The Two Sinopecs Bounce Back

09/14/2009 10:56 am EST

Focus: STOCKS

Jim Trippon

Editor-in-Chief, China Stock Digest

Jim Trippon, editor in chief of China Stock Digest, says two Chinese energy companies with a similar name are recovering nicely as oil prices rise.

China Petroleum & Chemical (Sinopec) (NYSE: SNP) is Asia’s largest refiner and the second largest in the world after Exxon Mobil (NYSE: XOM). It’s also a major gasoline retailer and almost anywhere in China you can pull into a service station bearing the well-known Sinopec name and logo.

Sinopec suffered substantial losses from last year’s oil price spike. Due to government-mandated gas price controls, the company lost money at the pumps, although it did receive billions in subsidies from Beijing.

The company says its first-half net profit more than quadrupled, driven by higher fuel prices brought about by China’s more market-oriented fuel pricing system. Sinopec says its net profit for the six months ending June 30th was $4.87 billion, up very sharply from just over a billion dollars a year earlier.

Under China’s new “resources pricing system,” refiners are guaranteed a 5% profit margin as long as the price of international crude is below $80 a barrel. The company [anticipates] “that the results of the first three quarters of 2009 will be over 50% higher compared with the same period of last year.”

We’re maintaining a target sell price of $110 on Sinopec, well below its peak of $160 a share in 2007. (It closed below $87 Friday—Editor.)  The company should continue to meet or exceed expectations as well as generating a dividend yield of more than 3% as long as oil prices remain below $100 per barrel on world markets.

[Meanwhile,] Sinopec Shanghai Petrochemical Company (NYSE: SHI) announced that it had moved from a loss to profitability. Profit after taxation and minority interests amounted to $146 million, a year-on-year increase of almost $200 million from the firm’s prior negative earnings position.

Looking ahead, company Chairman Rong Guangdao said, “In the second half of 2009, global economies are expected to enter a period of slow recovery and slow growth. International crude oil prices may continue to hover at relatively high levels. Market competition will be intense as ever.”

The company continues to expand its production capacity, and share prices are rising, reflecting growing demand in a booming economic and industrial environment. SHI is participating in Beijing’s aggressive purchasing of oil reserves worldwide. SHI announced [recently] that it will acquire Addax Petroleum Corp. for $7.2 billion.

The deal will be the largest overseas takeover ever by a Chinese company. Sinopec will gain access to substantial reserves in West Africa and the Middle East if the acquisition is approved.

We believe that the company will continue to benefit from China’s economic growth and the Chinese government’s acceptance of the refining industry’s need for adequate compensation (an easing of price controls) if much-needed construction of new facilities by SHI is to continue.

SHI was added to our buy list with a 5% allocation at a buy up to price of $40.00 per share. (It closed above $45 Friday—Editor.)

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