中國石化 (SNP) 2008 Q1 法說會逐字稿

Thank you for holding, and welcome to the Sinopec quarter one results announcement conference call. At this time, all participants and lines are in listen-only mode. The presentation will be followed by a question and answer session and instructions will be provided at that time.

I'd now like to turn the conference over to your host, Mr. (inaudible) [Fleming]. Please go ahead, thank you.

Welcome, and thank you very much for attending Sinopec's conference call for its results for the first quarter of 2008. Sinopec is hosting this conference call from Beijing. Reporting the results are the company's Chief Financial Officer, Mr. Dai Houliang, and there will be various heads of business units also in attendance today to help answer questions.

Before we begin this presentation, I would like to remind everyone of Sinopec's Safe Harbor policy, namely that certain statements made during the course of our discussions today may constitute forward-looking statements that are based on management's current expectations and beliefs, which are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks 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 call over to Mr. Dai. Mr. Dai, you may begin.

(interpreted) Good afternoon, ladies and gentlemen, [dear] shareholders and [debutees] of our shareholders. On behalf of Sinopec Corporation, I'm hosting this afternoon Sinopec's quarter one 2008 results announcement conference call. There will be two (inaudible) on our agenda. First there is a briefing of the 2008 quarter one results announcement, made by the interpreter, and secondly I'll be very happy to take your questions.

(interpreted) Good afternoon, ladies and gentlemen. Welcome to Sinopec's first quarter 2008 results announcement conference call. Looking at the market environment in the first two quarters, we saw rapid growth in the economy, continued rally in international oil prices, tight control on domestic product prices, and a relatively high level of petrochemical prices. The company closely followed the market's volatility, and took package measures to ensure market supply. In the meantime, emphasis has been made on work safety, energy conservation, and consumption effectiveness while efforts were intensified to refine corporate management and product mix.

The company witnessed a volume growth in hydrocarbon production, procured through crude oil product sales and ethylene [output]. By so doing, we reported healthy operating results in the first quarter.

Turning to operating results, the turnover, other operating revenues, and other income combined, grew by 22.4% to CNR339.284 billion, while EBIT dropped by 89.4% to CNR3.037 billion (sic - see presentation). Profit attributable to shareholders totaled CNR6.062 billion. Earnings per share was down 69.1% to CNR0.070.

Turning to financials, as of March 31, 2008 our short term [plus] long term debt totaled CNR160.244 billion, up CNR32.456 than that of the year beginning. Equity attributable to shareholders was CNR320.374 billion, up CNR12.941 billion versus the year beginning.

The Q1 net cash flow from operating activities was CNR2.663 billion. Net cash flow employed in investing activities was CNR15.474 billion.

Turning to the segment results, in E&P the company leveraged high oil price window by developing low-quality and low-yield reserves, and expedited through trying to ease the China gas transmission projects. The crude and natural gas production grew by 3.4% and 3.1% year-on-year, respectively. Given more development tapped in the low-yield low-quality reserves drove up production costs. The lifting cost increased by 19.1% year-on-year, to CNR602 per tonne. Due to the surge in global oil price, the company's crude realization was up 52.7% year-on-year as offset by the special oil income levy submitted, the Q1 EBIT in E&P remained parallel, year-on-year, to reach CNR11.54 billion.

In refining the company maintained safe and full load operations, ramping up low-quality crude throughput and oil product output to ensure domestic market supply. Crude throughput was up 6.7% year-on-year, and oil product output grew by a big margin.

Amid global price surge, and tight domestic price control on oil products, refining margin registered a negative figure, to minus CNR454 per tonne. Our refining arm suffered an operating loss of CNR20.636 billion, in spite of the government subsidy.

On marketing and distribution, the company sought, through various channels, from external suppliers or imports, to increase supply and ensure market stability. The company actively promoted high-spec oil products in the market, and upgraded self-services and fuelling stations.

[Sales] to optimize the resource allocation, extensive marketing networks and logistics systems, the total domestic sales volume and retail volume continue to increase year-on-year by 9.9% and 17.6% respectively. Annualized average pump volume per station grew by 15.9% year-on-year.

