中國石化 (SNP) 2005 Q3 法說會逐字稿

Welcome and thank you very much for attending Sinopec’s Third Quarter 2005 Earnings Conference Call. Sinopec is hosting this conference call from Beijing and reporting the results is Mr. Zhang Jiaren, CFO and Senior Vice President along with the head of each business unit. The presentation is in Mandarin and then there will be translation afterwards.

Before the beginning of the presentation, I would like to remind everyone of Sinopec’s Safe Harbor policy, which is that certain statements made during the course of our discussion today may constitute forward-looking statements that are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially including risk that may be beyond the company’s control. Any forward-looking statements made are valid as of today and Sinopec takes no obligation to update these statements.

I would now like to turn the conference over to Mr. Zhang Jiaren, CFO of Sinopec.

[Translated] Ladies and gentlemen, good morning. Welcome to Sinopec Results Announcement Conference Call for the first three quarters of 2005. In the first three quarters, China’s economy maintained a rapid growth with GDP growing by 9.4% in the third quarter. Domestic demand for petroleum petrochemical products kept increasing with a startling high international crude price. Domestic price control over the same products remained in effect. For the [inaudible] is in domestic and international markets, petrochemical product prices stayed at high level. The company optimized production and operations to increase oil and gas production, refining throughput, sales of refined products and ethylene production. Good results have been achieved.

Under ISRS, in the first three quarters, the company’s turnover and other operating revenues totaled 592.588 RMB billion, increased by 34.79% year on year. EBIT was 47.176 RMB billion, increased by 1.69% year on year. Profit attributable to equity holders of the parents was 28.249 RMB billion, increased by 2.57% year on year. And earnings per share was 0.326 RMB.

By September the 30th, the company’s long-term and short-term debt amounted to 112.597 RMB billion, increased by 19.468 RMB billion compared with the year beginning. Equity attributable to equity holders of the parent was 210.885 RMB billion, increased by 9.24% compared with the year beginning. In the first three quarters, the company’s net cash flow from operating activities was 14.759 RMB billion. Net cash flow for investing activities was 44.443 RMB billion. Cash and cash equivalent at the end of the reporting period was 15.228 RMB billion, decreased by 1.153 RMB billion compared with the year beginning.

In the first three quarters, the company sees the opportunity of high crude price carefully organized oil and gas production, focused on enhancing oil recovery in mature field and improving the overall development level, steadily push down capacity build up in Tahe oilfield and other new blocks, realizing a stable growth in oil and gas production. The company produced 29.19 million tonnes of crude, the 4.53 billion cubic meters of natural gas, increased by 1.35% the 5 points, 5.1% year on year respectively. In the first three quarters, the company realized an average crude price of 43.33 USD per barrel, increased by 36.99% year on year. The average natural gas price was 2.27 USD per 1,000 cubic feet, increased by 9.66% year on year. Lifting costs were 7.29 USD per barrel, increased by 14.8% year on year. EBIT was 31.836 RMB billion, increased by 82.63% year on year.

In refining segment, the company fully leveraged production capacity, optimized processing plant and they maintained very stable, long-term and full load operation, further increasing its resounding throughput to 104.07 million tonnes in the first three quarters, increased by 5.46% year on year. The company also improved product mix and increased the production of live chemical feedstock and other products needed by the market. That chemical feedstock production increased by 19.05% year on year.

Influenced by the domestic price control over refined product, in the first three quarters, the company’s refining margin decreased significantly on yearly basis to 1.48 USD per barrel. Operating loss was 7.926 RMB billion. In the first three quarters, according to the supply and demand in domestic refined product market, the company acquired resources from various channels to guarantee market supply. Total sales volume especially rate currencies and distribution volume kept growing rapidly. Total domestic sales of refined products was 77.5 million tonnes, increased by 10.41% year on year. Retail volume amounted to 46.19 million tonnes, increased by 19.73% year on year. And distribution volume was 15.42 million tonnes, increased by 2.59% year on year. Retail and direct sales [inaudible] gained 79.48%. By the end of September, the company had 30,583 petrol stations, among which 27,048 are self-operated. The company will continue to improve the operation efficiency of its petrol stations. The annual average throughput per self-operated petrol station converted from out of the first three quarters is 2,277 tonnes, increased by 13.57% year on year.

Influenced by the domestic price control over refined products, EBIT for marketing segments in the first three quarters reached 9.376 RMB billion, down by 26.84% year on year.

