中國石化 (SNP) 2013 Q1 法說會逐字稿

Welcome to today's Sinopec 2013 first quarter results conference call. Today we will have Mr Huang Wensheng, Secretary to the Board of Directors. Mr Wang Xinhua, Deputy Director-General of Finance Department and Mr Zheng Baomin, Deputy Director-General, Board of Investor Relations. After the introduction of the first quarter results the management will be ready to answer your questions. Now we will present the Q1 results first. Please.

Good morning, ladies and gentlemen. Welcome to Sinopec 2013 first quarter results announcement. In the first quarter of 2013 China's GDP grew by 7.7%. International crude price declined from year beginning high. (Inaudible) announce adjustments to the oil products pricing mechanics which enable domestic refined oil products pricing to closely reflect fluctuations of crude prices. The domestic demand for oil products and the chemical products continue to rise, although at a slower rate.

In the first quarter of 2013 the Company's revenue and other operation revenue increased by 3.6%. Operating profit was RMB27.6 million, grew by 26%. The net profit grew by 24%, mainly because the refining business made a turnaround in profit. In the first quarter of 2013 the Company's net cash from operating activities was RMB8.1 million. That cash used in investing activity was RMB51 million. The net cash generated from financing activities was RMB46.9 million as of March 31st. Equity attributable to shareholders of the Company was RMB547 million, up by 12% comparable to the end of last year.

In the first quarter of 2013 the Company's oil and gas production was 109 million boe, up by 3.8% year-on-year, of which crude oil production was 82 million barrels. Natural gas production was 163 bcf, representing a year-on-year growth of 0.8% and 14% respectively. In the first quarter of 2013 the Company's realized crude oil price was $98.8 per barrel, down by 6.85% year-on-year. Natural gas realized price was $5.86 per mcf, up by 3.9% year-on-year. Operating profit E&P segment was RMB16.2 million, down by 17%, following the trend in crude oil realized price.

In the first quarter of 2013 the Company's refineries were operating at full load with significant increase of higher value added product volume. Refinery throughput was 58.7 million tonnes, up by 5.9%. Oil production was 35.3 million tonnes, up by 7.4%. In the first quarter of 2013, along with (inaudible) of oil product price, our refining margin improved significantly. Operating profit of refining segment was RMB2.2 million, compared with a loss of RMB9.2 million a year ago.

In the first quarter of 2013 the total sales volume was 42.13 million tonnes, up by 1.9%. The domestic sales volume was 39 million tonnes, up by 1.7%. In the first quarter of 2013, facing the challenge of weak domestic demand and the stronger competition, the Company made effort to improve our sales structure. Operating profit of marketing segment was RMB9.1 million, down by 11% year-on-year. In the first quarter of 2013 the Company maintained the safe and stable operation of chemical facilities. (Inaudible). In the first quarter ethylene production was 2.4 million tonnes, black, year-on-year. In the first quarter chemical business saw a decline in chemical prices and the increase of (inaudible) price. Chemical margin dropped. Operating profit of chemical segment was RMB164 million, down by 87% year-on-year. CapEx of the Company was about RMB21.5 billion in the first quarter, of which RMB9.4 billion (inaudible) RMB2.8 billion in refining, RMB6.4 billion in marketing, RMB2.3 billion in chemicals and on RMB6 billion in corporate and others.

That's all for the presentation. Thank you again. We are pleased to answer your questions.

We will now begin our question and answer session. Our operator will explain to you the procedures.

(Operator instructions). Our first question is Lawrence Lau for BOCI. Please go ahead.

(Spoken in foreign language).

Thank you for your two questions. The first one is regarding the refining business we are based on quarter to quarter basis. We experience significant growth, given the last year (inaudible) we delivered more than RMB2 billion this year. If we look at the fourth quarter last year, given the crude price, we experienced decline scenario. We have the cost of the crude of the refining (inaudible) were high. So the refining margin has a squeeze a little bit. If you look at the refining margin in the fourth quarter of last year, that margin was some $6.60 per barrel versus, in the first quarter of this year, the refining margin is $5.23 per barrel. That is a major reason why, if you look at -- comparing with the first quarter with the fourth quarter of last year -- we have experience the decline.

The second question in regard -- the tax, the income tax. We increased that beta because of the tax of our overseas assets from Angola. Given that Angola has been operating for a lot of years, based on the product sharing contract the effective tax increased. That is a major reason. Thank you.

(Spoken in foreign language).

The next question is Andy Moore from Morgan Stanley. Please go ahead.

Morning, Mr Wong. It's Andy. I have two questions. The first one is about the refinery utilization. I'm not sure whether you can comment the overall utilization rate for refining capacity in the first quarter of 2013 and, potentially, for the second quarter of this year. We heard that for the local refiners in China I think we have significant high inventory issues now, so what's your view on the market outlook and what's the strategy for the Company in light of such a relatively weak economy recovery and weak downstream demand?

