We maintain our Market perform recommendation on Sinopec. Sinopec Group holds a 68%-stake in Sinopec Corp, which contributed ~98% of the group’s total revenue in FY21. Hence, we use Sinopec Corp as a key proxy for the group.

Sinopec Corp’s cash flow generation weakened and leverage edged higher albeit still moderate in FY22, as EBITDA margins declined. We expect Sinopec Corp to generate stronger EBITDA and FCF in FY23, and improve its debt metrics.

We think Sinopec is not cheap following its COVID reopening triggered China credit rally in mid-November. That said, we expect high-grade and stable SOE credits, like Sinopec, to remain supported and perform in line with the ADIG Index against the backdrop of a still fragile global risk sentiment post the banking sector turmoil.

Vulnerability to global and domestic oil and gas (O&G) prices is exacerbated by the company’s heavier reliance on imported oil for refining. This exposes the company to higher exogenous factors/geopolitical risks where it imported ~86% of its crude oil used for refining and 45-50% of its liquefied natural gas (LNG).

Policy risk from strict regulations over domestic O&G prices, exploration licensing, and import and export quotas could materially impact all three key business streams in Sinopec’s integrated business model.

The company’s strong reliance on the sales of crude oil may result in a weak ESG score as the environmentally damaging and high carbon intensity nature of the business conflicts with multiple ESG mandates. This potentially subjects Sinopec to elevated energy transition risk. Sinopec has taken various measures to mitigate this by expanding into renewable energy sources (ie. Wind, Solar and Biomass), implementing low-carbon production and operations (via decarbonizing technologies such as Carbon Capture, Utilisation and Storage (CCUS)) and ramping up on its hydrogen segment, where it aims to be the largest hydrogen company in China.