Morningstar | Sinopec's Possible Trading Losses Are a Dent, Lower Oil Prices a Greater Factor in Our FVE. See Updated Analyst Note from 28 Dec 2018
We cut our fair value estimate on China Petroleum & Chemical, or Sinopec, to HKD 6.80 per share (USD 87 per ADR) from HKD 7.50 (USD 96) following a cut in our crude oil price forecast for 2019 and 2020. We think the more than 10% drop in Sinopec's share price in December and particularly in recent days on trading loss concerns more than reflects the likelihood of weaker earnings in the next few years. There is limited impact to our mid- to long-term assumptions as our midcycle price assumptions are unchanged, with Brent at USD 60 per barrel. Our fair value estimate is buoyed by potential spin-off gains of the marketing and pipeline divisions, which make up around HKD 0.27 per share of our fair value estimate.There is limited detail on the possible trading losses at Sinopec, but higher-than-normal corporate-level losses imply that such trading losses may have started in the third quarter. We had already factored in higher head office losses but have increased this following this news. Overall, our assumed CNY 11.7 billion head office loss, which assumes a similar loss level in the fourth quarter and is 2.6 times 2017's level, has limited impact on our fair value estimate as it is expected to be a one-off event and Sinopec has cash to cover its positions and keep dividends stable. However, we would not rule out larger losses. The current share price would imply a significant CNY 350 billion loss, which we think is unlikely given news reports that the losses are related to crude oil trades and total revenue there is only expected to be CNY 189 billion. However, the suspension of the key traders presents stewardship concerns.
More significantly, we have lowered our earnings estimates by around 20% for all years in our current 2018-22 forecast period. This reflects lowered crude oil forecasts, especially for 2019-21, and the increased head office costs in 2018. With slower global growth, we think oil prices will hover around USD 60 over the next four years.
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