中國石化 (SNP) 2020 Q3 法說會逐字稿

Good morning, ladies and gentlemen. This is [Jin Lu] from PR China. Welcome, everyone, to Sinopec Corp.'s earnings conference call for the third quarter of 2020. (Operator Instructions). Now I would like to transfer the call to Mr. [Jung Jeong], Director General, Board Secretary of Sinopec Corp. Mr. Jeong, you may begin.

Good morning, ladies and gentlemen. Welcome to Sinopec Q3 result announcement and thank you for joining us today. This meeting is attended by Madam Shou Donghua, CFO of the Company; Mr. Huang Wensheng, Vice President and Secretary to the Board; Mr. [Soong Jengua], Deputy Head of Finance Department; and Madam [Lee Li], Deputy Head of Operations Management Department. First, I would like to give the floor to Mr. [Chen Young], Deputy Head of the Board Secretariat, to present to you the performance Q3. Mr. Chen, please.

Thank you, Mr. Jeong. Now it's time to update you on our delivery and the performance in the third quarter. Before we start let me highlight the cautionary statement. As you all know, the COVID-19 outbreak rampaged worldwide and significantly increased the downside risks of lower economy. China's economy kept good recovery momentum and the GDP grew by 4.9% year-on-year in the third quarter.

Domestic demand for natural gas and chemical products maintained growth and demand for refined oil products recovered steadily quarter-on-quarter. In addition, international crude oil prices fluctuated within a narrow range.

In the third quarter the Company launched a higher standard compared to (technical difficulty) and improving performances, (technical difficulty) market demand recovery and made great efforts to take over the difficulties of pandemic combined with low crude oil price environment. Through these efforts we achieved significant improvement in operation and profitability.

Our downstream business performance all returned to pre-COVID levels. In the third quarter our organic EBIT, excluding pipeline of [run-off gain], reached RMB30.2 billion increasing by RMB25.8 billion over second quarter and up by 37.3% year-on-year. In addition, the Company completed the transaction of oil and gas pipeline assets and booked RMB36.8 billion in EBIT.

In the first three quarters we seized the (inaudible) of relative low financing costs to adjust and optimize fair scale and structure and maintain a stable financial position. As of September 30, the Company's debt to asset ratio was 51.7%, at (inaudible) level. In the first three quarters, employed working capital decreased due to lower oil prices. Meanwhile, we've strengthened the control of capital budgets, reduced inventory and accounts receivable and optimized payments of bills.

Despite the sharp decrease in net profit, net cash flow from operating activities was RMB83.6 billion, up by 2.8%. Cash flow from investing activities was RMB103.3 billion. Cash flow from financing activities was RMB46.9 billion. Cash and cash equivalents, including time deposit, was RMB180 billion, up by 40.7%, providing strong backdrop for future growth.

In upstream, we kept high quality exploration efforts and reinforced profit oriented development. Meanwhile, we continued (inaudible) building in West (inaudible) and achieved a continued growth in market share of natural gas. In the first three quarters, domestic oil production kept flat. Natural gas sales volume increased by 10% year-on-year at a low oil price environment. We took great efforts to cut costs and achieve excellent results. Lifting cost was USD15.14 per barrel, down by 9.2%. All-in cost down by (technical difficulty) segment (inaudible) loss and realized RMB354 million in EBIT excluding pipeline run-off (inaudible).

In refining, driven by domestic demand and demand recovery, we further integrated production and marketing, maintained higher transaction rates and maximized the performance of (inaudible). We dynamically optimized product slates, increased the supply of chemical feedstock and increased production of (inaudible) and other marketable products.

In the third quarter, refining throughput was 63.5 million tonnes, up by 11% over the second quarter. Refining margin was USD9.80 per barrel, up by 57.6% year-on-year. Organic EBIT was RMB16.1 billion, increased RMB12.9 billion compared with the same period last year. In marketing segment, we reinforced research and analysis on the market conditions, strengthened market expansion to bring whole value chain synergies into full play.

