China’s Other Sinopec

08/12/2008 12:00 am EST

Focus: STOCKS

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, says a less well-known Sinopec may be a profitable alternative.

Sinopec Shanghai Petrochemical (NYSE: SHI) is the dominant refiner and marketer of petroleum products in China. Considering its immense size and sales volume, it’s remarkable that the company has a market capitalization of only $2.5 billion.

Sinopec Shanghai Petrochemical is not China Petroleum & Chemical Corporation (NYSE: SNP), a firm which also uses the name “Sinopec” as an abbreviation.

SHI is one of the largest petrochemical companies in China. It was one of the first Chinese companies to make a global securities offering and it has tripled in value since 1994.

SHI is a highly integrated petrochemical company that processes crude oil into a wide range of synthetic fibers, resins and plastics, intermediate petrochemicals, and petroleum products. It also makes petroleum-based fuels and oils and other intermediate petrochemicals such as benzene. The Chinese government owns approximately 55% of Shanghai Petrochemical.

The company continues to expand its production capacity, and share prices are rising, reflecting growing demand in a booming economic and industrial environment. The Chinese petrochemical market is expected to continue expanding due to the gradually increasing demand for petroleum, natural gas, petroleum products, and major petrochemicals.

SHI is reporting a loss of approximately $100 million for the first half of 2008 due to government-imposed ceilings on the pump price of gasoline and diesel fuel.

[But] at the end of June, Beijing authorized an 18% hike in consumer fuel prices. The effect of that price increase won’t appear on SHI’s balance sheet until the third quarter.

The company’s financial position was being badly squeezed by soaring global fuel prices and its inability to pass rising costs on to consumers. We expect a decline in world crude oil prices in coming months to help restore the firm to profitability.

The Chinese government may [also] call for future gas price increases. Currently pump prices in China are well below those in the US and other oil importing countries. That means gas consumption is effectively being subsidized by both the government and by Chinese oil companies. Under the circumstances, gas-guzzling SUVs are still very popular among Chinese consumers.

It’s a situation that can’t be sustained indefinitely, despite the government’s desire to keep a lid on consumer price inflation. Most price increases have been put on hold until after the Beijing Olympic Games. Pressure from oil companies to recover losses on their refining operations may gain new traction in September.

With a return to profitability, SHI will enjoy dominance in a huge and growing market. China is putting approximately ten million new cars on the road every year, and many new drivers will become SHI customers.

We believe that the company will continue to benefit from China’s economic expansion and the Chinese government’s acceptance of the refining industry’s need for adequate compensation. (The ADRs closed at $31.92 Monday—Editor.)

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