2021 results in line with our expectation

Revenue at Shanghai Petrochemical （SPC） rose 19.5% YoY in 2021 to Rmb89.2bn, and attributable net profit grew 221.4% YoY to Rmb2.07bn （core profit was Rmb2.66bn excl. Rmb588mn provisioning for asset impairment）。 Core profit is in line with our expectation.

Net profit at synthetic fibers, resins & plastics, intermediate petrochemicals, and petroleum products recorded a loss of Rmb854mn and profit of Rmb52mn, Rmb635mn and Rmb2.97bn in 2021 （vs. a loss of Rmb364mn, profit of Rmb1.26bn and Rmb582mn and a loss of Rmb2.20bn in 2020）。 We note that only the petroleum product segment significantly improved in 2021. We attribute the expanding loss at the synthetic fiber segment to weak demand from the downstream textile sector and low run rates due to facility maintenance. We think that earnings of resins, plastics and intermediate petrochemicals declined YoY due to higher cost from rising international crude oil prices, and slower sales price rises vs. cost due to saturated downstream market supply. We think that the petroleum product segment turned around YoY, as rising international crude oil prices boosted sales prices. The dividend of Rmb0.10/sh is flat YoY with payout ratio at about 54%, in line with our expectation.

Trends to watch

Consolidation of synthetic fiber and resin & plastic businesses largely complete; loss likely to narrow significantly in the future. The loss at the synthetic fiber segment expanded Rmb490mn YoY in 2021 due to weak demand from the downstream textile sector and low run rate resulting from facility maintenance. To cut losses, SPC started consolidating the segment with the resin & plastic segment in 3Q21, and this is now largely completed. We estimate that cost of the synthetic fiber segment will drop Rmb50-100mn in 2022. The firm has been developing its carbon fiber business in recent years, and it has transformed its acrylic fiber facilities to produce carbon fiber precursor. After 2-3 years of development, we foresee synergy between synthetic fiber and new material businesses and expect loss reduction.

Operations of large-tow carbon fiber to become a highlight. The firm’s 12,000t/yr large-tow carbon fiber project is scheduled to start operations in two phases at end-2022 and end-2024, which should bring incremental profit in the next 2-3 years. SPC is one of a few domestic firms with comprehensive technologies for large-tow carbon fiber and universally recognized for its product quality.

Gross margin under pressure amid high oil prices; scheduling facility maintenance likely. The firm expects crude processing volume to fall 0.8% YoY in 2022 to 13.65mnt. As international oil prices fluctuate at highs, we expect SPC’s cost to rise and gross margin to be under pressure. Given a mild decline in crude processing volume YoY, we think that SPC will schedule facility maintenance to mitigate the negatives from high oil prices.

Financials and valuation

Given the decline in industry gross margins in 2021, we cut our 2022 and 2023 attributable net profit forecasts 44% and 34% to Rmb2.7bn and Rmb3.2bn. Given that we expect oil prices to remain high we cut A and H target prices 9% and 15% to Rmb5.0 （20x 2022e P/E） and HK$2.3 （8x 2022e P/E）。 We maintain OUTPERFORM for both A- and H-shares, which are trading at 14x and 6x 2022e P/E. Our targets offer 39% and 44% upside for A- and H-shares.

Risks

Sharp fluctuations in international oil prices; disappointing progress in carbon fiber projects.