Sinopec Engineering Group (2386.HK)： Key takeaways from 2017 results

机构：中金公司

评级：BUY

目标价：9.70港元

Recurring profit in line with expectation

Sinopec Engineering Group (SEG) announced FY17 results: Revenue down 8% to Rmb36.2bn; reported earnings down 32% to Rmb1.13bn (Rmb0.26/sh) but up 16% to Rmb1.9bn (vs our Rmb2.0bn forecast) excluding one-off items such as a Rmb666mn forex loss and Rmb96mn in receivables provisioning. Dividend payout ratio rose to 79%; DPS of Rmb0.20 implies yield of more than 3% based on today’s close. Management is confident payout ratio will remain above 40%.

Trends to watch

New order target for FY18 appears conservative. Management is targeting new contracts worth more than Rmb48bn in FY18, with Rmb38bn from domestic projects, including Rmb19.6bn from the newly announced Zhongke integrated refining and petrochemical project. We are more optimistic and believe SEG can win Rmb55– 60bn worth of orders.

LNG potential. Management believes SEG will benefit from the ongoing natural gas boom. In particular, Sinopec has a series of LNG projects, including a new terminal in Wenzhou (Zhejiang Province), a capacity expansion project for the Tianjin receiving terminal, and the Alaska LNG project in the US. Investment from private players in gas storage facilities in China are also potential new revenue sources.

Margin trends also positive. As higher margin domestic projects may dominate revenue booking in FY18 and FY19, management expects gross margin to improve from 2H17’s low. Cost cutting may further enhance net margin.

Earnings forecast

We maintain our earnings forecasts.

Valuation and recommendation

The stock is trading at 8x 2019e P/E. We maintain our target price of HK$9.7 (10x 2019e P/E) and BUY rating.

Risks

Project delays, less than expected clients, FX risks