20181003-中国银河国际证券-中石化炼化工程-02386.HK-EARNINGS_RECOVERY_SUPPORTED_BY_PETROCHEM_INDUSTRY_UPCYCLE_3页_1mb

报告摘要

Sinopec Engineering (2386.HK) Summary

Core Content

Sinopec Engineering is a leading engineering, consulting, and construction company in China, specializing in oil refining, petrochemicals, coal chemicals, inorganic chemicals, and pharmaceutical chemicals. It is a subsidiary of Sinopec, with the parent company holding a 67% stake. The company has been listed on the Hong Kong Stock Exchange since 2013 and is currently valued at around 1.29x 2018E PBR, which is considered undemanding compared to its peak cycle valuation of >2x PBR.

Key Business Segments

Engineering Projects: Focus on oil refining, petrochemicals, coal chemicals, inorganic chemicals, and pharmaceutical chemicals.
Revenue Breakdown: In 1H18, revenue from oil refining and petrochemical projects accounted for 66.2% of total revenue.
Order Backlog: Total order backlog at end-1H18 was RMB108bn, up 18.8% YoY, equivalent to 2.5x 2018E revenue.
Customer Distribution: About 77% of order backlog is from China, and 53% is from Sinopec Group and its associates.

Earnings Recovery and Market Conditions

Earnings Recovery: The company is entering an earnings recovery cycle, supported by the rebound in oil prices.
Capex Upcycle: Oil majors in China are increasing capital expenditures, especially for production facility upgrades, which is a major driver for Sinopec Engineering's business.
Revenue Growth: Revenue in 1H18 grew 33% YoY to RMB18.3bn, driven by the recovery in oil prices and increased capex spending.
Gross Margin: Gross margin dropped to 10.4% in 1H18 from 16.1% in 1H17, due to the nature of projects in the execution phase. However, the company expects margin recovery in 2H18 to the normal range of 12%-14%.

New Contract Wins and Future Projects

New Contracts in 1H18: Secured RMB35.5bn in new contracts, a 99.7% YoY increase.
Project Targets: Likely to exceed the full-year target of RMB48bn.
Major Projects: Secured RMB19.6bn in contracts for the Zhongke Guangdong integrated refining and petrochemical project. Further tenders are expected for Zhenhai, Shanghai, and Nanjing projects, with potential new contracts of RMB10bn-20bn from each.
Non-Sinopec Opportunities: If oil prices stabilize at US$70-80/barrel, there may be increased capex from PetroChina and the Qingdao LNG project phase 2 (RMB2.3bn).

Financial Risk and Capital Structure

Low Financial Risk: The company has minimal bank loans, with working capital mainly supported by payables.
Profitability: Net profit in 1H18 grew 32.7% YoY to RMB1.1bn, despite FX losses and non-recurring expenses in the prior year. Excluding FX factors, recurring profit fell about 20% YoY.

Valuation and Investment Outlook

Valuation Metrics: Current PBR is 1.29x, which is lower than the peak cycle valuation of >2x PBR. PER is 13.6x, which is considered reasonable for a cyclical stock.
Dividend Yield: The dividend yield is expected to rise from 3.63% in 2018E to 4.41% in 2019E.
ROE: ROE is projected to increase from 9.64% in 2018E to 11.26% in 2019E.
Equity Rating: The analyst has given a "BUY" rating, suggesting a potential share price increase of >20% within 12 months.

Other Considerations

Iran Project: The company has an EPC contract worth RMB6.86bn for the Abadan refinery upgrading project, with management closely monitoring US sanctions risks and preparing mitigation strategies.
Market Catalyst: The next quarterly order book update is expected in mid-October, which could serve as a major catalyst for the stock.

Disclaimer and Disclosure

Disclaimer: This report is not intended for distribution to any person or entity in jurisdictions where it would be illegal. No representation or warranty is made regarding the accuracy or completeness of the information.
Disclosure of Interests: China Galaxy International may have financial interests in the subject company, and certain individuals may have roles or interests in the company mentioned in this report.

Analyst Certification

The analyst certifies that all views expressed reflect personal opinions and that no part of compensation is related to the specific views in this report.
The analyst confirms no trading or financial interests in the securities covered in the report within the specified time frames.

Summary of Key Points

Earnings Recovery: Supported by oil price rebound and increased capex by oil majors.
Revenue Growth: Strong YoY growth in 1H18, with potential to exceed full-year targets.
Order Backlog: Significant backlog with a high proportion from Sinopec Group.
Valuation: PBR is undemanding, and PER is reasonable for a cyclical stock.
Financial Risk: Low due to minimal debt and strong working capital support.
Future Projects: Expected to win substantial contracts from ongoing and upcoming projects.
Equity Rating: "BUY" based on positive outlook and potential for share price growth.