In chemical segment, the company’s big favorable chemical cycle fully leveraged newly-built production capacity, enhanced operation management and maintained full load operation of all major chemical plant, increasing the production of all major chemical products. In the first three quarters, the company produced 3.849 million tonnes of ethylene, increased by 28.47% year on year. And synthetic resins 5.547 million tonnes, increased by 23.16% year on year. Product mix was further improved and the production of high value-added products such as performance compounds and differential fiber was increased remarkably.

Benefiting from the optimization on this asset [inaudible] the past few years and [inaudible] newly built production capacity in a favorable chemical cycle, the company’s EBIT for chemical segment in the first three quarters was 14.647 RMB billion, increased by 25.84% year on year. In the first three quarters, the company’s cap-- the company’s CapEx was at about 36.484 RMB billion. CapEx for the E&P segment was 15.013 RMB billion. CapEx for refining segment was 6.839 RMB billion. CapEx for chemical segment was 4.777 RMB billion. CapEx for marketing segment was 9.182 RMB billion. CapEx for corporate and others was 672 million RMB. In addition, 2.313 RMB billion was invested Shanghai-Secco, BASF-YPC and other JV projects.

That is the company’s operation results in the first three quarters of 2005. Now my colleagues and I are ready to take your questions. Thank you. Now we’ll be pleased to take your questions.

This concludes the presentation and the management would be happy to take your questions now. [OPERATOR INSTRUCTIONS] Our first question will be from Howard Wong (ph). Howard you may proceed with your question.

Sure. [Translated] Okay and our first question comes from Howard Wong, Morgan Stanley. The question concerns with the CapEx of the company. For the second year, the company’s running the operating loss for the refining segment. And he has noted that the CapEx for the first half has been reduced by 400 million RMB and is there any plans for further reducing the CapEx for the second year?

[Translated] And the answer is, just as announced by our chairman during the road show in September, the company will adjust the CapEx plan according to the overall business performance of this year. And the plan is to reduce the CapEx of the company for the whole year by 4 billion, that’s to 58 billion for the whole year. The major reduction comes from the refining and chemical segment.

Such reduction in CapEx was not only because of the loss as we know very well that the operating loss for the refining segment was a reason of the policy or the press control by government. After such policy, we still see great potential for making profit for this segment. The reason for the reduction in CapEx was because of the demand in the Chinese market. We adjusted the CapEx plan to-- because of the change in demand in the Chinese domestic market.

This is briefly my answer.

And the next question is from Kushman Concaus Febe (ph). You may proceed with your question.

Good morning Kushman Concaus Febe, just actually the first question was already answered. So I’ll go to my second question. Could you talk a little bit about marketing and give us some reasons as to why the marketing profits are down on a YOY basis. Is it because of internal transfer pricing between the refining and marketing division or are there any other reasons like costs that are affecting the profitability of the business?

[Translated] The main reason was because of when the company acquired the [results] for their products the cost was increased. And that is also because of the high cost for the crude. On the other hand, the price for the refined product is bill controlled, tax and controlled by the government. Therefore, the margin for the marketing segment was affected negatively and that is also a result in the decrease in the profit for the marketing segment.

However with the increased momentum in kind for this marketing segment, as you can see the retail class direct sales has accounted for more than 80% of the total sales volume this year. Just as we promise or we committed during our IPO that is the, in five years’ time the retail class direct sales will account for 80% of the total sales volume. And by this year, we actually have achieved this target. Thank you.

Yes, can I have, can I just ask one additional quick question please?

[inaudible]

Just we understand that the refining profits are down because of the controls that the government has exerted in pricing. Could you tell us, could you give us a little bit of color as to what you expect in the fourth quarter, let’s say if your oil prices remain where they are today around $50. You know do you expect things to be better than the third quarter? Or do you think that things are going to be worse in the third quarter if the government doesn’t raise prices?

[Translated] And given the current policy on the price control, we don’t see there will be significant improvements in the profit for the fourth quarter. Whatever the price for the crude in the November or December will be better than what we had in October. However, we don’t see the margin will be significantly improved.

Thank you sir. Thank you very much.

[Translated] Thank you.

Our next question is from Trina Lin (ph). Trina, you may proceed with your question.

Good morning. This is Trina Lin from ABN Ambo. I’ve got two questions. One how many, could you tell us how many tonnnes of gasoline you exported in the third quarter of this year? And your expectations for export volumes in the fourth quarter? Second question, is-- do you expect any change in the government price policy for oil products in the near future? Thank you.

