Sinopec’s 2024 earnings missed our forecast by 15% mainly on impairments. We expect the company to show flat earnings in 2025 assuming no more impairments. The expected recovery of refining profit should largely fill the gap of lower E&P earnings as a result of lower oil price. Although we trim our 2025/26 earnings forecasts by 10%/11%, the company’s H shares still offer decent dividend yield assuming its payout ratio to stay at 70%. We reiterate our BUY call with target price of its H shares lowered to HK$4.58.

Key Factors for Rating

Sinopec’s net profit dropped 16% YoY to RMB48.9bn under IFRS in 2024, 15% below our forecast. The discrepancy mainly came from the RMB7.2bn pre-tax impairment, including RMB2.4bn against fixed assets (mainly at chemicals segment) and RMB4.6bn against inventory.

All downstream segments posted lower earnings or worsened losses on weak demand and declines in margins. Its E&P segment was the major positive with operating profit up 25% YoY to RMB56.4bn despite 3% YoY fall in realised oil price. The RMB5.8bn YoY drop in levy for mining rights concessions, RMB1.1bn YoY drop in windfall tax and the 3% YoY drop in lifting cost all boosted earnings. The profit on imported LNG also jumped 2.4x YoY to RMB1.8bn in 2024.

We expect Sinopec to see flat earnings in 2025. The recovery of refining profit on estimated US$0.3/bbl YoY improvement in refining margin should largely offset the expected decline in E&P earnings upon lower oil price. We also expect slight improvement in profitability of its marketing and chemicals segments assuming no more impairments.

The company’s H shares now offer decent dividend yield of 7.0-7.3% for the coming three years assuming 70% payout. It has also resumed share buyback.

Key Risks for Rating

Sharp fall in oil price.

Unexpected further huge impairments.

Valuation

We lower our target price for its H shares from HK$4.90 to HK$4.58. We continue to set our target valuation at 6.5% average dividend yield of the coming three years (rolled over from 2024-26 to 2025-27). In addition to reflecting the cut in our earnings forecasts, we also increase the payout ratio from 65% to 70%.

We also reduce our target price for its A shares from RMB7.23 to RMB6.50. We still set it based on its 3-month average A-H premium which has narrowed from 58% to 52% since early December.