中國石化 (SNP) 2009 Q1 法說會逐字稿

Good morning. Welcome to today's China Petroleum and Chemical Corporation 2009 first quarter earnings conference call. This is [Mishin Tai] from [Brunswick Group] the moderator of today's conference. For the first part of this call, the management team of Sinopec will be presenting the first quarter results. Afterwards there will be a question and answer session.

First, let me introduce the management team who are here with us today. Mr. Dai Houliang, Senior Vice President and CFO of Sinopec, Mr. Chen Ge, Company Secretary, [Mr. Wang Zhigang] Head of Corporate Finance. And we also have heads of business units with us today.

(interpreted) Good morning, ladies and gentlemen. Welcome to Sinopec 2009 first quarter results announcement conference call. First of all, I would like to invite Mr. Wang Zhigang, my colleague to deliver the result announcement in English. Now, over to you, Mr. Wang.

Thank you. Ladies and gentlemen, good morning. Welcome to Sinopec 2009 first quarter results announcement conference call. With a gloomy world economy in the first quarter, the Chinese government adopted proactive fiscal policy, and moderately easy monetary policy, and implemented package measures to expand domestic demand and stimulate economic growth.

GDP grew by 6.1% in the first quarter. International crude oil price was kept at low levels with (inaudible) averaging at $45.2 per barrel, down by 53.5% year-on-year. New pricing mechanism for refined oil products was put into force leading to a better environment for domestic refined [operation].

Amidst the impact of -- by the global financial crisis, demand for refined oil products and petrochemicals declined to different levels. However, with the implementation of the stimulus plan, domestic demand for petroleum and petrochemical products has maintained an upward momentum.

Affected by the global economic downturn and declining prices of crude oil, refined products and chemicals, the Company's turnover and operating revenues and income, decreased by 32.6% year-on-year; however, the Company made full use of its advantages of failed, controlled business integration and modern management and made profits from all it's four major business segments. And particularly refining business has resumed as an important profit source.

EBIT stood at RMB16.5 million registering a significant year-on-year increase. Net profits RMB11.2 million. Earnings per share soared by 85% year-on-year to $0.13. The Company took active measures to optimize its debt structure in the first quarter including issuing three-year term notes worth RMB10 billion, increasing low cost note financing and [repaying] high cost short-term debts.

By March 31st, shareholders' equity reached RMB340.2 million up 3.5% compared to that of the year end 2008. With stronger profitability, the first quarter saw better cash flow of the Company. Cash flow from operating activities worth RMB53.2 million. Net cash flow for investment activities, RMB17.5 million, and net cash flow used for financing activities, RMB31.4 million.

The Company reinforced cost control and maintained stable growth of crude oil production in the first quarter. Such provision re-enhanced geographic -- geophysical study, optimized work plans and injected more investment into exploration, in particular, geological survey.

For developments, we strived for enhanced recovery rates at higher single well output, controlled developments cost and lifting cost. We actively pushed forward the construction of Sichuan-to-East-China gas transmission project, and made more efforts in market development and national (inaudible) to achieve coordination among production, transmission, and sales.

The first quarter saw a thereupon 6% increase year-on-year in the crude oil output. Lifting cost remained at a similar -- at the same level this year, but EBIT from exploration and development segments fell off by 76.1% year-on-year as the realized crude oil price dropped suddenly.

The Company optimized chemical production schemes to cope with domestic needs for refined products and chemical feedstock in the first quarter. We coordinated production with sales through various measures, including intensifying procurement management, improving network efficiency, reducing transportation cost of the imported crude, making timely adjustments of product mix producing more gasoline and high value-added products, as well as vigorously developing markets for LPG, lubricants, and (inaudible).

Refinery throughput decreased by 3.3% year-on-year, that's increased by 1.2% compared with that of the fourth quarter 2008. Gasoline output increased by 15.3% year-on-year. Since the implementation of the new pricing mechanisms for the refined oil product at 2008 year end, we have given full flight to the scale and cost advantages of our refining business as well as the integration and management advantages of the Company.

EBIT from the refining business reached RMB7.328 million. The first quarter saw a year-on-year decline in domestic consumption of the refined oil products, in particular, a significant drop of diesel consumption.

