Top China ADR Portal

China ADR stock research


Warning: strtotime(): It is not safe to rely on the system's timezone settings. You are *required* to use the date.timezone setting or the date_default_timezone_set() function. In case you used any of those methods and you are still getting this warning, you most likely misspelled the timezone identifier. We selected the timezone 'UTC' for now, but please set date.timezone to select your timezone. in /home1/chinaves/public_html/libraries/joomla/utilities/date.php on line 56

Warning: date(): It is not safe to rely on the system's timezone settings. You are *required* to use the date.timezone setting or the date_default_timezone_set() function. In case you used any of those methods and you are still getting this warning, you most likely misspelled the timezone identifier. We selected the timezone 'UTC' for now, but please set date.timezone to select your timezone. in /home1/chinaves/public_html/libraries/joomla/utilities/date.php on line 198

Sinopec (SNP) receives a BUY rating from Chinavestor

E-mail Print PDF

SNP_H1_tumbRating BUY

We suggest a BUY rating on Sinopec (NYSE:SNP). Although SNP experienced a decrease in net profit last year due to 2008’s record high crude oil prices, 2009 first quarter results marked a significant improvement in profitability. Net profit increased 85% as crude oil prices averaged around $45 per barrel in the 2009 first quarter, compared to over $100 per barrel in 2008. With lower crude oil prices and a new pricing mechanism which adjusts for the cost of crude oil, we expect another positive quarter from Sinopec (NYSE:SNP).

Lower oil prices, profitability increases

Despite the high international crude oil prices which increased SNP’s operating expenses, the government maintained a cap on domestic price of refined oil products. As a result, net operating profit fell by 47.3%. However, crude oil prices early this year were significantly below last year’s and SNP reported a profitable first quarter.

A new pricing mechanism

The implementation of the new pricing mechanism introduces a market-based ceiling price that is linked to the cost of crude oil, thus allowing companies to pass on high crude oil prices to consumers. We expect this reform to shield SNP from incurring large losses if the crude oil price increases significantly in the future.

Positive outlook, moderate valuation

High P/E ratio and positive profitability estimates suggests a favorable outlook for SNP in 2009. Net income for the year is forecasted to be 65,970 million, with an EPS of 0.75. We project a future growth rate of 20%.

SNP_H1_1

 

SINOPEC Corporation

Key Income Statement Data

2005

2006

2007

2008

(RMB, millions)

Total Revenue

823,272

1,071,402

1,173,869

1,420,321

Total Operating Expenses

(764,441)

(992,582)

(1,123,842)

(1,474,320)

Operating Profit

68,246

83,820

85,864

28,123

Net Finance Costs

(4,625)

(6,100)

(8,101)

(3,776)

Profit Before Taxation

64,656

78,923

83,464

24,317

Tax Benefit/ (Expense)

(19,880)

(235,315)

(24,721)

1,883

Profit for the Year

44,776

55,408

58,743

26,200

Key Cash Flow Statement Data

2005

2006

2007

2008

Net Cash from Operating Activities

78,214

95,875

119,594

67,712

Net Cash used in Investing Activities

(77,523)

(103,023)

(113,587)

(110,158)

Net cash (used in)Financing Activities

(4,851)

1,192

(5,310)

41,777

Net Change in Cash and Cash Equivalents

(4,160)

(5,956)

697

(669)

Key Balance Sheet Data

2005

2006

2007

2008

Cash & Equivalents

5,014

2,763

7,969

6,948

Total Current Assets

81,257

83,788

185,116

164,311

Property, Plant & Equipment

170,711

270,783

375,142

403,265

Construction in progress

39,086

41,139

95,408

121,886

Total Assets

388,419

490,154

732,725

767,827

Total Current Liabilities

119,968

173,380

265,355

274,537

Long-Term Debt

53,401

52,689

83,134

90,254

Total Liabilities

215,112

271,851

399,967

418,505

Total Equity

173,307

218,303

332,758

349,322

Total Equity & Liabilities

388,419

490,154

732,725

767,827

Market Comparisons

Company

Industry

Sector

S&P 500

P/E Ratio (TTM)

17.84

7.22

68.56

95.07

Beta

1.65

0.96

0.45

0.99

Dividend Yield

3.35

1.86

0.42

2.61

Payout Ratio (TTM)