As our market expanded, and structure further consolidated, EBIT in marketing and distribution grew by 39% year-on-year to CNR10.762 billion.

Turning to the chemicals, our key chemical facilities maintained safe and full load operations, with the output and sales volume increasing on (inaudible). The company further played out the synergy of centralized chemical sales. Output of ethylene and synthetic resins grew year-on-year by 3.8% and 5% respectively.

The chemical prices stood at high levels in first quarter, as impacted by the price surge of (inaudible) and other chemical feedstocks, our chemicals segment reported an EBIT of CNR1.549 billion, down 70.1% year-on-year.

The CapEx in the first quarter [clocked] in that CNR15.034 billion. To break out numbers, the company spent CNR7.698 billion in E&P segment, to support Sichuan-East China gas transmission projected, and invested CNR1.773 billion in our refining arm, to ensure projects on track, including Qingdao 10 million tonne per annum refinery, Wuhan, and other oil product quality upgrading projects.

In chemicals segment, CNR2.097 billion was employed in Tianjin 1 million tonnes per annum ethylene project, Zhenhai 1 million tonnes per annum ethylene project, and Jinling 0.6 million tonnes per annum PX project.

In marketing and distribution, CNR3.092 billion was spent on building and purchasing gas stations in priority areas, where 100 new stations were added.

In addition, CapEx for corporate and other was CNR374 million.

That concludes the presentation on the first quarter results announcement. Now we'll be happy to take your questions.

Operator, please open the call to questions.

Thank you. The question and answer session will now begin.

(OPERATOR INSTRUCTIONS).

The first question is from Lawrence Lau of BOCI. Please go ahead. Thank you.

(interpreted) I have three questions from BOCI. The first question is regarding the special oil income levy in the first quarter. How much special oil income levy did your company submit in the first quarter?

Secondly, we noticed that the crude realization was relatively at high levels, however the EBIT in E&P in the first quarter was decreased. So, is there any special reasons behind that?

The third question, I notice from your balance sheet and statements according to the China's accounting rules, it was said that about CNR9 billion provision was recognized on the diminution of the asset value. Is there any special reason behind that? Can you please elaborate on it?

(interpreted). I'd like to address your first question. In the [first] quarter, the companies have [measured] CNR6.5 billion in terms of special oil income levy, which was CNR5.5 billion higher in [one] year.

Regarding your second question, there are several reasons behind it on the EBIT increase of E&P segment. First of all, the special oil income levy of CNR5.5 billion incremental volume factor in. Secondly, because of the changes on unrealized inventory profits, these impacted our EBIT by CNR4.2 billion, so CNR5.5 billion plus CNR4.2 billion accounts for CNR9.7 billion.

Besides that, the [DDNA] and labor cost, and other miscellaneous expenses also impacted our EBIT decrease.

With regard to your third question, according to our regular practice, if the inventory cost is higher than a net realizable cost -- net realized value, then the company will recognize a provision for the diminution in the inventory value. So in the first quarter, we made pilot programs on inventory costs of the crude for both the inventory crude, and the crude in transit. We felt that the crude cost was about CNR12.5 billion higher than the net realized full value. That's why we provided CNR3.6 billion in 2007 for the diminution in the value of inventories. And in a further quarter, we provided another CNR9 billion in diminution of the crude inventory value. So altogether, plus CNR3.6 billion plus CNR9 billion accounts to CNR12.5 billion.

This represents a regular practice of the company. In the past, the distortion of the international crude price and domestic product price was not that large, so it did not attract too much attention. However, in the first quarter, international oil price surged by a big margin. This caused a big distortion in correlation of the international oil price and the oil product price in domestic market. That's why we attracted quite much attention in that issue.

Thank you. The next question is from Gordon Kwan of CLSA. Please go ahead. Thank you.

Good afternoon, Mr. Dai. I have several questions. The first one is on the monthly VAT rebate on refined oil imports and crude oil imports. Now that we have seen your first quarter results, do you expect second quarter and third quarter profit to be higher or lower judging from this VAT rebate?

