China Petroleum and Chemical Corp-A:Q316demand better than expected,underpinning downstream earnings
Q316 net profit in line with our expectation
The company posted Q316 net profit of Rmb10bn and EPS of Rmb0.08, in line with ourexpectation. Average crude price was US$45/bbl in Q316, basically flat QoQ. Chemicalengineering and marketing business saw QoQ improvement in earnings, and upstreamearnings dropped slightly.
What is the most noteworthy in the results?
In Q316, the company benefited less from inventory income resulting from crude priceincreases; we believe its Q316 earnings could basically represent its normal profitabilitywhen crude price is at US$45/bbl. If crude price continues to rise, we think upstreambusiness still has significant room to increase earnings. Q316 net profit came in atRmb5.8bn, thanks to strong downstream demand, mid-to-low oil prices, strong PPprices and continued improvement in alkene's earnings. In terms of marketing business,the company's per-ton earnings improved slightly QoQ in Q316, benefiting from lowwholesale price for refined oil. When crude oil prices are relatively stable, thecompany's refining business could realize a gross profit of US$3.4/bbl, which weattribute to actual earnings improvement in a thorough implementation of premiumquality at reasonable prices.
Our EPS estimates may have upside risks
Our EPS estimates may have upside risks, as the company still achieved 5.8%annualized ROE when crude oil price was at US$45/bbl, thanks to its advantages inbusiness integration. We expect the company's EPS to increase by Rmb0.06/share foreach US$10/bbl increase in crude prices.
Valuation: price target of Rmb7.15, Buy rating
We believe overall investor reaction will be lacklustre in the short term, mainly asearnings expectation for the company needs to be driven by oil prices. Currently, theintrinsic value of its upstream business is still below UBS's estimate of US$60/bbl for2017 crude prices. Our price target is based on 14.3x our 2017 PE estimate.