34.95

23.05

86.20

56.18

Sales (MRQ) vs Qtr. 1 Yr Ago

11.91

-30.83

12.86

-7.31

Sales (TTM) vs TTM 1 Yr. Ago

20.52

15.06

14.24

3.53

EPS (MRQ) vs Qtr 1 Yr. Ago

2.86

-108.79

-126.96

-38.01

Current Ratio (MRQ)

0.60

1.22

1.38

1.47

Total Debt to Equity (MRQ)

68.65

29.37

105.23

130.72

Asset Turnover (TTM)

1.94

1.31

0.82

0.83

Return On Assets (TTM)

3.49

9.97

3.44

6.98

Return On Equity (TTM)

9.36

17.74

8.76

21.14

Gross Margin (TTM)

5.52

36.61

20.95

39.06

Operating Margin (TTM)

1.94

12.84

5.49

-

Pre-Tax Margin (TTM)

1.67

12.30

4.58

11.60

Net Profit Margin (TTM)

1.80

7.56

2.78

8.08

 

Summary

China Petroleum & Chemical Corporation (Sinopec Corp) is an integrated energy and chemical company with principal businesses of exploration, production and trading of petroleum and natural gas, refining and sales of petroleum products and production and sales of chemical products. Sinopec has a competitive advantage as the largest petrochemical producer in China, with a leading arket position in the production and sales of refined oil products. Despite a fall in 2008’s profit margins, the company had a large increase in profitability in first quarter of 2009 as a result of lower crude oil prices. With the implementation of government reforms in the pricing of refined oil products in January 2009, we expect Sinopec to maintain reasonable profit margins even if crude oil prices escalate in the future. Sales growth and EPS in the most recent quarter remain higher than industry rates, signaling a positive outlook.


For complete report with charts, please click on pdf file: CV_SNP_H1_09.pdf

 

1. Lower oil prices, profitability increases

In 2008, Sinopec Corp experienced a decrease in net profit. Under its financial statements prepared in accordance to IFRS, Sinopec’s net profit attributable to equity shareholders of the company fell 47.3%, from 56,533 million (M) in 2007 to 29,769M in 2008. This is a marked change given that profit increased from 53,603M in 2006 to 56,533M in 2007. Consequently, earnings per share also dropped from 0.652 in 2007 to 0.343 in 2008.

This fall in profitability is primarily due to the increased crude oil prices in 2008 which caused operating expenses to increase by 31.2% over 2007. Crude oil prices peaked at $145 per barrel in July 2008.

Historical Crude Oil Prices (Monthly)

SNP_LNG1

Purchasing expenses of crude oil constitute a significant component of SNP’s operating costs. As a result of the price hike, Sinopec’s purchasing expenses of crude oil and supplies increased by 32.4% in 2008, and accounted for 87.2% of the total operating costs. Yet, the government maintained a cap on the domestic price of refined oil products which caused a fall in net operating profit of 67.2% in 2008 and the company made an operating loss of 26,066M.

As demonstrated by the charts below, there is an inverse relationship between the company’s profits and oil prices. SNP has been more adversely affected by the oil prices than its competitors.

Sinopec Profit Margin vs Oil Price

SNP_LNG2

 

Profit Margin vs Oil Price for SNP, PTR & CEO

SNP_LNG3

Total revenue remained higher than its competitors due to the positive sales growth experienced by SNP in the last five years. Meanwhile, earnings per share have been on the rise since 2004, but declined in 2008.

Total Revenue for SNP, PTR & CEO

SNP_LNG4

 

EPS for SNP, PTR, & CEO

SNP_LNG5


However, net profit in 2009 Q1 increased 85% to 11,219M and earnings per share had risen from 0.070 to 0.129. Crude oil prices dropped significantly since 2008 from an average above $100 per barrel to an average of $45 per barrel in first quarter. While the drop in crude oil price reduced profits in the exploration and production segment by 76.1% when compared to 2008 Q1, the refining segment benefited from lower purchasing costs of crude oil, resulting in an operating profit of 7,328M.

Quarterly Net Profit for SNP

SNP_LNG6


2. Oil price reform, a new pricing mechanism

Another factor that contributed to the increased profitability in 2009 Q1 was the establishment of the new pricing mechanism based on the “Notice on the Implementation of Price, Tax, and Fee Reforms for Refined Oil Products” promulgated by the State Council on December 18, 2008, and effective from January 1, 2009.

  • Changes to the oil pricing regime

Prior to this reform, the government maintained a cap on the domestic price of refined oil products, which led to the fall in SNP’s net profit when crude oil prices rose above $100 per barrel during 2008. Under this new pricing mechanism, the government has introduced a market-based ceiling price that is linked to the price of crude oil.

