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Fundamental View
AS OF 21 Apr 2023- 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.
Business Description
AS OF 21 Apr 2023- 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% of its FY21 revenue. In terms of Sinopec Corp's segmental breakdown, refining and marketing contributed 57% of total revenue from external sales, chemicals represented 14%, and E&P contributed 6% in FY22.
- 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 FY22, Sinopec Corp held a total of 1,961 mn bbl and 8,806 bcf of crude and natural gas reserves. Sinopec process 242 mn tonnes of crude and produced 140 mn tonnes of refined oil products in FY22. It also has 9 hydrogen supply centers as of YE22. On the retail side, Sinopec Corp had 30,808 service stations under its brand as of YE22.
- Sinopec Corp is currently listed in the Hong Kong and Shanghai Stock Exchange. As at 21 April 2023, Sinopec Corp's market capitalization stood at RMB 705.6 bn.
Risk & Catalysts
AS OF 21 Apr 2023- 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.
Key Metrics
AS OF 02 Jun 2023
CreditSights View
AS OF 28 Mar 2023We 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.
Recommendation Reviewed: March 28, 2023
Recommendation Changed: May 03, 2021
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