The second question is, we saw a sharp decline in your chemicals' profit, down almost 70% year-on-year in the first quarter. Do you expect chemicals' performance to degrade through the rest of the year? Looking for your insights there?

And the third question relates to your strong performance in the marketing and distribution segment, we saw a big jump in operating profit in the first quarter. Do you think this strong growth in the marketing business is sustainable for the rest of the year?

Thank you.

(interpreted). Recently, we issued a circular on relevant government policies for the VAT rebating on the imported refined oil. And also, we announced the government subsidy on the refinery subsidiaries who process crude oil (inaudible).

The VAT imposed on the refined oil products we paid in advance will be rebated to us. This will be conducive for the company to further reduce the crude purchase price.

With regard to the subsidy on processing imported crude, currently the company is not aware of any concrete or specific notice, although there are some rumors in the market. But generally speaking, this trend will be conducive and favorable for Sinopec in time of high oil price (inaudible).

With regard to the EBIT in the chemical segment, due to the price surge in the chemical materials like (inaudible) in the first quarter, the cost in the segment of the chemicals have been impacted. The chemical segment is falling in line with the international market and its price is denominated by renminbi. Because of the renminbi appreciation in the recent period the chemical EBIT has been impacted by that be that reason.

With regard to the future trend in the chemical segment, we noticed that the chemical prices will still stand at high level, driven by the cost [picture]. China's fast economic growth provided very favorable market void for the chemical segment's EBIT.

With regard to the marketing and distribution the EBIT in the first quarter increased by a big margin, both year-on-year and versus the last quarter. Reviewing the first quarter in 2007 the international oil price stood at a relatively low level and the competition in the mass market was very terrific. In the first quarter of this year we noticed that the volume per station -- the throughput per station in our fuelling stations increased by a big margin. This further underpinned the profitability of the marketing and distribution segment. Based on the high oil price picture the company increased the ratio volume by a big margin, which further generated the increase in EBIT of the marketing and distribution.

Looking to the future, the trend could be attributable to several factors. We cannot give a picture simply good or bad at current, but we believe the marketing and distribution segment will be a very promising source for the growth of the company. Thank you.

Thank you. The next question is from (inaudible) of Credit Suisse. Please go ahead, thank you.

Good afternoon, sir, thank you for your presentation. I have three questions. The first one is on lifting costs. In the first quarter, lifting costs in RMB was up 19% y-o-y, could you give us a guidance for the full year? Do you expect to meet the flat lifting cost guidance for the full year, or do you think that this number, 19% growth, will continue at the same pace through the year? That's the first question.

Second question is on the special oil levy. There is some talk in the market about government adjusting the special oil levy in raising the starting point from $40. Would you be able to give us some color and your thoughts on that move?

And the third things is, in the marketing division, would you be able to tell us how much subsidy in the first quarter was booked in the marketing division? Thank you.

The marketing subsidy for the first quarter or fourth quarter?

For the first quarter, the total subsidy is CNR7.4 billion, how much was booked in marketing?

Okay, clear.

(interpreted) With regard to the lifting cost, it increased by 19% in the first quarter because of the several reasons. First reason is that we changed the standards using for the first quarter 2007 and the first quarter 2008. In the [third] quarter of 2007 the company adjusted the workload for the (inaudible) operation. And in the last quarter of 2007 the company paid the remunerations to the frontline workers. And in the first quarter 2008 the CPI increased by 8% year-on-year. So because of the above mentioned reasons, the lifting costs increased by 19% in the E&P.

We noticed that the lifting cost increased by 19.1% year-on-year, but decreased by 17.3% versus the previous quarter. And the company will make a stricter control on the quarterly target according to the budgetary plan. Thank you.

Indeed, we noticed there are some market rumors on the special oil income levied adjustment, but so far the company is not aware of any notice from the government on this side.

In the first quarter, the subsidy booked in the accounts of the first quarter, among which one-third has been booked to the marketing segment and two-thirds has been booked to the refining segment.

