Sinopec Earnings: Improving Downstream Contributions Aided by Inventory Gain; H-shares Undervalued

Sinopec’s 600028 cumulative nine months’ 2023 net profit of CNY 54.1 billion was 7% lower year on year, broadly in line with the Refinitiv consensus but below our expectations. We lower our 2023 net profit forecast by 12% to factor in the slower-than-expected recovery in refining earnings, but our longer-term estimates are largely unchanged. We keep our fair value estimate at HKD 5.60 per H-share (CNY 5.10 per A-share), after considering our latest energy price and foreign exchange assumptions. We think Sinopec’s H-shares are currently undervalued, and the estimated 2024 dividend yield of more than 10% and ongoing share buyback should continue to support share prices. However, CNOOC remains our top pick in the sector, given its cost efficiency and robust production growth.

Sinopec’s operating profits for the downstream segments in the third quarter were generally stronger sequentially. In particular, the chemicals division delivered a profit of CNY 583 million from a loss of CNY 1.6 billion in the previous quarter. This is a pleasant surprise after five consecutive quarters of losses for the segment. However, we do not expect significant improvement in the near term as the industry is still suffering from excess capacity. The refining segment made a profit of CNY 7.6 billion from a profit of CNY 1.0 billion in the second quarter, while the marketing division’s profit fell 18% quarter on quarter to CNY 7.4 billion. We believe the refining performance was aided by an inventory gain of CNY 6.6 billion given stronger oil prices in the third quarter. The marketing segment was affected by intense competition in the diesel market, but management is expecting a sequential improvement in the fourth quarter.

We are also positive that Sinopec’s cumulative nine months of operating cash flow continues to improve, growing 66% year on year to CNY 98.3 billion. This should continue to support the firm’s capital expenditure, share buyback, and dividend payout, in our view.