中國石化 (SNP) 2009 Q3 法說會逐字稿

Welcome to China Petroleum and Chemicals Corporation 2009 third quarter results conference call. Today we have Mr. Wang Xinhua, Chief Finance Officer, Mr. Chen Ge, Secretary to the Board of Directors and Chiefs of each business division with us. And the presentation will be presented in English. And the management will be pleased to address your questions afterwards.

Ladies and gentlemen, welcome to Sinopec 2009 third quarter results announcement. In the first three quarters, the Chinese government implemented economic stimulus package and adopted proactive fiscal policy and moderately easy monetary policy to ensure stable economic growth.

The GDP growing by 7.7%.

The international crude price fluctuated within a narrow band after soaring to a high level. Average Brent spot price fell by 48.2% year on year to $57.82 per barrel. Reforms have taken place on domestic product price and fuel tax. Domestic markets saw a revival in demand for refined products and chemical products.

The Company vigorously developed markets, expanded production capacity, pushed for integration of production, sales and research, increased oil and gas production and capped stable growth in refining throughput.

In the first three quarters, the Company's turnover, other operating revenues, and other income fell by 21.7% year on year due to the gloomy economy and the tumbling prices of crude refined products and chemical products. However, we managed to achieve good performance in all business segments, since the timely adjustment of operating strategy, effective market development, synergy of the integrated businesses and further expansion of overall production and operation.

EBIT added up to CNY69.3b.

Net profit attributable to equity holders of the Company was CNY49.8b.

Basic earnings per share was CNY0.574, jumping by 230.5% year on year.

Total equity attributable to equity shareholders of the Company rose by 10.9% from the end of last year to CNY363.5b by September 30.

Cash flow has been notably increased. Cash generated from operating activities was CNY100.7b. Cash for investment activities, CNY70.1b. And cash for financing activities, CNY30.6b.

For the E&P segment, we made more effort in precise exploration, improved development quality, and strengthened the integrated management of exploration and development in key regions to fully tap the potentials of producing oil fields. As for the development of natural gas, Sichuan to Eastern China gas transmission project was close to completion and prepared for production.

The output of crude and natural gas in the first three quarters rose by 1.3% and 0.2% year on year, respectively. The listing cost remains almost unchanged from a year ago. However, EBIT of the E&P segment plunged by 75.2% year on year due to the tumbling realized crude price.

For the Refining segment we maintained high load operation but good safety performance and optimized crude procurement and resource allocation. Product mix was adjusted to produce more high value added products. Progress was made in refinery operating projects to cater for the nationwide enforcement of JB3 emissions standard and the promotion of JB4 standard in some regions.

Refining throughput for the reporting period went up by 2.99% year on year. Oil product output rose by 3.36% year on year and light yield was further increased.

Reform in rollouts and product lines and fuel tax since the end of last year, the Company fully leveraged advantages in operating scale, cost, integration and management. The Refining segment recorded an EBIT of CNY21.557b, terminating the huge loss caused by the soaring crude price and tight regulation on domestic product price a year ago.

For the Marketing segment, the first three quarters saw a decline in total domestic consumption of refined products, in particular diesel consumption shrinking dramatically. We optimized operational structure, increased sales to end users, strengthened the marketing of gas and jet fuel, expanded non-fuel business and enhanced cooperation with key customers.

Lubricant and fuel oil businesses were further expanded. Construction of greenfield filling stations was accelerated.

Domestic sales and retail volume dipped by 5.53% and 9.32% year on year, respectively. However, sales and retail volume in the third quarter saw a sequential increase of 18.35% and 1.85%, respectively.

Impacted by various factors, domestic apparent consumption of refined products decreased year on year and our sales volume declined. The government has put ceilings on the price of gasoline and diesel since the new price matching took effective and the spread between expected price, wholesale price and retail price was reduced from year ago.

EBIT of the Marketing segment for the reporting period was CNY22.377b, down by 28% year on year.

For the Chemicals segment, we made great efforts to further develop markets, integrate production, sales and research, enhance service awareness, promote the development and application of new products, and increase output.

Ethylene output for the reporting period was 4.741m tons, down by 2.35% year on year. Synthetic resin output was 7.408m tons, up by 1.05% year on year.

The Chemicals segment scored an EBIT of CNY14.3b, indicating a dramatic year on year increase.

Capital expenditure in the first three quarters was CNY60.28b, of which CNY28.664b went to the E&P segment. Newly added crude production capacity reached 4.12m tons per annum. Newly added natural gas production capacity was 591m cubic meters per annum. Sichuan to Eastern China gas transmission project was close to completion.