Thank you.

Thank you sir, thank you very much.

Thank you. The next question is from Kelvin Koh from Goldman Sachs. Please go ahead, thank you.

Yes, hi. A couple of questions, firstly, you alluded to E&P having a write-off of CNR4.2 billion, can you, again tell us about the nature of this write-off for the E&P division?

Secondly, for the refining division there was a CNR9 billion write-off and you had mentioned that was because the inventory costs was higher than the net realizable value. Does that mean that if the domestic product price doesn't get adjusted during the second quarter, given that crude oil prices have been going up, that you expect to have another significant write-down in the refining division in the second quarter?

The third question is on the VAT rebate on crude oil, I just want to clarify whether the government has approved a 100% rebate or a 75% rebate? If you could clarify that,, that would be great? Thank you.

(interpreted) On the provision for the impairment laws of the inventory for E&P, in the same period last year, the crude oil price was standing at low level that some unrealized inventory profit has been translated into realized ones thus increasing [CNR1.2 billion] for that period. However, in the first quarter of this year, the unrealized inventory profit has reduced --been reduced by about [CNR3 billion]. This impacted our EBIT by [CNR4.2 billion].

As I said before, the inventory cost in the period, in the end of the period versus the net realizable value, this standard is considered as the constant and a regular standard of the company. In the future, the international oil price going forward at high level and the domestic oil product price is controlled by the government and we'll make the further analysis of other fuel product prices. So, based on the combined factors, the company will make another evaluation to decide whether to observe this constant standard or not.

With regard to the subsidy and compensation on the crude processes, as we announced in the company's circular, the policy with regard to the moderate subsidy according to the relevant government departments then this VAT imposed on the crude imports will be paid in advance and rebated through the group processes. So far the company is not aware of any further specific figures with regarding to the policy, but the company is expected to announce and disclose the relevant information in the second quarter's results announcement. Thank you.

Thank you. The next question is from [Tony Jung] of CICC. Please go ahead, thank you.

(interpreted) [Tony Jung] from CICC. My question is with regard to the crude production in the first quarter. The output of the crude increased by 3% so among which what is the proportion of the high cost of crude that is processed by the company?

(interpreted) Starting from 2007 the company began to tap those difficult reserves and in the first quarter the crude output increased by 3.4%. The incremental volume, among which about 600,000 tonnes coming from those high quality crude reserves. These also generated a higher return on our investment.

Thank you. The next question is from [David Johnson] of McQuarrie. Please go ahead, thank you. Hello, Mr. Johnson, your line has been opened, you may ask the question now.

Thank you. The next question is from [Brinjol Arbuthnot] of JP Morgan, please go ahead, thank you.

Hello and good afternoon. Just one quick one, follow-up on the inventory write-downs. Could you allocate the CNR9 billion across the different segments, because you do have operating profit over different segments, I presume that some of these write-offs are impacting different segments?

(interpreted) So the CNR9 billion impairment --provision for the impairment losses on the inventories are exclusively paid for the refining segment which has nothing to do with other segments.

Thank you.

Thank you. The next question is from [Hanik Song] of Brevan Howard. Please go ahead thank you.

(interpreted) I'm from Brevan Howard. My question is about special oil income levy. There are some talks from the market and media that the government intends to lift the threshold for the special oil income levy which is higher than $40. Then what do you think of this change, and is there any timetable behind that?

(interpreted) With regard to this question, I already addressed that just now. If the government now started to levy from the special oil income at $40 but whether they will lift that threshold or not, so far the company's not aware of any specific notice from the relevant government agencies. In the past, with the surge of international oil price, the company submitted more special oil income levy than before. But so far the company received -- has not received any notice in the specific terms from the government.

Thank you.

(OPERATOR INSTRUCTIONS).

Okay the next question is from (inaudible) of MainPower, please go ahead, thank you.

(interpreted) I have three questions from MainPower. The first question is that the subsidy of 4.4 billion has been booked into your 2008 first quarter's account and with regard to the profitability at 6 billion, if deducting that 4.4 billion subsidy, will the company expect an operating loss in the period?