Thus the Company made intensified efforts to expand markets through a number of measures including improving service to return customer loyalty and consolidate market position following market changes and increasing direct sales, enhancing internal management and reducing cost along the marketing chain, as well as promoting the development of (inaudible) business to provide better service at gas stations.

The first quarter saw a drop of 12.4% decrease year-on-year in refined oil product sales, but sales volume starts increasing by March. According to the new pricing mechanism, the government capped the retail price of gasoline and diesel. Price spread between ex-factory price and retailing price declined year-on-year. EBIT from the marketing segment slumped to RMB3.77 million year-on-year in the first quarter.

Domestic demand for chemical products stopped year-over-year in the first quarter. The Company has advised often efficient and service awareness and pushed forward technology alliance of key industries and customers. They fully leveraged the geographical advantages and the synergy of the integrated sales and made flexible marketing strategies to expand the markets.

Production arrangement was that to combine good marketing and research. The Company optimized production schemes and product mix was made to cater for market needs. More efforts were made in the developments of new products and the output of popular products and high value-added products were maximized.

The output of ethylene and synthetic resin reduced by 12.2% and 3.3% year-over-year respectively in the first quarter, but then, by 3.4% and 4.5% compared with that of the fourth quarter 2008. Profit margin maintained constant growth with increasingly stronger demands and higher price in the first quarter. EBIT from the chemical segment hit RMB2.8 million, up by 80.7% year-on-year.

CapEx in the first quarter was RMB15.278 million, among which RMB7.778 millions was for the E&P segment, RMB1.574 million for refining, RMB4.641 million for chemicals, RMB987 million for marketing, and RMB298 million for corporate and others.

Thank you for the time. Now my colleagues and I are happy to answer your questions.

Thank you, Mr. Wang. We will now begin our questions and answer session. Our operator will explain to you the procedures.

(Operator instructions). To ensure other participants have a chance to ask questions, please try to ask only one question each time.

The first question is from Credit Suisse, Prashant, please, go ahead.

I actually have two questions. Let me ask the first one first. If you look at your output of ethylene, it was down y-o-y, but if you look at China's net import of ethylene, and in the first quarter, the imports of polyethylene and polypropylene went up substantially.

So I'm just wondering why did you cut your ethylene output despite the fact that China is 50% net importer of ethylene. That's my first question, ethylene and ethylene products. And I have another question which I'll ask after this one, if you don't mind. Thank you.

(interpreted) Regarding the output decrease in ethylene production of the first quarter, there are two reasons. First of all, the ethylene output is decreased because of the demand was decreased, due to the impact by financial crisis in the first quarter.

The second reason, the Company truly encountered some bottleneck and also launched some unscheduled maintenance of turnarounds according to the plans. And we believe it's a good time for us to make full use of the time to launch the unscheduled maintenance in light of the economic downturns. And this unscheduled maintenance represent several numbers in the first quarter.

Okay, thank you for the answer. There is one other question in the marketing division if I may.

Yes, please.

Yes. On the marketing division as per the new pricing policy, I understand that you allowed a spread of RMB800 per ton on gasoline and diesel over the refinery gate price. Could you tell us first, what the spread was in the first quarter for gasoline and diesel over the refinery gate price for the marketing division? That's the gross spread. And the second is what was it in March, and what is it in April? At least some trend, an indication of some trend.

(interpreted) Regarding the present mechanism; firs of all I would like to shed some color on the new pricing mechanism. As we announced during the annual result announcements, the Company has also witnessed that the (inaudible) issued the new pricing mechanism for oil product starting from January 1st of this year, the new pricing mechanism is defined in line with the international oil prices, and it also takes into account processing cost, and certain expenses, and also allow for certain profit for the Chinese refinery.

According to the mandate, by the state departmental agency in the first quarter, a company has made three times the price adjustment for the oil product, and the adjustment determined is in the same trajectory with the upward trend of the -- with the trend of the international oil prices.

Looking into the April, we've witnessed that the crude price is hovering at $50 per barrel. So the price adjustment of oil product will move in accordance with international oil pricing.

Thank you.

Thank you.

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

Yes, I have a fairly simple one. Could you give the depreciation for the four segments, and if you'll allow me to, I can also ask the second question on marketing group. How is the composition now going, not just that of China, but also some other marketing companies, is that squeezing your margins?