[Translated] I’ll answer your second question first. The price control over the refined products really incurs a lot for the refining segment of the company. And we timely reported this phenomenon to the government. The government also pay great attention to this issue. And they are proactive. They studying how to make up the relevant mechanism of counter measures to solve this problem. We firmly believe that this problem will be solved and when it’s solved, the refining segment will achieve much better performance.

As for the first question, the gasoline exports in the third quarter was around, was around 450,000 tonnes that is about 150 to 180,000 tonnes per month. The export was mainly for the long-term contract. Okay.

Sorry, so this volume of exports will continue as well for the fourth quarter?

[Translated] I expect this volume will continue for the fourth quarter because these as I said were mainly for the term contract.

All right. Thank you.

Our next question is from Pat Weaver from Macquarie. Pat you may proceed with your question.

And this is Scott Weaver from Macquarie. Just two questions, first by following up the first question. If you can give color to your overall strategy going forward, in particular where do see gauging within the economy and how are you going to address that? So really where in your CapEx plan, where are you going to focus? Where do you see the best opportunities? The second question is, just on the listing cost side, I know you’re pushing hard to increase your production. Do you have any outlook in terms of where you think lifting costs will go as [inaudible]? Thank you.

I’m afraid your first question was not very clear.

Okay, sorry.

Basically he’s about it. Hello.

First question just more of follow on the first question that was asked in terms of longer term and the strategy for the company. And given their view of the demand, what-- provide some color on where they will be focusing their efforts? Where they see the best opportunities going forward? Where they’ll be focusing their CapEx?

Okay.

[Translated] For the first question, the company has a very clear focus for its future development. The company’s strategy is to increase the overall resources for petroleum, expand the market as well as to reduce the cost. And we also are making our [inaudible] for the next couple of years for a long-term development plan. As long as we finish the overall development plan, we are also disclose to the public.

And the listing costs for the-- through the first three quarters was $7.29. It was higher than the first half. That was $6.98 per barrel. The reason for that was actually the lifting costs for the third quarter was $7.90 per barrel. The reason for the increase in the lifting costs was because of the high oil price and we, this was a developed some of the hard to develop oil fields or oil reserves. And also for some of the, for some of the wells that has been stopped production. We also restarted. But the profit or the return for the high lifting costs was also satisfactory. For the whole year, we expect the lifting costs will be around $7.50 per barrel.

Thank you.

Thank you.

Our next question is from Shu Ming Tung (ph) from Goldman Sachs.

Hello. Hello can you hear me?

Yes.

[Translated] The question-- two questions from Goldman Sachs. The first one is just now Mr. Jiaren mentioned the company adjusted its CapEx plan according to the market changes. And the question is what changes to the company’s fee in the market? The second question was concerning with the privatization of the subsidiaries or the listed subsidiaries. For the Petrol China has decided to privatize three of its listed subsidiaries and to what is the plan for Sinopec especially given the cash flow is not very sufficient? And also there might be the acquisition [false] value should not be lower than the book value is there also, is this also true for the company?

[Translated] Mr. Jiaren answer to the first question. The company sees there is a change in the domestic demand for the refined products. According to the national statistics, the demand growth for the first nine months for refined products was 5.6%. However, the GDP growth for this period was 9.6%. Therefore, the coefficient between the demand growth for refined products with the GDP growth is about 0.6 to 0.8. That is what we see during the year 2000, 2001. We think this coefficient level is about the normal level.

There are several reasons for this drop back. The first one is the government has implemented some policies to contain or control the over [heating] investment. Therefore, the demands driven by the previous over [heating] investment was limited. And the second reason was last year there was insufficient supply for the power in China. Therefore, there was great demand for the refined products. And for these two reasons and for the first half of this year, these phenomena has been corrected. Therefore, the marketing volume of, according to the market demand was also dropped back to the normal level. According to these market changes, the company will also adjust its CapEx plan especially in limiting the growth in the refining capacity. In light of, in view of the market amount for the refined products.

As for the second question, also during the IPO stage the company announced that it will, according to different stages, privatize its listed subsidiaries. And you can see the previously done deals like the [inaudible], the Beijing Yanhua and also the very recently Wuhan Phoenix. Currently we don’t have a plan for the, for the next subsidiary. However when the plan comes out, we’ll also disclose to the public. And the-- as for the measures for taking, for privatizing those subsidiaries, we also followed the markets procedures. There are material and very experienced market procedures for privatizing such listed subsidiaries. We exactly follow those procedures. As for what are the details, measures, and the practice for the privatization, we’ll also disclosed when the time comes out. Thank you.

