One of China’s largest petrochemical companies, Sinopec Shanghai Petrochemical Company Limited (SHI.) announced first half 2011 net income of RMB 1.4 billion or RMB 0.198 per diluted share, compared with RMB 1.5 billion or RMB 0.210 per diluted share a year earlier.
The negative comparisons can be primarily attributable to higher costs, partially offset by a surge in revenues.
In the first six months of 2011, Shanghai’s crude oil costs amounted to RMB 27.4 billion – a substantial increase of 42.89% year over year – representing 61.76% of its total cost of sales for the period. The average unit cost of crude oil processed was RMB 4,937.91 per ton, up 25.57% over the first half of 2010.
The group continues to carry out various energy-saving and emissions reduction measures in agreement with the State’s relevant energy conservation and emission needs. During January-June 2011, Shanghai started the construction of the Phase 6 Project in full scale, consisting of the oil refining renovation project as the key component.
Higher Selling Prices Drive Revenues
In the first six months of 2011, Shanghai’s net sales were up 37.6% year over year to RMB 46.3 billion, reflecting 46.78%, 29.87%, 13.04%, 22.53%, and 87.10% improvements in net sales derived from petroleum products, intermediate petrochemicals, resins and plastics, synthetic fibers and trading of petroleum products, respectively.
The increase in sales was primarily driven by higher selling prices. For the half-yearly period, the average prices of the company’s synthetic fibers, resins and plastics, intermediate petrochemical products and petroleum products were up 17.77%, 15.49%, 20.67% and 16.53%, respectively, from the first half of 2010.
Production Update
Shanghai’s output-to-sales ratio and receivables recovery ratio were 99.85% and 99.37%, respectively. Shanghai processed 5,678,300 tons of crude oil, up 20.1% from the corresponding period last year. Output of gasoline, diesel and jet fuel increased 10.24%, 33.49% and 5.78% from the year-ago period to 510,300 tons, 2,055,700 tons and 402,500 tons respectively.
Shanghai produced 492,100 tons of ethylene and 258,700 tons of propylene, down 0.4% and 4.3%, respectively, over the previous year period. Production of synthetic resins and plastics were up 0.4% year over year to 570,800 tons.
Production of synthetic fiber monomers (499,600 tons) and synthetic fibers (129,100 tons) was up 0.04% and 4.2%, respectively, from last year ‘s levels. Synthetic fiber polymers produced during January-June 2011 (326,400 tons) was down 1.0% from the previous year.
About the Company
Established in 1993, Sinopec Shanghai is one of the largest petrochemical enterprises in China. The company’s principal activity involves the processing of crude oil into petrochemical products for sale.
Sinopec Shanghai’s highly integrated petrochemical complex processes crude oil into a wide range of synthetic fibers, resins and plastics, intermediate petrochemicals and petroleum products. A significant portion of its products is sold in the Chinese domestic market. China Petroleum and Chemical Corporation, or Sinopec (SNP), a state-owned entity, currently holds a majority stake of 55.56% in Sinopec Shanghai.
Our Recommendation
We are maintaining our long-term Neutral recommendation on the company, supported by a Zacks #3 Rank (short-term Hold rating).
Sinopec Shanghai, one of China’s largest petrochemical companies, is poised to benefit from the country’s continuous demand growth and its strategic positioning in a fast-growing economy. We also like Sinopec Shanghai’s unique vertically-integrated business model, whereby the company can use its intermediate petrochemicals in manufacturing downstream products.
However, a downstream-centric assets portfolio and government caps on refined product prices remain concerns. In particular, the bearish refining margin outlook has become a major liability, in our view.