In addition, we innovated business model, intensified the synergies of online and off-line and reached our type of goods and services and improved service quality. In the third quarter, the domestic sales volume of refined oil products was 45.4 billion tonnes, (inaudible) growth quarter-on-quarter. Organic EBIT for segment reached RMB10.7 billion. [Longtail] business profit reached RMB3 billion, up by 13% year-on-year.

In chemicals, the Company fine-tuned (inaudible) feedstock mix to further lower cost, optimized the operation and the product slate, increased the reach of higher value added products with a range of new and specialty (inaudible), reaching 68.6% and (inaudible) of high value added synthetic products reaching 31.3%. We also accelerated (inaudible) market and optimized layout and logistics to enhance profitability of business [chain].

In the first three quarters, upstream production was 88.5 million tonnes, so actually it decreased year-on-year. EBIT of the segment in the third quarter was RMB4.2 billion, maintaining relatively stable profitability. (inaudible), the Company is focused on quality and efficiency and strengthened the management of investment return. In the first three quarters, CapEx was RMB71.9 billion, down by 7.9% year-on-year.

RMB32.2 billion used in E&P segment, mainly for oil and gas exploration and production. RMB13.8 billion in refining, mainly for construction of key projects. Marketing and distribution was RMB13.8 billion, mainly for construction of refined oil product (technical difficulty) as well as [uphill] business development. (inaudible) costs were RMB[10].5 billion mainly for construction of key products. That's all for the presentation. Now the management is pleased to take questions.

Ladies and gentlemen, this concludes the prepared remarks for today and we are now ready for questions. (Operator Instructions).

[Hannah], Morgan Stanley.

Congratulations to your good performance in this quarter. I have two questions. The first question is regarding the one-off gain in the third quarter. I understand you have the pipeline gain and I also believe you will have some inventory gain due to the oil price movement. So, can you tell us the one-off gain for the quarter by the pipeline gain as well as the refinery inventory gain? These two separate financial figures.

The second thing is regarding the chemical. So, for the chemical segment, we see the recent spread is improving. The Company's financial number is okay, stable. But for the outlook for the fourth quarter and next year, what's your view regarding the chemical business performance? Thank you.

(Interpreted). Good morning. I would like to take your question. As you know, we have completed the pipeline transaction in the third quarter and the profit of the pipeline asset transaction was booked in the third quarter.

So, the one-off gain on the [IT] was around RMB36.8 billion and the one-off gain on net profit attributable to the shareholders of the Company was around RMB30.8 billion. And we can also have the cash consideration for around RMB52.6 billion and it can improve our financial structure of the Company.

Before Mr. [Soong] gives you an answer on the concrete number, I would like to give you some of the briefing supply/demand scenario for your better understanding. If you look at the year-on-year demand growth for the chemical products, the first nine months, the [ethylene] equivalent demand grew by 9.6% to 9.7% year-on-year. That is quite strong.

And if you look at the quarterly, the first-quarter negative growth, second quarter grew by some 12.5%, and the third quarter grew by some 14.7%. This is year-on-year growth. This keeps the quite strong demand momentum. And if you look at the Sinopec chemical structure, we needed the feedstock based on the (inaudible) base that is oil related. At this low cost crude oil price scenario, it gave us quite absolute (inaudible) compared with other feedstock sources and we have enjoyed some benefit in the low cost of crude in the chemical side.

In the [other] new products area, if we look at our chemical products, we have the rubbers, we have the organic chemicals, we have plastics, we have others. If you look at all those categories, the plastics price keeps quite stable. That part [satisfactory] asset portfolio becomes a significant part.

Every year we sell about 15 million metric tons of kinds of plastics. In that area we are the largest of the plastics producers in the world and in the margin in that area is very strong. That will keep us quite strong -- the operational momentum in the chemicals area. In the third quarter all of our chemical facilities operate at quite high utilization rates.