According to the China’s National Development and Reform Commission (NDRC), domestic fuel prices will be adjusted once there is a greater than 4 percent move of global crude oil prices from their moving average over 22 working days.

  • Impact on profitability

Previously, as at April 2008, $68 was approximately the point at which cost equals revenue for most Chinese oil companies, above which they would face a loss, while Sinopec could afford a crude oil price of about $ 76 per barrel.

With the new price mechanism, profits should be “normal” even when the crude oil price increases to $80 a barrel, with lower margins once the price rises above $80. According to NDRC, if the crude oil price rises above $130, the fuel price is unlikely to increase any further, or only by a small amount, but oil supplies will be maintained through the use of fiscal and tax mechanisms.

We expect this new pricing mechanism to shield Sinopec from incurring large losses if the oil price increases significantly in the future, as it allows the fuel price to reflect the global crude oil price. There still remains some uncertainty regarding this regime given the lack of crucial details on how it would operate. Nevertheless, it marks an improvement in the flexibility of domestic oil prices.

Sinopec is likely to benefit from this reform more than its competitors (PTR and CEO) as it supplies 80% of China’s fuel. The company also imports over 70 percent of its crude oil used in their refining segment, while Petrochina and CNOOC derive their profits mainly from oil exploration and production.

3. Profitability Analysis

SNP

PTR

INDUSTRY

Sales (MRQ) vs Qtr 1 Yr. Ago

11.91

-30.01

-30.83

Sales- 5 Yr Growth Rate

26.46

28.11

24.60

EPS (MRQ) vs QTR 1 Yr Ago

2.86

-37.5

-108.79

EPS- 5 Yr Growth Rate

-0.11

7.76

17.32

Gross Margin (TTM)

5.52

37.23

36.61

Gross Margin - 5 Yr Avg

13.25

48.81

33

Operating Margin (TTM)

1.94

14.51

12.84

Operating Margin- 5 Yr Avg.

6.32

25.42

15.44

Net Profit Margin (TTM)

1.8

11.28

7.56

Net Profit Margin – 5 Yr Avg.

4.39

19.13

9.82

Return on Assets (TTM)

3.49

9.97

Return on Assets - 5 Yr Avg.

7.65

16.08

13.15

Return on Investment (TTM)

5.73

12.84

Return on Investment- 5 Yr Avg.

12.42

21.09

17.09

Return on Equity (TTM)

9.36

17.74

Return on Equity – 5 Yr Avg

17.85

22.73

23.67

Quick Ratio (MRQ)

0.25

0.68

0.93

Current Ratio (MRQ)

0.6

0.99

1.22

LT Debt to Equity (MRQ)

38.68

6.56

18.96

Total Debt to Equity (MRQ)

68.65

37.84

29.37

Sinopec has achieved remarkable sales growth of 11.91% in first quarter 2009 against the industry’s negative growth of 30.8%. Meanwhile, its competitor PTR experienced negative growth of 30.0%.

Despite high sales, profitability ratios for 2008 were lower than SNP’s 5 year average, and relatively low in comparison to PTR and the industry. In particular, the gross margin suffered due to the high purchasing costs of crude oil in 2008. While PTR and industry gross margins were 37.23 and 36.61 respectively, SNP had a gross margin on 5.52. Consequently, the operating margin of 1.94 and net profit margin of 1.8 in 2008 were considerably lower than industry rates.

In terms of financial strength, SNP was more highly leveraged than PTR and the industry average in 2009 Q1. Total debt to equity ratio and long term debt to equity ratio was 68.65 and 38.68, while the industry average was 29.37 and 18.96. Also, the quick ratio was a low 0.25 compared to the industry quick ratio of 0.93.

4. Moderate valuation, positive outlook

2004

2005

2006

2007

2008

2009 E

Net profit for period

41,791

44,776

55,408

58,743

26,200

62,609

EPS

0.42

0.48

0.62

0.65

0.34

0.72

EPS change

14%

29%

5%

-48%

112%

Dividend payable

10,404

11,271

13,005

14,306

10,404

17,463

Dividend/Share

0.12

0.13

0.15

0.16

0.12

0.20

Profitability estimates for 2009 and the upcoming quarter are promising. The 2009 net profit is estimated to be 62,609M which would be a significant improvement from 2008. EPS is estimated to rise from 0.34 in 2008 to 0.72 in 2009, representing an increase of 112%.

