PetroChina's 2023 earnings grew 8% YoY to RMB161.1bn in 2023, 4% above our forecast. Despite the sharp fall in oil price, the company managed to post growth on strong performance of marketing and natural gas marketing segments. We expect its earnings to grow 17% YoY in 2024 on the absence of impairment, lower other taxes and small earnings growth at downstream operations. We increase our 2024-25 earnings forecast by 14-15%. We reiterate our BUY call on its H shares with target price increased to HK$7.06.

Key Factors for Rating

The company's underlying earnings were actually much stronger than expected considering the higher-than-expected levy on the transfer of mining rights booked in 2023 (RMB23.7bn vs RMB20bn) and the unexpected total impairment of RMB22.3bn against its fixed assets.

Despite the increase in other taxes and impairments and the 17% YoY fall in average oil price, the company still managed to post growth. The key growth driver was the 2.3x YoY jump in the operating profit of the natural gas marketing segment to RMB43bn. The strong growth was mainly due to the RMB10bn reduction of loss on imported gas, the 6% YoY growth in domestic sales and the 7% YoY increase in gas sales to end users and the 3% YoY increase in ASP. The focus on high margin users also helped.

The 67% YoY growth in the operating profit of its marketing segment (to RMB24bn) was another growth driver. In which, the profit from international trading grew 34% YoY to RMB15.1bn on its global presence as well as accurate judgement of market movements. The profit from domestic sales jumped 1.9x YoY to RMB8.8bn on volume growth (up 17% YoY) and efficiency gain.

Key Risks for Rating

Sharp fall in oil price.

Higher earnings of international trading cannot sustain.

Valuation

We raise our SOTP NAV from HK$11.99 to HK$12.41 mainly because of the increases in our earnings forecasts. Hence, we raise our target for its H shares from HK$6.85 to HK$7.06 as we still set our target valuation at 1.5x standard deviation above mean (now at 43.1% discount) in terms of share price discount to our NAV in the past five years. This is equal to 6.3x 2024E earnings.

We also increase our target price for its A shares from RMB9.69 to RMB10.11. We still set our target price at its 3-month average A-H discount, which has widened from 54% to 55% since late February 2024.

Expect Decent Growth in 2024

The company's guidance on volume growth for 2024 is quite conservative: 0.1% YoY growth in domestic crude oil output, 4.5% YoY growth in domestic gas output and 0.4% YoY growth in crude oil processing volume.

Despite this, we expect the company to see 17% YoY growth in earnings in 2024. The key drivers are the much lower levy on mining rights transfer (annual charge about RMB4-5bn vs RMB23.7bn in 2023) and the absence of impairment. We also expect mild growth for its downstream operations.

Changes in Earnings Forecasts

We increase our 2024-25 earnings forecasts by 14-15% mainly to reflect the stronger-than-expected underlying strength of its upstream operation and the stronger-than-expected performance at all downstream segments. In particular, we assume the strong earnings of international trading to last. Nevertheless, it partly depends on market volatility and only time will tell whether the strong performance in 2023 is sustainable.