Looking ahead, Chinese government today is encouraging [those domestic] recycling and try for exploring the global recycling and the demand environment continues strong. We have seen the momentum of our facilities (inaudible). And as this pandemic scenario, some of the import products have some [difficult]. We see the continued tight supply in the specific area of the plastics side. We can see the (inaudible), so we are quite confident in the chemicals in the fourth quarter of the first half of the year to come. Thank you. And Mr. Soong may give you some numbers.

(Interpreted) So, Mr. Huang has introduced a brief situation of the chemical segment. And so, based on our optimization of the structure of this part to lower the cost we have achieved a sound result in our chemical segment. So, in the first three quarters the comprehensive margin for chemical segment of our Company was around RMB409 per tonne, of which the feedstock product -- the margin of the feedstock product was around [RMB236 and 65] per tonne. And the synthetic resin was around RMB1,178 per tonne. And the synthetic rubber was around RMB732 per tonne and the synthetic fiber feedstock (inaudible) was around RMB52 per tonne.

One missing part is the refinery inventory gain. So, can you elaborate a little bit on that? Thank you.

(Interpreted) So, as you know, in order to maintain the normal operation the Company (inaudible) crude inventory at around (technical difficulty) level and the refined oil products (technical difficulty) at about [56] (inaudible) volume level.

So, in the first three quarters the inventory losses was around a total -- for the total of the Company was around RMB30.45 billion, and (technical difficulty) cost price of the crude and other refined oil products respectively at the end of September. So, it means that in the future if the crude price maintains stable so the impact of our inventory will be small. Thank you.

(Operator Instructions). Tom, HSBC.

Congratulations on a very good result. On the E&P side the performance was very good. I think the lifting costs are approaching a record low. Can you give us some color on, one, how you've done that; two, whether you think you can keep them down here at these levels or even lower them further? And can you give us the LNG losses in the segment?

And then secondly, just in terms of the non-fuel business and marketing (technical difficulty) was 3 billion. I think that is a record high number for you. And that points, I think, to some transformation of the business. Can you give us some color on those results and outlook for nonfuel and marketing? Thank you.

(Interpreted) So, the strategy of our E&P segment was to maintain the crude oil production before and to expand our next-step production as well as to lower the cost. So, in the first three quarters the cash operating cost was around $15.1 per barrel, which was down by 8.4%. So, in the future the Company will further lower the cost by optimizing the production cost.

In the first three quarters the Company imported the LNG for around 12.53 million (inaudible) and the total (technical difficulty) in the first three quarters was around RMB2.85 billion. And in this time the Company has saved the opportunity to lower the cost as the situation of the lower price of the (inaudible) market.

So, we also do the optimization work of our R&D sales and marketing business. So, for the total of (technical difficulty) business it increased for around RMB2.4 billion. And in our R&D folder business the profit increased for around RMB3.3 billion. And for the long-term contract R&D business the losses decreased for around RMB1.8 billion.

Sorry, I want to correct the number about the R&D business in the first three quarters. The total number for R&D business in the first three quarters compared with the same time of last year was around RMB4 billion fixed rate (technical difficulty). And in the coming winter season we will further optimize the structure of R&D procurement and the R&D marketing to improve our R&D business for the whole year. Thank you.

(Interpreted) So, for the (inaudible) business of the month, in the first three quarters the revenue was around RMB25.29 billion and the profit of the (inaudible) business in the first three quarters was around RMB3.02 billion, which was up by 13% year-on-year. And we also supplied the goods that the Chinese people will need in the pandemic event and to integrate the online and off-line business to expand our (inaudible) business and to cope with the challenges from the pandemic. And we will continue to expand our (inaudible) business in the future to achieve (technical difficulty).