[Translated] Your further question is whether the company’s limited by the acquisition or the privatizing price should be higher than the book value.

[Translated] The answer is the company has the choice to make that decision.

Our next question is from Rachel Sung (ph). Rachel you may proceed with your question.

[Translated] There are two questions. The first one is understood from the report the domestic independent of progress, the total station is or are actually running loss because of the wholesale price is higher than the retail price. Is this phenomena also true for Sinopec for given this context that Sinopec have planned to fasten the acquisition of those independent of private retail stations?

The second question is for the national [eleven] five-year plan period, the governments, the governments may develop clean fuels. Does Sinopec have further plans to develop like methanol, ethanol, or DME to blend with the oil products to reduce the CO2 emissions? Now that the company is ready to either file [inaudible] in six provinces, does the company have plan to further rollout this practice?

[Translated] For the first question, the Sinopec, the company’s operated retail stations are not running loss. There are still margin for the retail segment, retail sector. The [inaudible] price plus the transportation fees and the retail stations there’s still room for the profit. The EBIT for the retail segment is around 180 to 200 RMB per tonne. The reason for the independent or the private [seller] stations running loss. There might be that they are purchasing the resources from the local refineries and the price is already at a high level. And because of the attention in supply, the price must be very high. Or in other case, there are not sufficient supply. So the retail stations don’t have the gasoline for their customers. Therefore, they are running loss.

For the [inaudible] Sinopec is only engaged the [ESNO] program. That the pilot was previously was done in [inaudible] provinces. And after two years currently, this program was very successful. Basically, Sinopec planned the [ESNO] together with the products according to the required ratio. And this year the company according to the requirements by the [inaudible] reforming and development commission, the company roll out this program further to Hubei and [inaudible] provinces.

However, the overall ratio of this plant is ethanol with gasoline in the company’s total gasoline sales volume is still very little. Okay.

Our next question is from Terry Fong (ph) from HSBC. Terry you may proceed with your question.

[Translated] A very quick question from HSBC. The question is, by the end of September this year, what’s the company’s inventory for crude as well as refined products?

[Translated] The company’s inventory for crude was 8.3 million plus tonnes and inventory for the refined products is around 3.7 to 3.8 million. Thank you.

Our next question is from Tony Chung (ph). Tony, you may proceed with your question.

[Translated] The question from CIBC. The company’s chemical margin peaked last year and for this year was slightly dropped. Will this affect the company’s plan in its further chemical projects such as the [inaudible] or [Jianghan] one million tonnes capacity project, especially notice the DNPC’s starting there to [inaudible] project. Will this affect the company’s CapEx in building of these projects in view of the dramatically decrease in the chemicals demand?

[Translated] The projects like [inaudible] you mentioned currently we have not changed our plan to develop these projects. However the company has not finally-- formerly approved to start the construction of these two projects. We’re still at the early stage for the feasibility study.

The reason we did not change the plan is the demand for the chemicals where the seat, where the ethylene as feed is still increased by 7 to 8% every year. Therefore, we still see the demand growth is normal.

At the same time, we also forecast on the returns for the investment, especially those high-value added products program. Okay. Thank you.

Our next question is from Stuart Lynch from Merrill Lynch. Stuart you may proceed with your question.

Good morning. It’s Stuart Smith from Merrill Lynch here. Recently there’s been some newspaper speculation that there have been some discussions between BP and Sinopec. I understand that you wouldn’t have anything to announce at the moment, but perhaps could you give us an idea of what sort transaction Sinopec might be interested in doing with international companies and what the goals for Sinopec would be?

[Translated] We also recognize there’s rumors that Sinopec and BP are approaching together for the [inaudible] collaboration. A discuss-- but these really doesn’t exist. Actually we have enjoyed a very long history collaborating with BP from the very early start the project in [inaudible] and then the Secco [inaudible] as well as the acetic acid in Nanjing. But these are concrete cooperation projects.

Okay thank you.

[OPERATOR INSTRUCTIONS] At this time, we have no more questions.

[Translated] So once again, thank you very much for attending the conference call. And we have really had a very good discussion. For any further questions, you can contact our board secretariat at any time. Thank you again.

This call has been concluded. Thank you for joining.