(interpreted) Benefit from the new pricing region, we witnessed that the find of market segment both allow to appropriate profits and we believe the current market has witnessed a very substantial change against the same time last year.

Current market, we believe is featured with the supplier market who got resources, who will get not just market share. And we also witnessed that the crude oil price is not high. And the current market becomes a customer market.

(interpreted) The companies who are finding a market segment got its own unique advantages in terms of the volume, scales, cost base and it will fit geographical market position. So the Company will be more than active to be integrated into the market competition to get as much as possible the market share and a geographical position.

And our EBIT in the marketing segment also proves that we've got to be the major player in the competitions.

Thank you.

The next question is from [Steven Li] from HSBC, please go ahead.

(interpreted) My question -- I'm from HSBC, my question is about the sales volume in the first quarter. We witnessed that sales volume of oil products in the first quarter decreased year-on-year, very dramatically. And this decrease is even sharper than a decrease of the refining segment. I'd like to invite Mr. Dai to elaborate more about your current inventory level of the oil products. Is this now under great pressure now, and also will we see any change in the 180 million tons of the crude throughput plant.

(interpreted) In these, the sales volume of oil products -- and first of all they are decreased by 12%. However, the sales volume is actually increasing month by month, since this year the January, and we also found that the crude throughput for the -- to produce the oil products, it decreased 3% year-on-year. We believe the Company is able and in a position to make full use of integrated synergy and play an active role in the market position.

Regarding the crude throughput plant in first 2009, judging from the current economic growth and the recovery rate sign, we are fully confident that we will deliver the plant.

Thank you.

Our next question is from BOCI, Lawrence Lau.

(interpreted) Two questions from BOCI. First of all on the marketing segment, EBIT in the first quarter decreased dramatically. Is that a normal phenomenon? We just would like to elaborate more on that. And is there any reason behind that?

And we also witnessed that -- we also would like you to talk about the EBIT in April, will there be any turn around?

And another question in part is spread between the actual factory price and the retail price, wholesale price. Would you like to elaborate more on [that stretch] in the first quarter and your forecast in April?

(interpreted) Regarding the market EBIT -- marketing EBIT decrease in the first quarter, indeed it has decreased dramatically year-on-year. There are two reasons behind. First of all, last year we witnessed that oil crude price was at a high, and the control -- since the price was also controlled for the oil products in the domestic market (inaudible) last year, the market is featured with the suppliers market.

Second reason, after the new pricing mechanism issued they failed they gave a cap on the retail price, and the market turned into the [buyer's] market and witnessing much more intensified competitions. So under this situation, we believe the current EBIT in the marketing segment is at its normal level.

Judging from the current statistics, from the first quarter, the price between the ex-factory price and the retail price will lie at RMB700. It is a still a little bit far from the RMB800.

Thank you.

The next question is from CICC China Corporation [Ling Hui Ching]

(interpreted) I'm form CICC. Two questions. First of all it's about natural gas output decreased by 3.6% on the first quarter. Will there be any change for your whole year's production plan for the natural gas output?

Second question is regarding the Puguang gas field. Would you like to give some elaborations on the output plan for 2009, 2010, and 2011 in terms of the natural gas output?

(interpreted) Regarding natural gas output decrease by 3.6% in the first quarter, we saw that this was among our industrial users in the downstream business. It is much more gloomy than before. This also impacted our output to the decrease by certain margins.

However, we also witnessed the state government has issued the stimulus plan and that we are fully confident in the next period, the output on the forecast potential will be much more bright.

Regarding the Puguang gas field and the natural gas transmission plant we believe the current operation is well underway according to the schedule. In the third quarter, we also made the commissioning plant in our two branch lines, the (inaudible), the two branch lines.

So far we remain no change with the 10 billion cubic meters natural gas outline for 2009.

Thank you.

The next question is from Gordon Kwan from Mirae Asset Security.

Okay, thank you.

The next question is from [Tony Lee], Deutsche Bank.

Good morning. I just wanted to confirm the EBITs for the refining segment and also the marketing segment please?

(interpreted) The EBIT in the refining segment was RMB7.328 million. The market segment of the EBIT was RMB3.771 million.

