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Fundamental View
AS OF 02 Nov 2022We maintain our Market perform recommendation on Sinopec, as its 3Q22 results were in line with our expectations. We use Sinopec HK’s financials to gauge Sinopec Group’s credit profile given that Sinopec HK accounts for ~98% of the Group’s FY21 revenues.
We expect O&G prices to remain high vs historical levels, which should support topline growth. While domestic demand for refined oil products remains highly contingent on COVID policies, the added export quotas could also support export sales. We expect Sinopec to maintain its healthy debt metrics and strong liquidity position, thanks to good operating cash flow generation and prudent financial policy.
We expect strong government support and access to onshore funding channels to continue to underpin its credit profile in the near-term.
Business Description
AS OF 02 Nov 2022- Sinopec Group is a Chinese integrated oil and gas (O&G) company and is one of the largest globally & domestically, measured in terms of volume, refined product sales and number of service stations. We use Sinopec Corp as a proxy for Sinopec Group as it contributed to ~98.4% of its FY21 revenue. In terms of Sinopec Corp's segmental breakdown, refining and marketing contributed 55% of total revenue from external sales, chemicals represented 15%, and E&P contributed 6% in FY21.
- The group has historically relied on O&G imports as the main feedstock into its core refining business. Depending on the prices of their feedstock and product mix, this can arise in differing profitability and refining margins for the group. Sinopec Group's refining processes and marketing network are more essential to smooth its profitability and refining margins. The group also engages in some commodity hedging to mitigate extreme feedstock price fluctuations.
- As of FY21, Sinopec Corp held a total of 1,749 mn bbl and 8,456 bcf of crude and natural gas reserves. For its refining segment, it had 29 refineries with capacity of 287.3 mn tonnes/annum, and refinery throughput of 255 mn tonnes.
- On the retail side, Sinopec Corp had 30,740 service stations under its brand as at 30 June 2022.
- Sinopec Corp is currently listed in the Hong Kong and Shanghai Stock Exchange. As at 2 November 2022, Sinopec Corp's market capitalization stood at RMB 466.8 bn.
Risk & Catalysts
AS OF 02 Nov 2022Vulnerability 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.
Key Metrics
AS OF 02 Nov 2022| RMB bn | LTM 3Q22 | FY21 | FY20 | FY19 |
|---|---|---|---|---|
| Total Debt/Capitalization | 31.0% | 25.6% | 25.3% | 27.8% |
| Net Debt/Capitalization | 21.5% | 16.8% | 17.9% | 22.9% |
| Total Debt/Total Equity | 44.9% | 34.5% | 33.8% | 38.6% |
| Total Debt/Total Assets | 20.3% | 16.7% | 17.2% | 19.2% |
| Total Debt/EBITDA | 1.7x | 1.2x | 1.5x | 1.6x |
| Net Debt/EBITDA | 1.2x | 0.8x | 1.1x | 1.3x |
| EBITDA/Gross Interest | 18.4x | 20.1x | 16.8x | 12.9x |
| EBITDA Margin | 7.6% | 9.4% | 9.5% | 7.3% |
CreditSights View
AS OF 02 Nov 2022Sinopec Group holds a 69%-stake in Sinopec Corp, which contributed ~98% of the group’s total revenue in FY20. Hence, we use Sinopec Corp as a key proxy for the group. Sinopec HK recorded strong topline growth in 1H22. Though, its profitability and leverage metrics profitability slightly deteriorated. We expect Sinopec’s growth in 2H22 to be supported by stronger sales volumes, but profitability should remain pressured as crude input cost and chemical feedstock prices stays elevated. We expect its credit profile to remain healthy for FY22, and for Sinopec to maintain strong government support. We maintain our Market perform recommendation on Sinopec. We have a preference for the shorter-end (<5Y) of its curve.
Recommendation Reviewed: January 18, 2023
Recommendation Changed: May 03, 2021
Who We Recommend
Siam Commercial Bank
Bangkok Bank
Kasikornbank
