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

Sinopec’s 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.