This number I would like to [have a] couple of words on the transformation (inaudible). I would like to (inaudible) questions. Actually we expect and we plan to do some transformation in those downfield businesses based on over more than 30,000 (technical difficulty) 37,000 onlines. That is based on our (technical difficulty) as we (technical difficulty) to make our [outlines], not only service the (technical difficulty) but to enhance it (technical difficulty) for our customers. And that is (inaudible) is going to be the one stop (inaudible) based on the [cut].

You can't find those numbers. The sales revenue growth (technical difficulty) but the margin (technical difficulty). We put a lot of effort on those higher-margin areas as the Sinopec branded products really enjoy high margins. And in the next several years we believe most (technical difficulty) customers (technical difficulty) or owners, they have a higher quality service and higher quality products. And we will try to supply those products to meet the specific needs of our customers. That customer need will bring us for this new transformation so we are quite confident our (inaudible) will pretty much (technical difficulty).

(Operator Instructions). [Jung Shishi], Citi.

(Interpreted) So, the first question is regarding the cash flow (inaudible). The second question is regarding the long-term [combination] of the Company.

So I would like to take your first question. The cash consideration for the pipeline transaction was around RMB62.6 billion, and the majority of the cash -- we have received the majority of the cash in October and the others will be received in the fourth quarter. And the (inaudible) investment income of our financing in our financial report.

In terms of your second question regarding the competition in the refining and chemical side, I would like to take this question. Is it is a challenging that as the domestic supply increased in the past couple of years with a fairly large capacity of the refining and the chemical productions. However, if you look at it global wise, it is a capacity growth, but global wise it is a small part and a reasonable part, it's a small part.

We -- in the past several years, we continue to see the demand growth in China both in the refining side and in the chemical side has still kept the momentum. And the oil product side the growth rate is some half -- 50% to two-thirds of GDP growth in the chemical side is greater than GDP growth. And the market demands that, needs that capacity in place to meet this demand. At the same time China still imports roughly some 45% of the chemical products from the international market in the last year.

And in this year we pretty much leverage all of our integrated operations. Refining chemical under the marketing integration, that was quite (inaudible) in those operation. And in the refining side the competitiveness comes from the large-scale results, excellent senior management, the state of our technology, the great logistics -- a lot of what refineries can enjoy this competitiveness.

And in the marketing area we are integrating operations between the refining and the marketing. And our marketing will probably make more than 75% of the products from our refinery. So, keep our refining operating fairly high utilization rates versus some of our competitors. They have solved the difficulties (inaudible) at a reasonable level of the price.

So, through this integration operations and we believe as a major player in this area we can continue to leverage our advantages and can be a strong survivor and a player in this area. So, in the next six months or one year we will continue to see some of the capacity in place, but we believe we could still leverage our integration operation on the excellency operation. Thank you.

(Operator Instructions). Chen Aizhu, Reuters.

(Spoken in Chinese).

I would like to take your second question first and I will leave the first question to our Madam Li, who is the Deputy Head of our production on the (inaudible) department. For the (inaudible) you can find a lot of the reports (inaudible) Sinopec management team that has great importance in that area.

A few months ago we organized a lot of the -- a conference that (inaudible) on the hydrogen development and we wanted to more roughly (inaudible) of the expansion (inaudible) with us, so talking about the future of the hydrogen. That gave a quite strong signal that Sinopec want to be a major player in this area that is going to be the future of the energy. And at sometimes they have to cancel also a lot of the initiative in that area.

At this moment we focus on the integrated value chain of the hydrogen, including the hydrogen production, the transportation and the fuel cell investment as well as the hydrogen stations. Today we have sort of roughly four stations in place to serve our customers on the (inaudible) construction and we'll be completing this construction at the end of this year and early of next year. And we are under (inaudible) also put some money in those fuel cell investments that (inaudible) a one-off [negative] signal. That is a symbol that we have put some money today as the second-largest shareholder of that.