The second question is regarding the chemical demand. I think recently we also see the chemicals end price -- the price is in significant decline, following the oil price decline. So I think what's the Company's strategy; and will we see any large negative impact on profitability in second quarter or third quarter of this year? That's my two questions. Thank you.

Thank you for your two great questions. I'm not in the position to give you guidance on the earnings on this second quarter, on those third quarters. In terms of your first question regarding the refining utilization rate, in the first quarter we were very high. That was the up end of some 98% utilization rate. If you look at the demand in the first quarter it's still strong. The overall demand in the first quarter is around some 4.3% year-on-year growth. So in the second quarter we still believe that China economy will be grow stably, and we expect the demand still be there.

For the inventory, in terms of the T pod refinery, I'm not in the position to give you answer, but if you look at the market speculations when the crude price fall, they may speculate a lot, and a lot of the downstream customer, they may -- holding the buying power, so there may have some inventory in the supply side. That is mainly because of the price, as well as the speculations. Regarding your second question, in terms of the chemical demand, in the first quarter that was some 1.7% year-on-year growth. The price is weak just because of the international price is such lower.

Our strategy is still, as you know, we focus on our productions to meet our customer needs, and we tie up with our research, marketing, as well as our production force, to produce a lot more of these high end products, tailor-made products to our customer needs. So the proportion of those tailor-made products have been increased in the last year. We also book a lot of our investment, as well as our productions, efficiency in terms of our synthetic rubber, as well as the (inaudible). In those areas we have a strong competitiveness. That is our major chemical strategies, as well as our situation in China in the first quarter. Thank you.

Thank you.

The next question is Tim Hunter from J. P. Morgan. Please go ahead.

Hi. Thank you very much for holding the call today. There has been some concern around your acquisition strategy of the upstream assets from the (inaudible) and, probably, you'll have to raise more capital to do it. We've already seen two rounds of capital raising this year, and equity and a debt issuance. So can you talk a little bit around your acquisition strategy for the remaining part of this year, and if you would do funding it through the capital markets again?

Thank you for your question regarding the acquisitions.

The acquisition we have done is acquired the upstream assets from my parent company. That's through a (inaudible) approach and based on that arrangement that this vehicle will consolidate all those financial favors at a cost of some $1.5 billion. Under -- that is based on the reserve as well as based on enterprise value. It has been discounted to the comparable (inaudible). So at the moment the parent company still holds a significant upstream assets. We are looking at opportunities, but we feel it's very hard to have a significant acquisition in this year, given we have been (inaudible) for quite a long time.

There are a lot of products that are owned by my parent company. Some of them are owned or operated with other third parties. Those acquisitions we treat as the pre-emptive rights of the third parties, so we are doing it very carefully. Some of the assets cannot be listed vehicles (inaudible) investment and we may not do it. So from the (inaudible) perspective we are looking for the opportunities. In the short term we do not have the concrete planning.

In terms of the capital raising when we make our budget we normally base our projected cash flow as well as of dividend payout level and the opportunity we've invested. So the projected cash flow may support our (inaudible) may not increase our gearance. In the first quarter, by the end of April, we have raised the capital from overseas markets from the private placement of some $3.10 as well as issuing the senior bonds of some $3.50. That is very helpful to support our development as well as our operations. Thank you.

Thank you.

The next question is (inaudible) from (inaudible). Please go ahead.

(Spoken in foreign language).

In terms of the gasoline and the (inaudible) production increase I will like to hand it to the Zheng Baomin to give you the answer. Before I do that I would like to take your second question of the SEG's IPO. In the last year we have been -- the parent company has been consolidating that company through the professional management and also the professional services. We are a strong believer through the privatization also the IPO of that company will fully -- the company will utilize their strengths not only serve my Company, as well as serve the other companies. We believe that (inaudible) to improve our efficiency in terms of the services by -- is it going to support our growing business? That is we believe that (inaudible) from my Company. For your first question I would like to hand it over to (inaudible) to give you answer.

Hi.

Hi.

I'm very glad to take your question. For the gasoline and diesel production the strong increase is in line with the demand growth in China. Since the number of car sales is quite strong -- and actually every year they are adding about close to 20 million vehicles, most of those automobiles are private cars. So the demand for the gasoline is consistently strong. Even last year we saw a double digit increase. This year we -- in the first quarter we saw another double digit increase year-on-year. So in order to meet those demands we increased our gasoline production. Also Asian travel is also quite strong in China, so that resulted in jet fuel demand increase. However, due to the weakness in the economy the diesel demand, which is closely related to the macro economy activities, was flat. So our increase in the diesel production is also not so much. Thank you.