CapEx for the Refining segment was CNY8.063b. A number of fuel quality upgrading projects have come on stream.

CapEx for the Chemicals segment was CNY16.118b. Ethylene projects in Tianjin and Zhenhai are on schedule.

CapEx for the marketing segment was CNY6.315b. 495 greenfield service stations have been built to further expanded our marketing network.

The rest, CNY1.12b was for R&D, information technology and other purposes.

Thank you. Now we are happy to take your questions.

We now begin the Q&A session. Our operator will explain to you the procedures.

(Operator Instructions). The first question is from [Pashan Golesh] from Credit Suisse.

Good morning, sir. Thank you for the presentation. I had -- actually have a few questions but let me just ask the first one. On the Puguang gas, could you tell us in terms of what is the startup date for the first gas from Puguang? That's one.

The second is what is the volume ramp up? When do you expect 15bcm to be achieved by?

And the third thing was there was some talk about a new gas discovery in Sichuan recently near Chongqing. And it talked about the result being as big as Puguang. So could you comment on that, please? Thank you.

(Interpreted). Good morning, ladies and gentlemen. Welcome to the Sinopec third quarter results announcement conference call.

Before I address your questions, I would like to comment a number of issues regarding the profitability and performance in 2009 third quarter, which has just been presented by our Investor Relations Manager.

We witnessed a quite outstanding performing result in the third quarter, and in the first three quarters, which registered an increase dramatically, year on year. The major outstanding performance is mainly attributable to the stable growth in the economy in the first nine months and because also due to our market expansion efforts.

However, the year 2008 was quite an even year for us. In 2008 we have witnessed a quite tight control on domestic oil product price and the Refining segment suffered very huge loss, which registered about CNY14.4b.

However, due to the launch of the new (technical difficulty) at the beginning of 2009, we have terminating the huge loss in the Refining segment in first nine months.

Given that 2008 is quite an even -- an amount comparable with this year's performance, we would like to compare this year's first reported performance with 2007. Compared with 2007, the EBIT was slightly down but the EPS and net profit was quite parallel with year 2007.

Now I'd like to address the questions from Pashan from Credit Suisse.

The Puguang gas build, the operational time started from this year, October 10. The output this year is predicted to be, preliminarily, 700m cubic meters.

Regarding the new discovery in Chongqing, we have checked with the source of these reports and this, we believe, is a not quite correct report, due to the lack of knowledge by the reporters.

Regarding our gas build in the northeast of Sichuan province, we are focused as a major cornerstone of our natural gas discovery. Currently, we are doing very active efforts on the development in that regard. Currently, it's still quite premature for us to submit a registered reserve for the natural gas. Thank you.

Could you just tell me what you expect from Puguang volumes next year and the year afterwards? You have 700mcm this year. What do you expect next year and the year afterwards? And if you could give me a ramp up schedule please. Thank you.

(Interpreted). The natural gas output in Puguang next year is predict to be 4b cubic meters. And we expect we will make a quite active effort to achieve high production capacity. And this figure will be increased to 8b cubic meters in 2011, according to our prediction, as Puguang will achieve full capacity. Thank you.

The next question is from [Steven Lee], HSBC.

(Interpreted). My question is about Refining margins. We have witnessed a year on year increase in Refining margins in first three quarters. However, the sequential growth rate it was not very good. It was negative. And will you expect the fourth quarter to be a kind of disaster performance in terms of Refining margin? And will the management expect a big fluctuation in the Refining margins in this period? And what is your expectation for the Refining margin in the period afterward? Do you expect to this level or will it revert to the normal?

(Interpreted). First, to the new fuel price mechanism, the first nine months we witnessed a quite normal and stable growth in the profitability on the Refining margins.

The first quarter Refining margin was $7.9 per barrel, second quarter $9.2, and third quarter $5.2. And the average Refining margin for the first nine months was $7.7 per barrel.

The current Refining margin was mainly attributable -- partially attributable to the new fuel price mechanism. Another reason is because of the major assets were made to ramp up the total operational volume and cost control approaches.

But the major slide, despite our efforts in market expansion and cost control, the new fuel price mechanism has been well in place, which has majorly supported our Refining margins.

Since the launch of new fuel price mechanism, we have made seven times of an adjustment in domestic fuel price in the first nine months, mainly in accordance to the international crude price changes.

Out of the seven times of price adjustment, four adjustment was to increase the domestic oil price according to the increase of international oil price. And there has been three times of adjustment to decrease the domestic fuel price, according to international market change.

So looking at the first three quarters' price adjustment, we believe the government has mainly made the price mechanism well in place, which no doubt, the government made appropriate adjustment and micro regulation according to the economic front and also demand/supply economics.

