Uncertainties Remain for Sinopec
The following excerpts explain why Zacks senior Chinese market analyst Paul Cheung, CFA remains neutral on China Petroleum and Chemical Corporation , the petroleum and petrochemicals company:
Sinopec recently reported strong financial results for the first three quarters of 2007. While a number of uncertainties remain, we believe that the near- to-medium-term environment supports its continued upstream production growth and downstream capacity expansion. Moreover, Sinopec’s integrated petrochemical and refining businesses are expected to benefit from possible price reform for refined products in China.
“Our key concern about Sinopec continues to be its refining margins under the environment of high crude oil price. Though the Chinese oil companies are able to charge close to market prices for their crude oil volumes (though typically with about a one-month lag), the government plays a major role in refined product (particularly gasoline and diesel) pricing. The government controlled the price of refined products to keep the inflation level at a reasonable level. It is estimated that Sinopec could lose more money in the refining business if oil prices stay at more than $60 a barrel.
“Currently, SNP ADRs are trading at 11.5x our 2008 earnings estimate, slightly higher than its global peers but lower than its Chinese peers. SNP ADRs are also trading at 11.4x our 2009 earnings estimate, slightly higher than its global peers. Our $123 price objective reflects a P/E multiple of 12x our 2008 earnings estimate. Overall, we think the stock is fairly valued. Therefore, we are maintaining our Hold recommendation for Sinopec.”
Tags: Petroleum, Sinopec