Nomura believes the profitability of Sinopec's (00386) E&P division will improve in 2018 on higher realised oil prices and increasing gas production, but should be largely offset by a profit decline in refining and marketing.
The research house sees intensifying competition from independent refiners next year after 38% jump in their crude imports quota for 2018, and the build-up of a captive marketing network, both putting Sinopec's refining and marketing margins at risk if
independent refiners' access to overseas markets continues to be cut off.
It said that Sinopec is currently trading at one standard deviation below the long-term
average on EV/EBITDA, and lower than 6.3x and 5.7x EV/EBITDA, respectively, when Brent was at US$60/bbl in the previous two cycles, as the market has started pricing in the earnings risks of refining and marketing.
Nomura maintained its "neutral" rating on Sinopec, with a target price of HK$6.13.
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