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Sinopec Petrochem Records 1H Loss

Zacks Equity Research

One of China’s largest petrochemical companies, Sinopec Shanghai Petrochemical Company Limited (SHI) announced first half 2012 net loss of RMB 1.1 billion or RMB 0.160 per diluted share, compared to net profit of RMB 1.4 billion or RMB 0.198 per diluted share a year earlier.

The negative comparisons can be primarily attributable to higher costs and lower revenues.

Crude Costs Rise

In the first six months of 2012, Shanghai’s crude oil costs amounted to RMB 28.9 billion – an increase of 5.48% year over year – representing 64.58% of its total cost of sales for the period. The average unit cost of crude oil processed was RMB 5,465.53 per ton, up 10.69% over the first half of 2011.

Lower Selling Prices Pull Down Revenues

In the first six months of 2012, Shanghai’s net sales were down 5.91% year over year to RMB 43.6 billion, reflecting 9.42%, 12.00%, 25.63% and 11.89% decline in net sales derived from intermediate petrochemicals, resins and plastics, synthetic fibers and trading of petroleum products, respectively. This was partially offset by a 2.94% improvement in petroleum products net sales.

The decrease in sales was primarily driven by lower selling prices. For the half-yearly period, the average prices of the company’s synthetic fibers, resins and plastics, and intermediate petrochemical products were down 22.88%, 12.14%, and 1.41%, respectively, from the first half of 2011. Only petroleum products managed to buck the trend, whose average price climbed 7.30% year over year during the period under review. 

Production Update

Shanghai’s output-to-sales ratio and receivables recovery ratio were 100.14% and 99.96%, respectively. Shanghai processed 5,518,100 tons of crude oil, down 2.82% from the corresponding period last year. Output of refined oil products decreased 3.45% from the year-ago period to 2,866,000 tons.

About the Company

Established in 1993, Sinopec Shanghai is one of the major 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 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 the causes of concern. In particular, the bearish refining margin outlook has become a major liability, in our view.

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