Shanghai Petrochemical (600688): Profits in 2Q19 may have bottomed out, reflecting weaker performance; Hong Kong stocks raised to neutral

Shanghai Petrochemical (600688): Profits in 2Q19 may have bottomed out, reflecting weaker performance; Hong Kong stocks raised to neutral

Performance Review Maintaining a neutral 2Q19 performance is in line with our expectations. Shanghai Petrochemical announced its 2Q19 results: under Chinese Accounting Standards, net profit attributable to mothers was recorded5.

27 ‰, a decrease of 14% from the previous month and a decrease of more than 70%, which is the worst performance in a single quarter.

The performance was mainly due to the higher cost of crude oil in 2Q19, the narrowing of the spread of petrochemical products and the small inventory loss.

  We upgraded Shanghai Petrochemical-H rating from “underperforming industry” to “neutral”. The main considerations are: 1) the company’s gradual change of targets has fully reflected the weak performance; 2) we expect the company’s earnings to bottom out in 2Q19.
  The development trend of profitability has bottomed in 2Q19.

We expect 3Q19 earnings to improve month-on-month, mainly considering the company’s crude oil cost conversion, the demand for refined oil may improve due to the peak season and the spread of petrochemical products is rebounding.

We judge annual results are expected to bottom out in 2Q19.

  The shutdown of Shandong Dilian’s environmental protection is expected to bring short-term benefits.

As part of the plan to suspend production in the summer and fall this year, the Shandong government requires that 1 local refinery limit production by 30% from August 2019.

  In the mid-term integration of Shandong refining industry, it is trying to promote the de-capacity of the refining and chemical industry.

The Shandong government recently approved 2 Yulong Island Refining and Chemical Integration Projects. According to the planned first-phase project, the refining capacity will reach 4,000 tons / year, and the second-phase planned capacity will be 6,000 tons / year.

With the initial launch of new production capacity, Shandong will install 1: 1.

25% eliminated backward production capacity.

Therefore, we expect that after the first and second phases of the Yulong Island project come online, Shandong will eliminate backward production capacity of 5,000 tons / year to 7,500 重庆耍耍网 tons / year. The accelerated phase-out of gradual power generation will help state-owned refineries ease their capacity expansion in this round.Competitive pressure in the cycle.

  Earnings Forecasts and Estimates We have lowered our 2019 earnings forecast by 11% to 30 trillion, keeping our earnings forecast for 2020 unchanged.

Maintain Shanghai Petrochemical-A / H target price of 4.

3 yuan / 2.

70 burns unchanged, corresponding to 1.

5 times / 0.

8 times 2019 P / B ratio, and 3% downside and 7% upside.

Shanghai Petrochemical-A / H is currently trading at 1.

6 times and 0.

8 times 2019 P / B ratio.

  Risks Oil prices fluctuate sharply; refining margins and petrochemical spreads rebound less than expected