Sinopec's net profit grew 3% YoY to RMB37.1bn in 1H24, 4% above our forecast on higher-than-expected profit from associates and JVs. Its profits at refining and chemicals segments were actually below our forecasts. Looking ahead, we expect its earnings to drop 20% HoH in 2H24 as the recent fall in oil price is likely to pile short-term pressure on the profitability of refining and marketing segments. Despite this, we raise our 2024-26 earnings forecasts by 4-11% after post results adjustments. The company's proposed minimum payout of 65% for 2024-26 offers good downside protection. Hence, we reiterate our BUY calls and raise our target price for its H shares to HK$6.21.

Key Factors for Rating

The company's operating profit slipped 5% YoY in 1H24, 3% below our forecast. In which, that of its refining segment dropped 38% YoY to RMB7.1bn. On top of the 13% YoY contraction in refining margin to US$6.05/bbl, the weak prices of by-products and unfavourable changes in exchange rates also worked against the company. While key chemical spreads widened a bit QoQ in 2Q24, the loss of the chemicals segment hardly improved.

The company's operating profit slipped 5% YoY in 1H24, 3% below our forecast. In which, that of its refining segment dropped 38% YoY to RMB7.1bn. On top of the 13% YoY contraction in refining margin to US$6.05/bbl, the weak prices of by-products and unfavourable changes in exchange rates also worked against the company. While key chemical spreads widened a bit QoQ in 2Q24, the loss of the chemicals segment hardly improved.

We expect its earnings to drop 20% HoH in 2H24. The recent sharp fall in oil is likely to result in near-term decline in refining margin and inventory losses for downstream operations. We also assume higher cost for 2H of a year.

Despite this, the company's H shares still offer attractive 2024-26E dividend yield of 7.6-8.0% based on its proposed minimum payout of 65%.

Key Risks for Rating

Sharp fall in oil price.

Lower-than-expected profitability of downstream operations.

Valuation

We lift our target price for its H shares from HK$5.73 to HK$6.21 mainly to reflect the increases in our earnings forecasts. Our target valuation is still at 6.5% average 2024-26E dividend yield.

We also raise our target price for its A shares from RMB7.63 to RMB8.00. We continue to set it based on its average 3-month A-H premium, which has narrowed from 43% to 41% since late June.