SPC-A:Positive fundamentals richly valued;initiating with Sell发布时间：2016-03-31 研究机构：德意志银行
Premium valuation to Asia / global peer average; initiating with Sel
Strong FCF & ROIC improvement; higher dividend payout potential SPC, a pure downstream refining and chemical company in the China oil & gas sector, should benefit the most from robust refining GRM and a chemical up-cycle in the low oil price environment, which also relieves SPC’s employed capital, and should drive strong FCF ahead. However, we believe these positive earnings drivers are richly priced into A-share valuations. Hence, we initiate on SPC-A shares with a Sell rating and a price target of RMB4.4, implying potential downside of -37%.
Strong FCF & ROIC improvement; higher dividend payout potential
A sustainable low oil price situation should help relieve SPC’s employed capital. We believe SPC will earn strong FCF in 2016E-18E (the current share price offers a 10% FCF yield). Moreover, we forecast ROIC to improve strongly by 3.4ppts, from 14.1% in 2015 to 17.5% in 2018E. As we expect the company to be in a net cash position by 2016, we see potential for a higher dividend payout if there is no meaningful capex ahead.
Beneficiary of refining sweet spot and chemical up-cycle
We believe SPC’s refining and chemical business will continue to generate strong returns in 2016-18E and beyond, and that China refining margins will continue to improve with refined products’ standard upgrades. We see refining margins remaining in a sweet spot in the next few years, assuming oil prices recover to US$70/bbl gradually. A global chemical up-cycle to 2017 with tightened supply and balanced demand, alongside potential delay/ cancellation of China CTO/MTO projects is likely to further widen chemical spreads.
Valuation: re-rating to continue
SPC-A trades at 3.4x/20.8x 2016E P/B and P/E (in line with historical average). We derive our target price of RMB4.4 using DCF, and this implies 2.0x/13x 2016E P/B and P/E. SPC-A trades at 100% above Asia refining and chemical peers’ average, which we believe is unjustified despite its ROIC being higher than that of peers. SPC-A key upside risks: 1) SPC is allowed to keep the extra profit from floor refined product prices, leading to stronger-than-expected refining margins; and 2) stronger-than-expected demand in refined/chemical products leading to better-than-expected margins.