Total dividend payable is estimated to be 187,463M in 2009, compared to 10,404M in 2008. Thus dividend per share is expected to increase from 0.12 to 0.20.

For the upcoming quarter, net profit is estimated at 13,498.20M, representing a 20% net profit growth rate for the future. SNP’s P/E ratio of 16.42 is high in comparison with PTR’s P/E ratio of 13.42, and the industry ratio of 5.31. However, with the current P/E of 16.42 and a projected EPS growth rate of 21%, SNP’s Price/Earnings to Growth Ratio is 0.78. A PEG ratio below 1 suggests that SNP’s stock price is moderately valued and we recommend a buy rating.

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2 E

Net profit attributable to equity shareholders

6,062.00

2,193.00

8,168.00

13,346.00

11,219.00

13,498.20

EPS

0.07

0.03

0.09

0.15

0.13

0.16

Net profit growth rate

-10%

-64%

272%

63%

-16%

20%

EPS growth rate

-8%

-64%

276%

61%

-15%

21%

 


Table 1: Sinopec Corporation - Annual Income Statement, 2006-2009 (RMB, millions)

 

 

Year to December

2005A

2006A

2007A

2008A

Turnover and other operating revenues

Turnover

799,259

1,044,652

1,173,869

1,420,321

Other operating revenues

24,013

26,750

30,974

31,780

823,272

1,071,402

1,204,843

1,452,101

Other income

9,415

5,000

4,863

50,342

Operating expenses

Purchased crude oil, operating supplies

(651,201)

(861,437)

(970,929)

(1,285,155)

Selling, general and administrative expenses

(33,880)

(37,758)

(37,843)

(46,175)

Depreciation, depletion and amoritsation

(31,618)

(34,235)

(43,315)

(45,832)

Exploration expenses

(6,411)

(7,983)

(11,105)

(8,310)

Personnel expenses

(18,649)

(19,857)

(22,745)

(23,285)

Taxes other than income tax

(17,185)

(28,639)

(34,304)

(56,799)

Other operating expenses

(5,128)

(2,437)

(3,601)

(8,773)

Total operating expenses

(764,441)

(992,582)

(1,123,842)

(1,474,320)

Operating profit

68,246

83,820

85,864

28,123

Finance costs

Interest expense

(5,926)

(7,437)

(7,314)

(11,326)

Interest Income

384

555

405

445

Unrealised gain/*loss) on convertible bonds

-

(3,211)

3,947

Foreign currency exchange losses

(79)

(153)

(311)

(954)

Foreign currency exchange gains

996

935

2,330

3,112

Net finance costs

(4,625)

(6,100)

(8,101)

(3,776)

Investment income

178

256

1,657

390

Share of profits less losses from associates

857

947

4,044

580

Profits before taxation

64,656

78,923

83,464

24,317

Tax benefit/(expense)

(19,880)

(235,315)

(24,721)

1,883

Profit for the year

44,776

55,408

58,743

26,200

Attributable to:

Equity shareholders of the Company

41,455

53,912

56,533

26,796

Minorty Interests

3,321

1,496

2,210

1,883

Dividends payable to equity shareholders

Interim dividend declared during the year

3,468

3,468

4,335

2,601

Final dividend proposed

7,803

9,537

9,971

7,803

11,271

13,005

14,306

10,404

Earnings per share:

Basic

0.48

0.62

0.65

0.34

Diluted

0.48

0.62

0.65

0.30

 


Table 2: Sinopec Corporation - Annual Balance Sheet, 2006-2009 (RMB, millions)

 

 

