Sinopec’s Downstream Earnings Disappoint in 2022

China Petroleum & Chemical 600028, or Sinopec, reported 2022 net profit of CNY 66.2 billion, down 8% year on year. This was below our expectation largely due to weak refining and chemicals earnings, partly offset by a CNY 13.7 billion gain from the disposal of Shanghai SECCO. We cut our fair value estimate to HKD 5 per H share (CNY 4.40 per A share) from HKD 5.50 (CNY 4.76) after taking into account our latest energy price and foreign-exchange assumptions. We think Sinopec’s H shares are currently fairly valued, while the attractive 2023 dividend yield of more than 8% and the company’s shares buyback plan should continue to support share prices.

We think key highlights of the 2022 results were the sharp fall in operating cash flow and the proposed A share issuance. Sinopec’s operating cash flow in 2022 fell 48% year on year to CNY 116.3 billion, mainly due to greater working capital needs arising from rising energy prices and higher inventory due to logistics disruptions. That said, management expects improvement in 2023 and reassures investors that shareholders’ return will remain a priority. Including share repurchases, Sinopec’s 2022 payout ratio was 71%, and we continue to forecast a 70% payout ratio for the next five years. Meanwhile, the firm proposed to issue 2.2 billion A shares (about 1.9% of total outstanding shares currently) at CNY 5.36 per share to its parent to fund capital expenditures for several projects. We think Sinopec does not need to raise equity funding, given its low net gearing ratio of 0.04 times as of the end of 2022. Hence, this may reflect the parent’s intention to increase shareholdings.

Meanwhile, Sinopec cut 2023 capital expenditure by 12% year on year to CNY 165.8 billion, focusing on the exploration and production (45% of spending) and chemicals (28%) segments, in line with the firm’s strategy to maintain stable growth in oil and gas reserves and shift from refined oil products to chemicals feedstock to enhance earnings.