The second question, with regard to the international oil price surge, will the company be expected to suffer operating loss in this side, and will the government in this regard, to increase the subsidy further and increase the (inaudible) product prices?

The third question, there are some talks in the market that the company is intending to take the refined products from the small and independent refineries at a premium price, so is that true and what is the CapEx of the company on that side?

(interpreted) Thank you for the question. I'd like to address the three questions altogether. With regard to the last year, the international oil price surged rapidly and recorded several rounds of new highs. Starting from January last year, the Brent oil price averaged at $54.6 per barrel and now increased to the current $110 to $120 a barrel. According to the current default exchange rate the net back crude price, which could justify the current oil product price, export grade price, is about $70 per barrel in terms of the net back crude price. This was about $40 to $50 per barrel lower than international crude oil prices.

And currently there is a big spread between the ex-works price of the oil product price and the duty paid CSS price. The differentials in terms of the gasoline was as large as [3,000] and in terms of diesel differentials was as large as [4,400].

(interpreted) The company has taken a holistic view -- measures, to ensure the domestic market supply. Based on that picture, the company's refining business suffered severe loss which also impacted the overall operating performance of the company.

Starting from April, the company received the notice from the Ministry of Finance regarding the policy to pay subsidy and ensure the market supply of oil products. According to that notice, the Ministry of Finance will start to pay subsidy on the crude processing businesses which suffered [great loss on that]. And this subsidy will be prepaid in advance and settled on a monthly basis. And in the second quarter, the base imposed on the imported refined oil products to be paid in advance and then will be refunded in full amount.

So from a long term view, the adjustment on the prices of the resourced products is a [mega trend]. According to the report from the 17th CPC Congress, CPC meeting, it is expected that to expedite and form an orderly -- and with orderly competition a multi-market system. And the development of the various production factors should be developed to reflect the market supply and demand pattern, the scarcity of the resources and the environmental deterioration costs. And such production factors should be in compliance with the mechanism for the prices of the resourced products.

According to the resolution from the central government meeting on economic worth, it is expected to further transform the economic development pattern and to ensure the stability of the consumer price and also straighten out and restore product price. For those resourced products which have very big distortion with the market prices, the government should give the necessary adjustment on that.

And the hydrocarbon price mechanism should be pushed forward at a steady pace. Through the more rationalized pricing mechanism, the resource conservation and environmental friendliness will be pressed forward.

Judging from the current demand economic situation, CPI in the first quarter increased as high as 8%, which exerted quite big pressure on the consumer product price increase. So there is still quite a big uncertainty to debut or adjust the product price mechanism.

So, based on the high oil price and tight supply picture, the company will try its utmost to increase its efficiencies to production volume growth and cost control and further optimizations. So, according to that [current line] the company's expected to increase its EBIT, just as our Chairman [Zhou Yuan] said in the annual results announcement conference, the company will further give evaluation and make a (inaudible) to give further evaluation to our subsidiaries and give prescriptions according to the ailment of the subsidiaries. And then, in that regard, the company's expected to further enhance or improve the current EBIT performance. Thank you.

Thank you. The next question is from David Clark of Deutsche Bank. Please go ahead, thank you.

Thank you. I apologize for going back to this subsidy issue for the refining segment, but I'm referring to the announcement dated April 20 where it says that Sinopec will receive a subsidy that is distributed in advance and settled on a monthly basis. So, could I ask, has Sinopec received any subsidy yet for the month of April and, if so, how much was it and how was it calculated?

(interpreted) Currently the company has not yet received any pre allocation notice in the first quarter. The company will disclose the relevant information in the second quarter results announcement.

Okay, thank you.

And that concludes our call today. Thank you everyone for joining us.

Thank you again for your interest in Sinopec. Please feel free to contact either Sinopec directly or Christianson if you have any additional questions. Goodbye everyone. Thank you very much.

Thank you for your participation in today's conference. This concludes the meeting. You may now disconnect your lines. Thank you.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.