In particular, in the third quarter, the government -- we have witnessed that there has been a big price rise in international crude price. And the government has made appropriate regulation on domestic fuel price that we witnessed that third quarter Refining margin was dramatically down against that of second quarter. Especially in September, we have saw some significant profit loss.

According to the new fuel price mechanism, we have judged that the international oil price has been rising for consecutive periods. However, the adjustment has already exceeded the range of the new fuel price mechanism.

So far, we're not aware of any confirmed notice from the government on next round of adjustments. Overly speaking, we believe the government will make the new price mechanism well in place in a step like manner.

Given the financial crisis worldwide and based on a peer comparison, we believe our profitability and performance maintained a strong growth -- maintained strong development. Thank you.

Thank you. Our next question is from [Lois Lall] from BOCI.

(Interpreted). [Lois Lall] from BOCI. I have two questions. First one is regarding the Refining segment. Just now, the management mentioned about the profitability loss -- profit loss in September. What do you make of the October, because as medias report, it could be consequent loss -- consistent -- continuous loss in October.

In a second question, I'd like to comment on the Chemical department. Regarding the Chemical department, we have learned that the CRCC, the new plant in CRCC and Tianjin will be operational. So what is your expectation for the time tempo of the operational time?

(Interpreted). After the analysis on the October's performance, we predict that the October profitability could be parallel with September.

Regarding the two ethylene plants in Tianjin and the CRCC, Tianjin will be operational before the end of this year and CRCC will not be operational until next year. Thank you.

(Operator Instructions). Our next question is from [Ernest Ju] from [Gauther] Securities. Please go ahead.

(Interpreted). My question is about natural gas production capacity and your sales volume of natural gas. Currently we have signs that the production capacity of natural gas is higher than the sales volume of natural gas. After the operation of Puguang Gas, do you think such a comparison will be consistent with before?

(Interpreted). Regarding the relation with -- between the production capacity and sales volume of natural gas, of course some parts of the natural gas produced from our gas field will be self-used by us. And another reason for the low sales volume of natural gas is due to the economic front.

In the first quarter we have witnessed the economics still riding on the bottom. And natural gas market, we have saw in some slump.

In the foreseeable future, the economic growth will maintain stable development and demand for the natural gas will be much more booming than before. And we believe the sales volume of natural gas will be ramped up. Thank you.

Thank you. Our next question is from Julian Loh from DBS Vickers Hong Kong.

(Interpreted). I have two questions. The first question is about the Chemical margin in October. What expectation of October's Chemical margin versus the third quarter?

The second question is about the parent -- overseas margin in acquisition activity. We noticed that the parent company made great efforts on overseas activities in terms of M&A. What's tangible for the listed part to inject the parent's overseas assets into the listed part?

(Interpreted). We remain very much bullish about the Chemical market in first three quarters and profitability was also quite healthy. However ongoing into September, we saw that the number of a number of the ethylene plants started operation. Product from various suppliers also put into the market, which generated intensified competition. So the September price of chemicals a little bit dropped than before.

And given the market changes in the chemical market entering into September and also new capacity built from the overseas suppliers, we predicted the competition in the chemical market for the last quarter will be very intensified.

We plan to intensify our effort on market expansion and ramp up the profitability through our four measures in the last quarter.

Approach one, we plan to optimize our product flight and maximize the product of those marketable products.

Approach two, we will intensify efforts on our integration of production, sales and research and ramp up the output of the value added products.

Approach three is regarding the market expansion and the expansion of the market share through the network building.

Approach four, we'll work closely with the Middle East producers and fully utilize the market from the Middle East. In this way we'll try our utmost to avoid the entry of the overseas suppliers directly into Chinese market.

Through the above mentioned approaches, the Company plans to further expand our market share and competitiveness. And we will try our utmost to make sure the Chemicals segment will be healthy. Thank you.

Thank you. Our next question is from (inaudible) from (inaudible).

(Interpreted). Two questions. First question is about natural gas, especially on the natural gas price in Puguang. According to the early report, that Puguang gas price is mandated at 1.281. And we saw variance of 10%. But according to most recent report, it could be maintained into different brackets, which means that different uses will use different bracket of natural gas. For example, if the price will be different for industrial users and the civil users. So could you please give us some elaborations on that?

The second question is about dividend payout. Given the currently healthy profitability, do you think the Company will raise the payout ratio?

(Interpreted). Regarding your first question about natural gas price, the most recent report, different users using different bracket of natural gas is not correct. According to the current market development, we arranged the natural gas price in Puguang at CNY1.28 per cubic meter with the variance of 10%. And according to the recent market scenario, we will make the 10% increase of the CNY1.28 per cubic meter.