Year to December

2005

2006

2007

2008

ASSETS

Non-current assets

Property, plant and equipment, net

170,711

270,783

375,142

403,265

Construction in progress

39,086

41,139

95,408

121,886

Interest in associates

5,933

7,470

16,865

15,595

Interest in jointly controlled entities

7,280

7,482

12,723

11,781

Investments

1,037

971

3,194

1,483

Deferred tax assets

3,220

5,936

10,439

12,810

Lease prepayments

568

765

8,224

10,817

Long-term prepayments and other assets

3,748

5,011

10,124

11,642

Total non-current assets

307,162

406,366

547,609

603,516

Current assets

Cash and cash equivalents

5,014

2,763

7,969

6,948

Time deposits with financial institutions

110

220

668

752

Trade accounts receivable, net

8,826

8,832

22,947

12,989

Bills receivable

1,334

2,760

12,851

3,659

Inventories

50,417

53,988

116,032

95,255

Prepaid expenses and other current assets

15,556

15,225

24,922

34,925

Income tax receivable

-

-

-

9,784

Total current assets

81,257

83,788

185,116

164,311

Total assets

388,419

490,154

732,725

767,827

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Short-term debts

25,059

38,241

44,654

74,896

Loans from Sinopec Group Company

3,946

1,358

15,840

23,587

Trade accounts payable

28,833

38,041

93,049

56,667

Bills payable

19,077

16,265

12,162

17,493

Accrued expenses and other payables

40,559

72,313

89,171

101,878

Income tax payable

2,494

7,162

10,479

16

Total current liabilities

119,968

173,380

265,355

274,537

Non-current liabilities

Long-term debts

53,401

52,689

83,134

90,254

Loans from Sinopec Group Company

39,212

38,840

37,180

36,890

Deferred tax liabilities

2,216

6,174

5,636

5,235

Other liabilities

315

768

8,662

11,589

Total non-current liabilities

95,144

98,471

134,612

143,968

Total liabilities

215,112

271,851

399,967

418,505

Equity

Share capital

86,702

86,702

86,702

86,702

Reserves

86,605

131,601

220,731

241,967

Total equity

173,307

218,303

332,758

349,322

Total liabilities & shareholders' equity

388,419

490,154

732,725

767,827

 


Table 3: Sinopec Corporation - Annual Cash Flow Statement, 2006-2009 (RMB, millions)

 

 

Year to December

2005

2006

2007

2008

Net cash generated from operating activities

78,214

95,875

119,594

67,712

Investing activities

Capital expenditure

(63,993)

(70,604)

(99,946)

(99,636)

Exploratory wells expenditure

(5,810)

(7,985)

(9,913)

(8,380)

Purchase of Investments and investments in associates

(3,650)

(3,571)

(1,581)

(3,089)

Proceeds from disposal of investments

1,264

717

1,441

1,366

Proceeds from disposal of property, plant and equipment

567

406

413

263

Acquisitions of non-controlling interests of subsidiaries

(4,324)

(21,971)

0

(598)

Purchase of time deposits with financial institutions

(565)

(916)

(3,373)

(1,442)

Proceeds from maturity of time deposits

1,462

1,283

3,340

1,358

Net cash used in investing activities

(77,523)

(103,023)

(113,587)

(110,158)

Financing activities

Proceeds of issuance of corporate bonds

9,875

22,689

35,000

15,000

Proceeds from bank and other loans

554,187

764,659

768,039

1,147,279

Repayments of corporate bonds

0

(21,000)

(12,000)

(10,000)

Repayments of bank and other loans

(557,692)

(754,159)

(788,793)

(1,125,333)

Distributions to minority interests

(1,682)

(852)

(593)

(1,404)

Contributions from minority interests

129

1,255

1,223

1,137

Dividend paid

(10,404)

(11,271)

(13,872)

(12,572)

Distributions to Sinopec Group Company

(3,218)

(216)

(5,682)

(2,180)

Net cash generated from/(used in) financing activities

(4,851)

1,192

(5,310)

41,777

Net (decrease)/increase in cash and cash equivalents

(4,160)

(5,956)

697

(669)

Cash and cash equivalents at 1 January

18,251

14,069

7,063

7,969

Effect of foreign currency exchange rate changes

(22)

(25)

(64)

(79)

Cash and cash equivalents at 31 December

14,069

8,088

7,696

6,948

 


Analyst Certification

 

 

I, Linette Ng, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Copyright, user agreement and other general information related to this report:

Copyright 2007 Chinavestor.com. All rights reserved. This research report is prepared for the use of Chinavestor.com clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Chinavestor.com.

This research report provides general information only. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice. Past performance is not necessarily a guide to future performance.

Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.

For complete report with charts, please click on pdf file: CV_SNP_H1_09.pdf



If you like us, spread the word to the fellow investors on your favorite Social Bookmarking websites
Reddit! Del.icio.us! Mixx! Free and Open Source Software News Google! Live! Facebook! StumbleUpon! TwitThis Joomla Free PHP
 

!!! CHINAVESTOR.COM is for SALE !!!

BUY this domain with all its credentials. Chinavestor.com has been added to Google News and Finance since 2008! Huge web traffic upside potential! Website is optimized for Chinese stocks but can easily be tweaked. Contact Seller Here

sale1
G_news
Check out The Benefits of Getting into Google News!

Free weekly newsletter

Get hot China stock news every Monday