Sinopec’s net profit dropped 34% YoY to RMB32.5bn in 2025 under IFRS, 7% below our forecast. The discrepancy mainly came from the bigger-than-expected impairment. The blockade of the Strait of Hormuz has caused trouble to the company’s refining operations. Not only is the crude oil cost getting much higher, the availability of crude oil is also in question. We trim our 2026-27 earnings forecasts by 7-9%. Maintain HOLD given the low visibility of the company’s earnings beyond 1Q26.

Key Factors for Rating

In 2025, the company made total impairment of RMB8.6bn against its fixed assets, much higher than RMB2.4bn in 2024 and our assumption of RMB2.5bn. In which, RMB5.65bn was for the chemicals segment given the prolonged operating loss of the segment.

The big drop in earnings was mainly due to the earnings decline at its E&P segment and marketing segment. The operating profit of its E&P segment dropped 19% YoY to RMB45.5bn on a 13% YoY decline in realised oil price. The operating profit of its marketing segment fell 47% YoY to RMB10bn on lower domestic sales and inventory loss.

Looking ahead, we expect the company’s earnings to surge 63% YoY in 2026 as almost all segments should see improved earnings on the rise in oil price. At the very least, we expect very strong earnings for 1Q26.

However, the earnings visibility beyond 1Q26 becomes low as the blockade of Strait of Hormuz not only results in sharply higher oil cost for its refining business, but also makes it difficult for the company to secure sufficient oil supply. About 90% of crude oil input for its refining business comes from seaborne imports, with the majority of it from the Middle East. While the company tries hard to secure alternate supply, it is not easy to replace the supply of 2- 3m bbl/day in a short period of time.

Key Risks for Rating

Chinese Government subsidises the company on the loss arising from the sharp rise in cost of imported crude oil.

Better-than-expected profitability of downstream operations.

Valuation

We lower our target price for its H shares from HK$5.12 to HK$4.98 to reflect the cuts in our earnings forecasts and hence dividend forecasts. We roll over our target valuation from average 2025-27E dividend yield 5.8% to 2026-28E.

We also reduce our target price for its A shares from RMB6.34 to RMB6.00. We still base our target price on its 3-month average A-H premium which is at 41%.