Currently, we are closely discussing with different target customers, different regions, provincial government and municipal government, the sales and purchase agreement. Currently, this discussion is well underway.

Before I address your questions, I'll make some comments on the profitability analysis. The year 2008 was quite particular for us. It is not quite comparable. But compared with 2007, the 2009 first three quarters performance is parallel with that. So we predict to maintain our dividend payout ratio as before. Thank you.

Thank you. Our next question is from China Business News, [Guang Yo].

(Interpreted). I have two questions. The first question is still about natural gas pricing for the -- China's natural gas. We have heard that the new natural gas price mechanism will be in place by the end of this year. And there are about two versions of such reports. The first version is that the natural gas price will be closely related with the international and domestic natural gas, according to their different weight.

And second version could be several kind of approaches. Someone also predict that the natural gas price could be related with the renewable energy price. So what's your expectation for the natural gas price in China, especially the natural gas in the existing oil fields, except the Puguang gas field?

The second question is about the price adjustment for the domestic fuel products. Currently, the oil price internationally has been riding on $80. So what is your forecast for the next round of adjustment? Could be -- we believe the government could be a little bit prudent on the new move of the price adjustment, especially for the price increase. So what is your forecast on the new adjustment impact on Sinopec's profitability?

(Interpreted). The natural gas price in domestic market is relatively lower than international market. Just now mentioned about the traditional natural gas pricing, according to different categories of users. I believe this is the traditional one, but this one is not quite conducive to the energy saving and development of natural gas industry.

Since the launch of new fuel price mechanism, the government also intensified efforts on the research of the new natural gas pricing mechanism. According to our analysis and prediction, the major direction for the new price mechanism reform could relate or link the new natural gas price with the domestic crude or fuel product price. And natural gas price will change, according to the change of the crude price and domestic fuel products.

That is to say, the natural gas price in the next step will still be directed by the state government, but this direction will keep abreast with the market change. If the new price mechanism for natural gas is stable, then it will help support -- will increase the natural gas price domestically and will support our profitability and development in E&P segment.

And also, given the second branch line of the PetroChina West Gas East Transmission Project, this project's second phase and second branch will be operational soon. We believe the new natural gas price mechanism will be stable as soon as possible

Regarding the fuel products price adjustment, according to current fuel price mechanism, currently, the condition is already ripe for the price adjustment. But so far, we are not aware of any official notice from the government on the timetable and the range of these adjustments.

Based on our overall judgment, the new fuel price mechanism will be well in place by the government. And banking on this mechanism, our refining margin will still maintain a normal growth.

Impacted by the financial crisis, the international counterparts have maintained a refining margin and relatively stable of $3 per barrel. And we believe that in our perspective and our scenario, our Refining margin is relatively healthy. Thank you.

Thank you. (Operator Instructions). Our next question is from DBS Vickers, Julian Loh.

(Interpreted). To raise again the question I just now presented about injection of listed parts -- injection of the parent's asset into the listed part.

(Interpreted). I would now like to address you this question. We have made a disclosure on the -- and also comments during our interim results announcement on the parent company's overseas activities. And we were making an intensified effort to accelerate at that work.

To intensify the effort of injection of parent company's assets into listed part, we have newly established a Sinopec International Petroleum Exploration and Production Company Limited under the listed part. And this subsidiary will be mainly in -- responsible for the injection of the parent's assets.

The injection process has now been well under way. So if everything goes smoothly, the injection work will be wrapped up in the foreseeable future. Thank you.

Our next question is from Steven Lee from HSBC.

(Interpreted). I'd like to pose questions regarding the Marketing and Distribution segment. The EBIT of third quarter is higher than the second quarter. Could you give us some color on the retail margin of the diesel and gasoline?

And also, second question is about what is your current inventory of the oil products?

The third question is do you think the Company will ramp up export of the oil products?

(Interpreted). In the Marketing segment, we have maintained relatively good results in the first three quarters. As the macroeconomic growth has been maintained stable growth and rebound, the Marketing segment is relatively quite healthy in terms of the price of the products, the profitability and the sales volume.

The retail margins and the difference between the retail price and export price in the third quarter was CNY583, which is a 11% increase against the second quarter, whose retail margin was CNY488.

This performance is attributable to impulse control measures and expansion of the market share. Currently, we maintained an inventory level of the refined product at 7m tons and the third quarter's refining throughput was increased by 4.4% through the ramp up of the domestic output and export to the overseas market. Thank you.

Thank you. There are no further questions.

Thank you, everybody for attending this conference call. And I'm sure that the management would update the whole year results in due course. We will see you next year. 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.