At the same time we also put a lot of the R&D investment in the hydrogen production area given today we are the largest hydrogen producer in China. We produce some 3 million metric tons of hydrogen in our refining and chemical facilities. A lot of those have been used as feedstock of our refining to improve the quality of our other products.

At the same time we're also looking at the potential opportunities for the electoral (inaudible) and earlier this month you can find we have signed the letter of intent with (inaudible) for (inaudible), the potential manufacturer in China.

So in short, that is going to be the future of the energy. As a major energy and chemical company, our objective is try to be a world leading energy and chemical company. And those hydrogen is one area to put money for new development of the new energy. So, we will allocate some of our resources along whole value chain of this hydrogen, including hydrogen manufacturing, logistics, fuel cell and (inaudible). Thank you very much.

And the second question regarding the oil procurement, we would like to invite Madam Li to give you a quite short answer in that regard. But given it's about the (inaudible) issue, we cannot give you the concrete number of the -- the concrete beta of the inventory. Madam Li, please.

(Interpreted) Good morning, ladies and gentlemen. I would like to take your question regarding the crude oil procurement during the low oil price environment. As you know, we insisted on buying oil -- crude oil from various regions all over the world. And we will also truly harness the corporation with the big oil companies. And during the -- even though the challenges from the spot price fluctuation of the oil price and we can (inaudible) because we have a very professional team to deal with the oil procurement (inaudible) the challenges from the tough environment in the past decades.

And we also have the long contract crude oil procurement to fulfill all the normal operations of the Company. And we can also have a -- keep a small -- we also keep some certain proportion of the crude oil procurement from the spot market to a lower cost of the crude procurement. Thank you. We also have some oil inventory to maintain our stable operation and we would like to show you some good performance in the future. Thank you.

[Kathleen Wong], JPMorgan.

Hi, this is (inaudible) from JPMorgan. Thank you for the chance to ask a question. I have two questions. The first question is with regard to the retail price for excess profit that the government has collected. Recently the Shandong government announced that they would collect the windfall profits (inaudible). And obviously Sinopec has already allocated the profits to pay back the government. So, what do you think these funds will be used for? And is there a possibility for the government to allocate some of the profit to Sinopec for building new energy or clean energy infrastructure, for example charging stations?

The second question is with regards to your chemicals division. If we look at -- you said (inaudible) of about 3.85 billion. Can you give us a sense of how much came from PX? Was PX lossmaking? And are you (inaudible)? Thank you.

(Interpreted) Okay, so, as you know, based on the pricing mechanism of the refined oil products, China was -- its crude oil price was lower than the $40 per barrel price of the crude oil product will be stable and the premium will be kept in the other payables in other financial reports.

So, currently speaking in the first three quarters for this year, the premium was around (inaudible). And we will hand over to the government and based on our knowledge, we will still hand it over to the government.

For the chemical side, you are right. Under the third quarter we are earning from some RMB4 billion. Given our (inaudible) products mix, we have the plastics, we have the chemical fibers, we have the monomer and polymer for the chemical fibers and we also have other organics. And significant contributions come from the plastics side. From the chemical fiber area, we make some marginal contribution in that area. The monomer and polymer (inaudible) for the chemical fiber area is also a part of those contributions.

And providing it's a feedstock for the PPA and further down for the PEP. And in that value chain, given the oversupply in the presiding area under the margin has been lower and we -- up to now we will not record (inaudible) preside in production but the margin is not that great as it was in the previous several years.

The next several years given a lot of the supply and the demand is modest so we will -- we believe those presiding still will be a positive contribution in the Company in the plastic fiber value chain. And we are (inaudible) operations given that this will come from our refineries, the optimizations also come from our -- the chemical value chain the downstream product sells. So, we will continue to make some efforts (inaudible).

Thank you again for attending the conference call. If you have any further questions, please contact our Board Secretary and our people based in Beijing, Hong Kong and Houston. And let's conclude today's announcement. Thank you. Bye.