Sinopec’s earnings dropped 56% QoQ to RMB8.0bn in 3Q24 under IFRS, 30% below our forecast. The big miss was mainly due to the sharp fall in marketing profit, which was hit by inventory loss and weak demand. We expect the company’s earnings to jump 81% QoQ in 4Q24 on the recovery of downstream earnings. We trim our 2024-26 earnings forecasts by 5-11% after post results adjustments. Given the company’s attractive dividend yield, we reiterate our BUY calls with target price reduced to HK$5.76 for its H shares.

Key Factors for Rating

The operating profit of its marketing segment plummeted 61% QoQ to RMB2.6bn in 3Q24 (under IFRS, same below). The sharp fall in oil price (17% for Brent) throughout 3Q24 has resulted in RMB1.4bn inventory loss. On top of this, the segment was hit by weak demand and higher unit cost.

All other segments also posted lower sequential earnings in 3Q24. The operating profit of the E&P segment dropped 11% QoQ as realised oil price fell 8% QoQ and lifting cost rose 4% QoQ. Its refining segment posted an operating loss of RMB0.5bn in 3Q24 vs an operating profit of RMB0.2bn in 2Q24 as refining margin narrowed 2% QoQ. Its chemicals segment continued to see loss as key chemical spreads remained weak on unfavourable supply demand dynamics.

We now estimate Sinopec’s earnings to surge 81% QoQ in 4Q24. Its refining margin should improve as we expect oil price to fluctuate around current level rather than in a downtrend seen in the previous quarter. We also assume the profit its marketing segment to recover to a level similar to that of 2Q24.

Despite the cuts in forecasts, the company’s H shares still offer attractive dividend yield of 7.8-8.8% for 2024-26E based on assumed payout ratio of 65%.

Key Risks for Rating

Sharp fall in oil price.

Lower-than-expected profitability of downstream operations.

Valuation

We reduce our target price for its H shares from HK$6.21 to HK$5.76 to reflect the cuts in our earnings forecasts. Our target valuation remains 6.5% average dividend yield for 2024-26E.

We also trim our target price for its A shares from RMB8.00 to RMB7.92. We still set it based on its average 3-month A-H premium, which has expanded from 41% to 50% since late August.