Shanghai Petrochem Income Falls

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One of China’s largest petrochemical companies, Sinopec Shanghai Petrochemical Company Limited (SHI) announced 2011 net income of RMB 986.5 million or RMB 0.133 per diluted share, compared with RMB 2.8 billion or RMB 0.385 per diluted share a year earlier.

The negative comparisons can be primarily attributable to higher expenses. In particular, Shanghai’s crude oil costs in 2011 amounted to RMB 53.5 billion – up 34.83% over the previous year – representing 60.90% of its total annual cost of sales. The average unit cost of crude oil processed was RMB 5,044.64 per ton, up 28.51% year over year.

Higher Selling Prices Drive Revenues

In 2011, Shanghai’s net sales were up 24.15% year over year to RMB 89.5 billion, reflecting 6.24%, 10.19%, 10.56% and 29.99% improvement in net sales derived from synthetic fibers, resins and plastics, intermediate petrochemical products and petroleum products, respectively.

The increase in sales was primarily driven by higher selling prices. For the year, the average prices of the company’s synthetic fibers, resins and plastics, intermediate petrochemical products and petroleum products were up 8.35%, 12.23%, 17.44% and 18.32%, respectively, from the previous year.

Production Update

Shanghai’s output-to-sales ratio and receivables recovery ratio were 99.76% and 99.81%, respectively. Shanghai processed 10,866,700 tons of crude oil, up 3.3% from the previous year. Production output of gasoline, diesel and jet fuel increased 6.92% from the year-ago period.

Output of gasoline was 968,500 tons, up 3.87% year over year; output of diesel was 3,979,800 tons, up 8.27% from the previous year; and output of jet fuel was 797,300 tons, up 4.13% over the previous year.

Shanghaiproduced 910,100 tons of ethylene and 481,700 tons of propylene, down 6.45% and 7.93%, respectively, over the previous year. Production of synthetic resins and copolymers were down 3.16% year over year to 1,097,900 tons.

Production of synthetic fiber monomers (946,200 tons) and synthetic fiber polymers (664,200 tons) were down 0.41% and up 3.26%, respectively, from last year levels. Synthetic fibers produced during 2011 (250,000 tons) was down 1.42% from the previous year.

Project Development

During 2011, Shanghai’s Phase 6 Project – consisting of the oil refining renovation development as the key component – proceeded in full swing with an investment of RMB 3.2 billion for the year.

Energy Saving Initiatives

The group continues to carry out various energy-saving and emissions reduction measures in agreement with the State’s relevant energy conservation and emissions reduction requirements, thereby curbing its overall energy consumption by 5.31% from the year-ago period.

About the Company

Established in 1993, Sinopec Shanghai'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 are sold in the Chinese domestic market. 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.

Sinopec Shanghai 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.

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