PetroChina’s net profit grew 5% YoY to RMB45.7bn in 1Q24, 6% below our forecast. The discrepancy mainly came from the lower-than- expected earnings of its refining operations. Looking ahead, we expect the company to see stronger earnings QoQ in 2Q24 on higher oil price. We adjust our 2024-26 earnings forecasts by -0.9% to +3.3% after updating our model with its 1Q24 results and annual report. We reiterate our BUY call with target price of its H shares raised to HK$7.80.

Key Factors for Rating

The operating profit of its refining business dropped 26% YoY to RMB7.0bn, 37% below our forecast. The miss was mainly due to the lower-than-expected refining margin. Crude oil processing volume actually grew 8% YoY.

Most other segments showed improved profitability. In which, the operating profit of oil, gas and new energies segment grew 5% YoY to RMB43.0bn in 1Q24 as the 2% YoY fall in lifting cost, 3% YoY increase in oil and gas output and the depreciation of RMB overwhelmed the 1% YoY drop in realised oil price. The operating profit of the natural gas marketing segment surged 22% YoY to RMb12.3bn on 8% YoY growth in domestic sales volume, 4% YoY increase in ASP and RMB1.3bn YoY reduction in the loss on imported gas.

We expect the company to see higher earnings in 2Q24 on a QoQ basis as average oil price is likely to be higher as long as it can stabilise at the current level. Although natural gas marketing segment should see lower profit owing to seasonality, the upstream segment is still the dominant profit earner.

The -0.9% to +3.3% changes in our 2024-26 earnings forecasts mainly reflect the changes in finance costs. The company’s H shares offer about 6.5% dividend yield for coming three years, which is still attractive.

Key Risks for Rating

Sharp fall in oil price.

Lower-than-expected profit of downstream operations.

Valuation

We increase our SOTP NAV from HK$12.41 to HK$12.75 mainly on lower-than- expected net debt. We increase our target price for its H shares from HK$7.06 to HK$7.80 as we raise our target valuation from 1.5x standard deviation above mean to 2x (now at 38.8% discount vs 43.1% previously) in terms of 5-year rolling share price discount to our SOTP NAV.

We also raise our target price for its A shares from RMB10.11 to RMB11.19. We still set our target price at its 3-month average A-H discount which has remained at 55% since late March 2024.