Key takeaway

In 1Q26, SINOPEC CORP. posted a sharp earnings increase. The core driver was the US-Iran conflict, which pushed crude oil and refined product prices significantly higher and led to a substantial improvement in refining margins. In Q2, the upstream and chemical segments are expected to improve as crude oil prices rise and chemical product restocking begins. Going forward, strict control of domestic refining capacity combined with capacity exits in Europe, Japan, and South Korea will bring a cyclical inflection point for the refining and chemical industry. Meanwhile, the USIran situation has exposed weaknesses in overseas supply chains, highlighting the stability of China's petrochemical supply chain. This creates an opportunity for the value revaluation of highquality domestic major petrochemical assets.

Event

SINOPEC released its 1Q26 report, achieving revenue of RMB706.70bn, down 3.9% YoY, and net profit attributable to shareholders of the parent company of RMB17.01bn, up 28.2% YoY.

Quick Take

Upstream: cost optimization and stable earnings. In terms of production, the company achieved oil and gas equivalent output of 131.5 million barrels in 1Q26, up 0.4% YoY. In terms of pricing, the company's realized crude oil price was USD71.7 per barrel, up USD0.2 per barrel YoY, and the realized natural gas price was USD8.7 per thousand cubic feet, down USD0.7 per thousand cubic feet YoY. In terms of cost, the company's oil and gas cash operating cost was RMB728.0 per ton, down 0.5% YoY. In terms of profit, the upstream segment achieved operating profit of RMB11.81bn, up 0.7% YoY.

Refining: refined product output rose to secure supply, and earnings surged. In terms of production, to ensure resource supply for the industrial chain in 1Q26, the company's refined product output increased slightly YoY. Gasoline, diesel, and kerosene output reached 38.06 million tons, up 2.3% YoY, but chemical light feedstock output fell 12.6% YoY to 9.90 million tons. In terms of cost, the refining cash operating cost fell 1.6% YoY to RMB206.7 per ton. In terms of profit, due to front-loaded crude costs, the company's refining margin rose 82.3% YoY to USD11.3 per barrel, and the segment's operating profit reached RMB18.40bn, up 828.1% YoY.

Chemicals: dynamic adjustment of plant utilization rates and structural product adjustments. In terms of production, in 1Q26, the company's output of ethylene, synthetic resin, and synthetic rubber was 3.553 million tons, 5.138 million tons, and 0.380 million tons, respectively, down 8.0%, 9.5%, and 7.5% YoY. Output of synthetic fiber monomers and polymers, and synthetic fiber was 2.838 million tons and 0.297 million tons, respectively, up 9.3% and 1.4% YoY. On the cost side, the company's fully-loaded chemical unit cost was RMB1,230/ton, up 3.1% YoY. On the profit side, the segment's operating profit was -RMB1.51bn, with the loss widening slightly YoY.

Tightening domestic refining capacity and exits from Europe, Japan, and South Korea may herald a cyclical turning point for the industry. On the domestic front, in 2025, seven ministries including the Ministry of Industry and Information Technology issued the Work Plan for Stable Growth of the Petrochemical and Chemical Industry (2025-2026), which mandates strict control over new refining capacity, a reasonable pace for new ethylene and paraxylene capacity additions and releases, and priority support for upgrading legacy petrochemical facilities, industrialization demonstration of new technologies, and existing refinery-to-chemicals transformation projects. Overseas, squeezed by narrowing margins in recent years, global petrochemical industry capex has continued to decline, and capacity in Europe, Japan, and South Korea has kept exiting. Against the backdrop of tightening domestic policy and overseas capacity exits, the transformation and upgrading of the refining and chemical industry is likely to accelerate, and the company, as China's largest refining and chemical enterprise, stands to benefit substantially.

The US-Iran situation exposes the fragility of overseas supply chains, benefiting China's major petrochemical assets. In early 2026, amid disruptions from the US-Iran situation, the Strait of Hormuz was blocked. The heavy reliance of Japan, South Korea, and Southeast Asia on Middle Eastern crude led to largescale refinery production cuts and shutdowns, exposing the fragility of the region's petrochemical supply chain. In the short term, the rapid rise in oil prices will pressure refinery costs and could accelerate capacity exits in Europe, Japan, and South Korea. In the long term, the exposure of Southeast Asia's supply chain fragility will slow the pace of capex and potentially decelerate industrialization. China's crude procurement is diversified, giving it a clear advantage in supply chain stability, and the value of its major petrochemical assets is likely to be re-rated.

Investment recommendation: Considering that the refining and chemical industry is at a cyclical turning point, the eruption of the US-Iran situation will accelerate overseas exits, and the phase-out of domestic legacy smallscale capacity is also expected to gradually advance under the push against involution, the company is steadily advancing its refinery-to-chemicals transformation and is poised to benefit substantially in the future. We forecast the company's 2026-2028 net profit attributable to shareholders of the parent company at RMB44.06bn, RMB58.05bn, and RMB62.27bn, respectively. At the current market cap, the corresponding PE is 14.7x, 11.2x, and 10.4x, respectively. We maintain our "Buy" rating.

Risks:

1. Crude oil price fluctuation risk: The company has a high dependence on imported crude oil. International oil prices are influenced by geopolitics, global supply-demand dynamics, USD exchange rates and other factors, resulting in severe volatility that is difficult to predict. A sharp rise in oil prices will push up raw material costs for the refining and chemicals business, squeezing gross margin. A sharp decline in oil prices will shrink profitability in the upstream exploration and production segment. The company's integrated structure cannot fully hedge against two-way fluctuation shocks, putting earnings stability under pressure.

2. Downstream demand weakness and overcapacity risk: Macroeconomic recovery is falling short of expectations. Refined oil product demand continues to face pressure from the rising penetration rate of new energy vehicles, and gasoline demand has already entered a downward trajectory. The chemicals segment is confronting structural overcapacity. Large-scale refining and ethylene capacity is being commissioned in a concentrated manner domestically, and generic chemical products are in oversupply, with prices remaining at low levels. The profitability recovery of the chemicals business lacks momentum.

3. Energy transition and policy compliance risk: The global energy transition is accelerating, and the trend of new energy substitution is clear. Over the long term, this will squeeze the market space for the traditional oil and gas business. As the dual carbon policy continues to advance and controls on environmental protection, energy consumption and carbon emissions tighten, the company must keep increasing environmental investment and low-carbon transition capital expenditure. This will raise operating costs in the short term, and if the transition progresses more slowly than expected, long-term competitiveness will be weakened.

4. Market competition and financial pressure risk: Private refining and chemical enterprises continue to disrupt the market with low-cost capacity, and intensifying industry competition is putting pressure on the company's product gross margins. The company's asset-liability ratio remains at a relatively high level. Under an assetheavy model, capital expenditure is sizable. If profitability remains persistently weak, the company may face asset impairment risk, and there is also a possibility that the high dividend payout ratio policy could be adjusted downward.