Goldman Sachs lowered its target price for Sinopec Engineering Group (SEG)(02386) by 4.3% to HK$7.7 and maintained its "buy" rating.
The research house said SEG's 1H revenue beat; however, earnings were lower than Goldman expected due to margin compression (increasing labor and raw material costs, increasing sub-contracting costs and R&D expenses).
Goldman believes that SEG is poised to benefit from ongoing downstream capex strength (particularly in petrochemicals). Its 1H new orders have reached Rmb33bn, representing 60% of the company's FY2019 target.
Goldman expects that SEG will have the ability to increasingly pass-through raw material and labor cost inflation to customers. It also believes the increased R&D expenditure should help SEG win contracts with better terms in the future. It revised its EPS forecasts by -8%/-3%/0% to factor in the slower-than-expected margin improvement.
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