Event: 1) Recently, China Securities Regulatory Commission released Stipulation on Exchangeable Bonds of Listed Companies (Trial Edition) and put forward requirements on qualification of exchangeable shares, i.e., A, Net asset of listed companies in the last term should be no less than Rmb1.5bn, or average weighted ROE of latest three fiscal years be no under than 6%; B, Shares used for circulation were unlimited for sale during conventional share exchange period.
2) Due to USD’s appreciation to EUR and rising unemployment in the America, international oil price went down for the sixth trading days last Friday; futures of light crude oil on Oct was USD106.23/barrel based on closing price of NYMEX on Friday, a decline of 28% from its summit.
Our analysis and estimation: As stated in 2008 petro-chemical investment strategy report on Jan 2 2008, PetroChina and China Petroleum & Chemical were influenced by five factors. In the recently half year, share prices of the two companies sank over 60% both, however, exchangeable bonds and international oil price turned out dual favorable situation; Q3 earnings were good despite poor performance of PetroChina in interim report with EPS of merely Rmb0.26. In Q3, oil price sharply fell and accordingly special oil gain levy declined, however, refined oil price went up from Rmb1000/ton to Rmb1500/ton in June and drove price hikes in naphtha and dispel gasoline; the company’s share price has stumbled to around Rmb12, posting a good position to buy in. We hold optimistic view on PetroChina and maintain investment value based on following six factors.
Factor 1: Exchangeable bonds or solution to non-tradable share will bring low cost fluidity.
After approval of Stipulation on Exchangeable Bonds of Listed Companies, minor non-tradable stocks will be ultimately changed. PetroChina is one of the most profitable companies worldwide and meantime, one of the few with growing oil reserves. Exchangeable bonds will solve cash problem of non-tradable shares and bring high ROE. Additionally, profit of PetroChina accounted for one third of the total state-owned enterprises; its bonds must be with low interest, lowest risks, large amount and good liquidity to attract more investors. Besides, major non-tradable stocks will enjoy financial cost reduction by exchangeable bonds issuance, thus performance is expected to rebound.
Factor 2: International oil price has entered into best gaining period.
Summer oil consumption summit was finished and winter heating oil summit of north hemisphere still too far away, thus international oil price gradually declined; we forecast price will fluctuate around USD100-110 in 2H2008. With spike of refined oil in June, PetroChina has entered into best gaining period with USD100-110. We forecast performance will turn better in the second half year and achieve EPS of ~Rmb0.80.
Factor 3: Price regime reform of refined oil will present advantages of the company.
Share price of PetroChina has plunged from Rmb48 to current Rmb12, which was too low despite its rationality; the company has become the one with lowest global reserve estimation. Compared with MOBIL, a foreign company with lowest estimation, PetroChina should be no less than Rmb16.31. Besides, from long-term run, short supply of the market will push the price high.
Factor 4: Climbing reserve-replacement ratio (over 1) needs market reflection.
Reserve-replacement ratio being over 1 means the company can meet the market demand by new reserves without using primary reserves, thus total reserves will become larger and exploitation is longer. International market will usually give high estimation at companies with reserve-replacement ratio over 1, however, the company has become the one with lowest reserve estimation, and this was not indicated in share price.
Factor 5: Output of chemical products rapidly increased.
In 2007, output of chemical products reached 15.55mn ton, an increase of 16.7%. From 2008-2010E, it will increase faster since operation in Guangxi and Dushanzi. Increment in output will help extend industrial chain and enlarge gross margin.
Factor 6: Petroleum pipe business is expected to profit since 2009.
Lanzhou-zhengzhou-changsha project has been successfully connected and will be put into production; this is the longest refined oil pipe. Deducted this pipe, the company has owned refined oil pipe of 2669km, crude oil pipe of 10559km and natural gas pipe of 22043km. With completion of left pipe network, the company’s pipe business will enter into gaining period in 2009-2010 and bring large profit growth.
Earnings forecast and rating: Q3 performance has substantially turned around poor situation. Influenced by six factors stated above, PetroChina has entered into profiting period. We forecast 2008 EPS to be Rmb0.8 and 2009E EPS be around Rmb1, which was apparently underestimated. According to PE of 20x from companies of high reserve replacement ratio, the company should be estimated Rmb18.8-20, thus we give “Recommended” rating for the counter.