Thank you.

The next question is from Stanley Shi, Everest Capital.

(interpreted) From Everest Capital, in the first quarter the crude price realization in E&P segment will deliver at the low level. Would you like to give some elaboration on that?

(interpreted) In the first quarter the Company's crude realization is actually according to our own crude, which is related to the same crude [flight] in the international market. And we found that the crude realization in the first quarter crude remained at low level. However the moving average is actually in accordance with the trajectory of international oil prices.

Judging from the current situation, the crude realization in the second quarter will be higher than the first quarter.

Thank you.

The next question is from Goldman Sachs, Kelvin Koh.

Hi, congratulations on the very strong results. Just one quick follow-up question to Prashant's earlier question. Can you give us the average retail margins on RMB per ton basis for the first quarter of this year as well as for April of this year?

(interpreted) Just now, when I took the previous question, I also share my information that in the first quarter the spread between the ex-factory price and retail price was already about [RMB700] per ton.

Judging from the current market situation, we presume that the retail margins will be also in the same level and we will not be in a position to disclose the figures now until the results announcement for the second quarter.

Thank you.

The next question is from Prashant, from Credit Suisse.

The next question is from [Eric Lincoln, from NECU].

I'm sorry. This is -- I'm not an expert here, but we happen to own your stock. So I just wondered if you could explain in a non-expert way, what is the new pricing mechanism and will you see any more benefits? It sounds like second quarter is not going to be a lot better than the first quarter despite the pricing mechanism.

(interpreted) To give you some introduction on the new pricing mechanism, the current domestic price for the gasoline and diesel is actually based on the international -- crude price in the international market. And this pricing mechanism will take into account the average crude processing cost plus certain sale taxes and some freight and also allow for some appropriate profit.

When the crude price in the international market changed above certain number, above certain range, then the oil product price in domestic market will be adjusted. In the third quarter we have already adjusted the oil product price for three times.

Benefiting from the new pricing mechanism, our refining segment actually was turned into a profit contributor, which is a very dramatic change against the last year.

Thank you.

The next question is from [Jin Long], GIC.

(interpreted) From GIC, question regarding this special income levy. In the first quarter how much did you pay for the special oil income levy and what's the comparative analysis against the last year?

(interpreted) The special income levy in the first quarter amounts to RMB10 million. The payment in the same time last year was RMB3.7 million.

Thank you.

The next question is from Chung Ching, CICC.

(interpreted) From CICC, on the profitability for the refining segment, in March we witnessed that international crude oil price increased by $10. In the second quarter what's your forecast for the profit per barrel of the product? Will there be any potential change? Would you like to forecast? Could you please give some elaboration on that?

(interpreted) The -- benefiting from the new pricing mechanism the ex-factory price is actually based on the international crude price and this mechanism also covers the sales tax and owed you a profit from refinance. If these price mechanisms were to be well in place, we are confident the refining segment's EBIT and profits in the second quarter will be maintained at a normal level.

Thank you.

The next question is from Ling Hui Ching, CICC China Corporation.

(interpreted) Question from CICC regarding the cost of the Company. We witnessed the lifting costs have remained parallel, but the cash operating cost for refining and the marketing segment respectively increased by 10%. Would you please elaborate more on that?

(interpreted) The -- there is no big change for the lifting cost, and no big change for the output in the E&P segment year-on-year. But for the refining and marketing hit by the financial crisis, we saw that the crude processing volume and also sales volume of the oil products both decreased.

So it's not very easy for (inaudible) into a benefit. That's why we saw a cash operating cost is decreased for both the refining and the marketing segment. Another reason behind this is because of the US dollar ForEx change which has changed by 4% year-on-year.

Thank you.

The next question is from [Chang Joudin] from [Shanghai Group].

(interpreted) Question from Shanghai Group. In the first quarter we saw that the output for the diesel was decreasing and increase in the gasoline output. Does that mean there is any change in the distribution mix for the gasoline and diesel?

(interpreted) That's a good question indeed. Hit by the financial crisis, the mix for the gasoline and diesel sales volume indeed changed notably. We had to seen that the gasoline consumption increase year-on-year while the diesel consumption dropped dramatically year-on-year.