(Operator instructions). The next question is Andy Moore from Morgan Stanley. Please go ahead.

Hi, Mr Wong. Again, it's me. Another question is the export strategy. I think recently we saw the pick-up of export, especially for diesel from China to overseas market. So is it ongoing strategy for Sinopec to increase their export volumes? Thank you.

Thank you. As Baomin explained just now, given the response of weak demand of the diesel in China, we exported a reasonable amount of diesel to the overseas market to balance the supply and demand in China situation. We take the market -- not only in China domestic market, but also we will take the overseas market as a whole, so consolidate all of our operations. Thank you.

Thank you.

The next question is [Debbie Shen] from HSBC.

Yes I would like to have an explanation on why the petrol chemical segment is so weak in the first quarter and are we expecting improvement in second quarter? Also for the CapEx regarding the refineries and the petrol chemicals for the full year are we seeing potential increase for 2013 and 2014?

With the weaker chemicals that's because not only in China but it is weak poor chemical performance globally. China chemical business have opened into our side. So this is a response of weak demand and the low costs of the productions of the shale gas as well as the middle use that should have a higher competitiveness. So we have seen this weak in the chemical side. Our chemical is used in (inaudible), and we put a lot of effort into upgrade of master based chemicals to produce high end products. That is (inaudible).

In the commodity side like the Polyethylene as well as Polypropylene we tried to increase our performance compounding productions to meet our customer needs to fight with the challenges of this business. We are very positive in this business and we are a strong believer that it is going to be improved in this year compared with last year.

In terms of the CapEx we have made our CapEx plan and in the refining side the CapEx was part of upgrading of our products quality as well as our refining. On the chemical side we may produce our high end products. That is the area where we are focused on. We do not have an update of the new CapEx plan in the year 2014 but we really have the guidance for the (inaudible) we have published them and reported to the shareholders. Thank you.

The next question is [David Kunis] from Credit Suisse. Please go ahead.

Hi there. Thanks for the presentation. I know you can't forecast for refining profitability going forward but you mentioned the new mechanism being introduced. If crude prices stayed the same and product prices stayed the same going forward do you think that you would require higher, the same or lower refining margins for the remainder of the year?

In the first quarter refining margins were $5.23 per barrel. Because there is a crude price experience that dropped in the past two weeks and the Government hardly being effectively to reduce our pump price and that could lead to the (inaudible) margins as a higher cost of the crude and the low price of the goods so the margins have increased.

But with the cost decline of our crude and we can't expect that the margins can be improved a little bit. We are now also working with the government because by the end of this year the gasoline quality will be European full equivalent and we expect the higher quality can charge the premiums. That can also be job for our refining business. This is effective of the price mechanism can term our refining from the red to the profit making business and we are very positive in this mechanisms. Thank you.

Thank you.

The next question is [Albert Muir] from SWS Research.

(Spoken in foreign language).

Thank you for these two questions. I would like to hand it over to Zheng Baomin to give you an answer.

The first of your questions regarding the (inaudible) margin in the current situation because the economy is still quite weak because of the big recovery in the next one or two months. So we haven't seen big change in the (inaudible) market. As for the second question the corporation with China Gas this is -- discussion is still going on and last year we had made an announcement that it is not -- China Gas made an announcement that the two companies have signed the strategic letter of intention for future corporations. So the discussions and negotiations are still going on and up to now we do not have any update on that discussion. Thank you.

The next question is Tom from HSBC.

Gentlemen good morning. Congratulations on a good result in a difficult market conditions. I wondered if you could elaborate a little bit on exactly what happened in the marketing business. For me that was the key area that missed. The other businesses I think performed quite well but I am surprised to see that the marketing earnings were as light as they are. That's been an area of consistent strength for you. Can you talk about the dynamics in the first quarter and how we should think about the normalized profitability in marketing?

Thank you Tom. The marketing business in first quarter is good as this is difficult market situations. But in comparing with the results last year it's weak given that last year demand was very strong and then in this year we have seen the weak demand in terms of the diesel side. That is a major reason. You can find we have reduced the sales of distribution and the wholesale volume has been increased. This is the interpretation of some loss in the marketing side.

But if you look at the retail side (inaudible) will be very strong in the gasoline in particular. In the longer term perspective in the whole year in the marketing business we believe with the mileage as well as the driving season is coming and we believe the marketing business can deliver very positive earnings and it could be better. Thank you.

(Operator instructions). There are currently no questions.

Okay so this is the end of today's conference call and thank you very much for attending.

Okay thank you very much. If there are any further questions you may have you can talk with our IR people. Thank you. Have a nice day.