Sinopec Earnings: Resilient Upstream Earnings Offset by Weak Downstream Segments; Shares Undervalued

China Petroleum & Chemical Corp’s 600028, or Sinopec’s, first-half 2023 net profit of CNY 36.1 billion was down 19% year on year, broadly in line with our expectation, with resilient upstream income offset by weak refining and chemicals earnings. After considering our latest energy price and foreign exchange assumptions, we increase our 2023-25 earnings estimates by 3%-13% and raise our fair value estimate to HKD 5.60 per H-share (CNY 5.10 per A-share) from HKD 5.50 (CNY 4.84). We think Sinopec’s H-shares are currently undervalued, and the estimated 2023 dividend yield of more than 10% and share buyback plan should support share prices. That said, concerns about downstream demand due to China’s slowing economic growth could weigh on its share price performance in the near term.

In the first half of 2023, the firm’s operating cash flow improved to CNY 27.6 billion from CNY 4.9 billion a year ago, but trailed first-half 2021′s CNY 48.3 billion. While it’s a solid rebound, it is somewhat disappointing, as capital expenditure remains higher than we prefer. On a positive note, Sinopec raised the target for domestic sales volume of refined oil products by 6% and this may signal better demand recovery in the second half of 2023. We think the firm is likely to see sequential improvement in the third quarter on the back of higher oil prices and inventory gains.

First-half capital expenditure of CNY 74.7 billion was 15% higher year on year. In particular, Sinopec raised its 2023 budget by 8% to CNY 178.7 billion due to higher investment in the chemicals segment. We think the operating environment for the chemical industry remains challenging in 2023 due to increasing competition. Sinopec’s chemicals segment was loss-making during the period, and we expect a full-year loss in 2023. Nonetheless, we anticipate a recovery in 2024, once the current excess capacity is absorbed by the market.