<Results Analysis> A decent 1H22
- 2Q22 results were not as weak as expected; lower downstream earnings were offset by strong E&P and inventory gains
- Interim DPS of Rmb0.16 was declared; expect full-year dividend yield of ~10%; launch of first share buyback programme since listing
- Raised FY22/23 earnings forecasts by 16%/19%
- Reiterate BUY; TP HK$5.30
1H22 net profit up 11% y-o-y to Rmb44.5bn, better than the expectations of an earnings decline in anticipation of weaker downstream performance with lockdowns in 2Q22. This is a record interim profit for Sinopec, similar to its two Chinese peers.
E&P was the star performer. E&P generated Rmb26.3bn (+322% y-o-y) in operating profits on the back of a higher realised oil price of c.US$95/bbl and natural gas price of US$8.94/Mcf.
Refining and marketing fared better than expected, aided by inventory gains on the back of higher oil prices, as Sinopec typically keeps 20 days of inventory for crude oil and 15 days for refined products. Total inventory gains of ~Rmb40bn (pre-tax) were recorded for 1H22. Stripping this out, core profit would have been ~Rmb14.5bn.
While headline profit is expected to moderate in 2H in the absence of significant inventory gains, core margins should improve with stronger demand for refined products post-lockdowns and a shift towards high-value-add products.
Chemicals segment continued to face keen competition and margin squeeze, dipping to a small operating loss in 2Q22.
Overall, management remains confident on the longer term outlook of the downstream business, especially with their cost and product optimisation strategies.
Earnings revisions. We have fine-tuned our numbers to reflect higher oil prices, inventory gains, and downstream margins. FY22/23 net profit is lifted by 16%/19%, respectively.
Capex was c.Rmb65bn in 1H22, of which 51% was for E&P, 14% for refining, 28% for chemicals, 5% for marketing, and 2% for corporate & others. This is in line with the strategy to enhance E&P reserves and pivot towards high-value-add products. FY22 capex guidance of Rmb198bn is maintained.
An interim dividend of Rmb0.16 was declared, same as last year. We expect a final dividend of Rmb0.16, bringing a full-year dividend of Rmb0.32 (based on a ~50% payout ratio). This translates to a lucrative dividend yield of c.10%.
First share buyback mandate approved since listing. The board of directors has approved a general mandate for Sinopec’s share buyback programme since listing, which was proposed in early 2022. No details were disclosed for H-share repurchase, though we may take reference from the A-share buyback. Sinopec plans to repurchase Rmb1.2-2.5bn worth of A-shares, implying 0.3%-0.6% of the outstanding shares in China. Coupled with a steady dividend, these signify Sinopec’s commitment to shareholder return.
Leading the pack in clean energy transition. Sinopec has completed and commissioned China’s first 1mt Carbon Capture, Utilisation, and Storage (CCUS) project in 1H22. It is also building the world’s largest green hydrogen production plant from renewable sources. It aims to be the largest hydrogen player in China by building 1,000 hydrogen refuelling stations by 2025 and expanding its hydrogen production capacity from the current 3.9mt/year (already the largest producer in China, with ~11% of China’s total production as of end-2021).
