SINOPEC

tauringhuang.

Lex
Tuesday, August 26, 2008
  

  
Serving
the people or its shareholders? While China's drivers fill their tanks on subsidised gas, investors can only watch and weep. Sinopec, part of China's triumvirate of oil and gas companies and Asia's biggest refiner, loses $19 on every barrel of oil it refines, according to brokerage CLSA – and that is after cross-subsidies and recent increases in gasoline prices.

Sinopec's operating profit fell by 86 per cent to slightly more than $1bn in the first half, thanks to that refining business. Yet, surprisingly, investors seem to feel chirpy. Sinopec's share price has risen by 12 per cent since the beginning of July, outstripping both the broader index of internationally listed Chinese shares and global energy peers. Why?

It is not because Sinopec's business story has changed. Sales are rising – Chinese demand for oil products is forecast by the International Energy Agency to increase by almost 6 per cent this year. But so too are costs. Oil product prices remain above the 80 cents per litre Chinese motorists pay at the pump. Sinopec itself is guiding for another miserable quarter. In addition, there are Sinopec's own plans. Capital expenditure rose by nearly a fifth in the first half and the company is eyeing two multi-billion dollar acquisitions overseas.

tauringhuang.

The wild card is government. The state can lessen Sinopec's load through cross-subsidies or by lifting retail prices. These subsidies came to about $5bn during the first half, while gasoline prices rose by about 18 per cent in June. Speculation about further increases is swirling through China, but there is room for disappointment. The slowing economy will temper Beijing's appetite for bold retail price hikes. Meanwhile Sinopec trades on 17 times next year's earnings, twice the rating of peers. Just as American drivers spurn SUVs for more gas-efficient transport, so too should Sinopec investors consider switching to more promising vehicles.