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Morningstar | Sinopec's Profit Guidance Points to Smaller Trading Loss Than Expected; Our FVE Unchanged

Sinopec's 2018 profit guidance and update on subsidiary Unipec, points to a trading loss of CNY 4.65 billion that will be booked into 2018 results, which is smaller than what we and the market expected. The profit guidance itself, under China GAAP, points to an operating performance that should be around 6% above our estimate. At this stage it's difficult to ascertain the drivers of the deviation, and we maintain our forecasts and fair value estimate of HKD 6.50 per share (USD 84 per ADR).

As mentioned in our prior update, Sinopec has already normalized an "overhedged" position in its crude oil purchases. We believe the risk of further exceptional trading losses is contained. While the guidance shows that fourth-quarter operating level performance is not as soft as we estimate, the bottom line is short of our forecast and is somewhat disappointing. This possibly points to lower associate contribution and perhaps other one-off items.  Sinopec will release its results on March 25. We think it's possible for the company to keep its absolute DPS unchanged from the 2017 level given its strong financial position, but this would represent a payout close to 100% based on guided EPS of CNY 0.515. Sinopec's 2017 payout was 118%, but the company could be a bit more cautious if it prefers to conserve cash.

Sinopec's shares have rebounded from their December 2018 dive when news of the trading loss first emerged. At the current level, we think upside is limited particularly with signs that upstream losses will likely widen again with our view for Brent crude oil prices to hover around USD 60 per barrel. Slowing global growth also likely weighed on petrochemical demand in the fourth quarter and should be a headwind in the first half of 2019. However, inventory mark downs should be less of a factor relative to the fourth quarter of 2018. Expected spin-offs of its marketing and pipelines assets are the key near-term drivers for the company.