And our exports also decreased by 10% margin. In the processing and export segment we believe the diesel consumption is there a lot. However in the daily consumption --

-- for the fuel users, the gasoline consumption represents a large proportion.

In the first quarter, we also encountered a couple of public national holidays like spring festival, and then the New Year, but judging from the kinds of situation, we predict that the consumption will be recovering.

Thank you.

The next question is from [Guang Hua Huan] (inaudible).

(interpreted). Question involving the margin in the chemical segment. What's your observation for the current margin in the chemical segment? In the first quarter, we noticed that the profit for the urea is increasing. What do you think of the trend for the chemical fertilizer's profitability in the first half of the year, or even for the whole year, will it be increasing? And what's your forecast for the profit for ethylene, resin, and the rubber?

(interpreted) In this chemical segment, the margin is actually defined; that is spread between the chemical feedstock and the product. In the first quarter, the price of (inaudible) remained at much low level. And so that's why we saw the chemical segment profit remained in parallel, or a little bit slight increase year-over-year.

According to our production plan, in the chemical or fertilizer production is predicted to increase by 10% year-on-year. This is also closely related with the no-production in the first quarter of 2008. And currently, we don't see that the chemical fertilizer is a major contributor for our total profits, because its profitability remained at mild level.

For the production plan in the synthetic resin, synthetic fiber, and the rubber as well as the organic chemical products, the Company will make timely changes in accordance with the market [complex] change.

Thank you.

The next question is from [Yi-Jung Chen], Taiwan Securities.

Hi, I've two questions. The first question is -- sorry, the marketing EBIT, can I have it by month, i.e., January, February, and March? And the second question is was there any inventory write-backs for the refining or chemical segment in first quarter? Thank you.

(interpreted) Regarding the breakdown for the monthly EBIT, for the monthly segment, actually today we are in the position to disclose the EBIT for all segments on the quarterly level. If you do have an interest in that figure, please contact our Investor Relations after the meeting.

And we also have a written back, the (inaudible) for the inventory, for the chemicals and refinery segments, according to the rules of the accounting regulation.

Thank you.

The next question is from Xinhua News Agency, [Ann Pei].

(interpreted) From Xinhua News Agency, after the new pricing mechanism was launched, what do you think will be the major profit contributor or major factors contributable to your company's profitability?

And another question is about the crude supply. We notice that the global investment for the crude, which also generates a decreased supply for the global petroleum resources, will Sinopec make such similar investment decrease? What's your forecast for the next four to five years for the crude -- for the EBIT in the crude in the E&P segment?

(interpreted) After the new pricing mechanism was launched, we believe the major contribution to the Company's profitability is the macroeconomic momentum in China. And currently, we predict that the economic crisis will bottom-out and started to recover. So we are delighted that in a country where already seeing some signs of recovery.

So this will be also contributed to the total profit of the Company. On the other hand, the economic situation globally also presents some uncertainty for the company's profitability.

The investment on E&P segment in the first quarter on crude output increased year-on-year. This is also based on justifying the CapEx plan in the first quarter. So far we don't see there is any change for our CapEx plan for the E&P segment.

During our annual results announcement, our Chairman already disclosed to our investors that the listed part of Sinopec is already getting (inaudible) to bid directly in international upstream asset.

At home market, we are also intensifying our efforts on exploration, production activities so as to strengthen our business segment in E&P. We are confident in the follow-up years, the capacity in the E&P segment will be built up at a high level.

Thank you.

The last question is from Reuters, [Shi Lee].

(interpreted) Reuters have two questions. First of all it's about the acquisition of the company. Does the Company have any plans of [charities] of overseas acquisition? In the annual results announcement for 2008, Chairman Su already disclosed that the Company is also looking into some resources in Africa and Latin America. What is the time development?

The second question, what is your view on the CNPC's [loan for deal] transaction recently? Is there any impact or changes to be brought about to Sinopec?

(interpreted) For the overseas acquisition plan, currently the Company is not just under the process of justifying or assessing several uptrend projects. We will be in a position to disclose on a timely basis.

Regarding your question about the recent loan for deal transaction in the nation, we don't see there is any impact or changes in Sinopec.

Thank you.

Thank you for your participation. As our scheduled time is up, we have to end our conference call here. Thank you, again.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.