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Morningstar | Sinopec's Profit Remains Robust but Guiding for Lower Sales, Our FVE Unchanged

There was little surprise in no-moat Sinopec's first-half performance with the 52% year-over-year jump in net profit driven by higher oil prices. We keep our fair value estimate unchanged at HKD 7.50 (USD 96 per ADR) after minor tweaks to our forecast. While we think Sinopec is fairly valued currently, we think the company's attractive dividend yield remains intact and the increase in interim DPS to CNY 0.16 from CNY 0.11 last year portends to an attractive full-year dividend. While we've not forecast a rise in full-year dividends, we would not be surprised to see an increase given the company's net cash position. As it is, at our projected 2018 DPS, Sinopec's forward dividend yield is 7.7%.

Refining margins held up well, with the company able to source lower priced feedstock. This helped mitigate a deterioration in chemicals segment margins. Sinopec has also guided that fuel product sales will be almost flat for the full year reflecting a resurgence in competition in the wake of the recovery in prices. We have not made any significant changes to our assumptions. In addition, the pick-up in oil prices doesn't change our bearish view on its upstream activities. Expectations for crude oil prices to pull back and Brent to average USD 60 per barrel within the next five years is capping our outlook for Sinopec. Our view remains for global oil demand growth to lag supply. We expect Sinopec's 2018 earnings, which we project at CNY 92.4 billion, to represent a peak with normalizing refining and chemicals margins to also start dragging on profitability over the next few years.

An absence of impairment charges, which totaled CNY 21.3 billion in 2017 will help lift 2018 profitability. Our forecast also assumes a 7% depreciation in the Chinese yuan in the second half from first-half level. We estimate this lifts Sinopec's earnings by around 9% since commodity prices are U.S. dollar-linked and Sinopec's costs, outside of feedstock, are largely yuan-denominated.

Free cash flow is expected to remain healthy as we don't see Sinopec finding attractive significant acquisitions or viable investment opportunities. The company's capital expenditure of CNY 23.7 billion in the first half is just 20% of full-year expected capital expenditure and a pick-up in second half spending is in line with the prior year experience. The spin-off of its marketing and pipeline assets within the next three years is still the key positive catalyst and we reflect a partial gain of HKD 0.19 per share (USD 2.44 per ADR) in our fair value estimate.