Sinopec’s earnings surged 27% YoY to RMB17.7bn in 1Q26 under IFRS. Refining segment was the key growth driver with operating profit jumping 6.7x YoY to RMB18.8bn, partly helped by an RMB6.3bn inventory gain. However, the company’s earnings outlook is highly uncertain in 2Q26. Refining profit is likely to fall QoQ as the high oil price started to hit and domestic prices of gasoline and diesel were not raised proportionally. While we raise our 2026-27 earnings forecasts by 4-8%, we reiterate our HOLD calls at this stage.

Key Factors for Rating

NDRC raised the domestic prices of gasoline and diesel by 24% and 26% in two rounds of price increase in March after the Middle East war started. However, the crude oil with increased prices from the Middle East and Africa did not hit its cost until 6-8 weeks after the increase in spot oil price. Hence, the company enjoyed abnormally high refining margin in 1Q26, especially in March. In fact, the company reported refining margin surged 82% YoY to US$11.3/bbl in 1Q26.

Its operating profit of its E&P segment somehow dropped 4% YoY to RMB12.4bn in 1Q26. While its realised oil price was basically flat, the appreciation of RMB vs US$ hurt its revenue in RMB terms but most of its costs are in RMB.

The company booked an RMB8.6bn inventory gain in 1Q26, with RMB6.3bn in the refining segment and RMB1.8bn in the chemicals segment.

Its earnings outlook is highly uncertain in 2Q26. Its refining margin should drop significantly as the oil cost should rise substantially. On top of higher spot price, shipping cost and insurance also surged by US$10/bbl. While NDRC raised the domestic prices of gasoline and diesel by RMB1,580/tonne and RMB1,515/tonne in total in two rounds in late March and early April, the increments were only equal 53% and 52% of the theoretical values under the price adjustment formula. We estimate the loss in revenue to be RMB11.9bn.

Key Risks for Rating

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

Better-than-expected profitability of downstream operations.

Valuation

We raise our target price for its H shares from HK$4.98 to HK$5.19 to reflect the increases in our earnings forecasts. Our target valuation remains 5.8% 2026- 28E average dividend yield.

We also lift our target price for it’s a shares from RMB6.00 to RMB6.48. We still base our target on its 3-month average A-H premium which has expanded from 41% to 43% since late March.