/22 annual return net profit forecast of HK $13.9 / 1.48 billion is introduced, leaving the target price unchanged at HK $4.45m, corresponding to 8 times FY21 price-to-earnings ratio and 46 per cent upside. Maintain an industry rating that outperforms. The company's current share price corresponds to 5 times FY21's earnings.

Risk.

New business exploration fell short of expectations; wharf and warehousing businesses were less profitable than expected.