1、Andy.MJack.LAlbert.LIn-LineMORGAN STANLEY ASIA LIMITED+Andy Meng,CFAEQUITY ANALYST+852 2239-7689Jack LuEQUITY ANALYST+852 2848-5044Albert LiRESEARCH ASSOCIATE+852 3963-3610China Energy&ChemicalsAsia PacificIndustryViewWhats ChangedFROMTOChina Energy&ChemicalsIndustry ViewAttractiveIn-LineCNOOC(0883.
2、HK)Price TargetHK$16.62HK$16.28PetroChina(0857.HK)Price TargetHK$5.89HK$5.21PetroChina(601857.SS)Price TargetRmb5.18Rmb4.60China Petroleum&Chemical Corp.(0386.HK)Price TargetHK$7.43HK$5.94China Petroleum&Chemical Corp.(600028.SS)Price TargetRmb6.54Rmb5.24Sinopec Shanghai Petrochemical Co Ltd(0338.HK
3、)Price TargetHK$3.00HK$2.74Sinopec Shanghai Petrochemical Co Ltd(600688.SS)Price TargetRmb2.66Rmb2.42China Energy&ChemicalsChina Energy&Chemicals|Asia Pacific Asia PacificCut Long-Term Oil Price toUS$60;More ConservativeDownstream AssumptionsWe downgrade our industry view to In-Line.Upstream,we cuto
4、ur long-term oil price forecast to US$60/bbl,implying noupside(spot oil is at US$64).Downstream,we expect moredownward pressure on refinery/marketing and chemicals.Ourlatest preference ranking:CNOOC PetroChina Sinopec.Both upstream and downstream,we see less positive fundamentaldevelopments,which co
5、uld cap stock performance in the next 6-12 months:Forupstream,we cut our long-term oil price forecast to US$60/bbl,implying limitedupside,since the current spot price already stands at US$64.As for downstream,we reiterate our view that chemicals are passing through a downturn whilerefineries also fa
6、ce overcapacity from the launch of several large projects.Weexpect no material turnaround within the next 6-12 months.CNOOC remains our top pick with back-to-growth strategy to unfold:Wecontinue to appreciate CNOOCs back-to-growth strategy and expect its superiorgrowth to become the key re-rating ca
7、talyst.In order to achieve such growth,webelieve CNOOC will also demonstrate its large reserve potential,the backboneof making its production sustainable.If CNOOC can achieve production andreserve expansion amid good cost control,it will create material positiveshareholder value.PetroChina is signif
8、icantly undervalued,but needs reform clarification to unlockthe hidden value:PetroChina is trading at its HK$4.20 trough level,seenpreviously when oil prices stood at just US$30.Its earnings have improvedcontinuously from the Rmb7.9bn trough in 2016 to Rmb53bn in 2018.2019eEV/EBITDA is just 3.5x,a 3
9、5%discount to the global average.Despite suchundervaluation,we dont expect any material re-rating until there is reform toremove the uncertainty on pipeline valuation,which is significant and critical toPetroChinas shareholder value.We expect the National Pipeline Company to beestablished in 3Q19,wh
10、ich is a prerequisite to remove this overhang.Sinopec is attractive on valuation,but not on fundamentals:2019e P/E iscurrently 10.2x,and P/B is 0.8x with ROE of 7%.Despite such cheap valuation,wethink the companys downstream businesses are likely to face continuouspressure its chemical business is e
11、ntering a cyclical downturn,and its refineryand marketing operations are facing more newly established competitors.Withthe lack of fundamental recovery,we maintain our EW rating on both the H-andA-shares and cut our price targets.Exhibit 1:Changes in Oil Price AssumptionsBrent(US$/bbl)201920202021LT
12、New64.961.659.660.0Old55.456.565.065.0Chg%17%9%-8%-8%Source:Morgan Stanley Research estimatesMorgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivi
13、ty ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliate
14、s are not registered withFINRA,may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1July 31,2019 09:00 PM GMT Order of PreferenceExhibit 2:Prefe
15、rences amongst the Big 3+COSL and Sinopec ShanghaiSource:Company data,Refinitiv,Morgan Stanley Research estimates;prices as of July 26,2019.2 Downgrade Industry View to In-Line;Like OFS and Would AvoidDownstream Timetable of 1H19 Results and Our PreviewChinas Big 3 Oil Majors will report their 1H19
16、results towards the end of August,and weexpect no major surprises around the earnings.We present a summary of the reportingdates and our and consensus estimates in Exhibit 3.In 1H19,Brent crude prices averagedUS$66/bbl,7%lower than US$71/bbl in 1H18;we expect 1H19 results to be mostlystable despite
17、nonrecurring items.CompanyWhats in the price?Whats the market missing?PetroChinaSinopecCNOOCSinopec ShanghaiExhibit 3:1H19 reporting timetable:China Big 3+Sinopec ShanghaiTickerCompanyReporting DatesCcyMSe%YoYConsMS vs Cons Beat/Miss0857.HKPetroChina-H8/29/2019Rmb bn271%2414%Slight Beat0883.HKCNOOC8
18、/22/2019*Rmb bn276%270%In-Line0386.HKSinopec-H8/23/2019Rmb bn29-32%290%In-Line0338.HKSinopec Shanghai-H8/20/2019Rmb bn1.2-66%1.8-33%Miss1H19 Net ProfitSource:cninfo,Bloomberg,Morgan Stanley Research estimates(e)*Not yet announced;estimated by BloombergOil price fluctuating within a range amid ample
19、supply anddemand slowdownConcerns over gas pipeline restructuringWeak competitiveness in downstreamStrong growth potential in gas businessGas pipeline reform likely to unlock the hidden valueOil price fluctuating in a range amid ample supply anddemand slowdownWeaker downstream segment earningsCheap
20、valuationDividend to remain respectableOil price fluctuating within a range amid ample supply anddemand slowdownGood cost controlRobust production growth and promising reservepotentialWeaker earnings in both refinery and chemical businessesChemical downturn unlikely to be completed in thenext 6-12 m
21、onths3CompanyKey Highlights for 1H19What to Watch for?PetroChinaSinopecCNOOCSinopec Shanghai Oil Price and Share Price Performance in 2019 YTDSince the trade tensions between the U.S.and China re-escalated in early May,concernsaround a global economic slowdown and oil demand weakness have become mor
22、eprevalent.Despite disciplined supply from OPEC countries and declining output fromIran and Venezuela,expectations for much slower growth in oil demand have drivendown the oil price since May.In consequence,share prices of Chinas Big 3 oil majors have declined by 3%on average,materially lagging the
23、17%oil price recovery YTD.Within the Big 3,CNOOC is the topperformer with an 8%positive return,while Sinopec and PetroChina haveunderperformed with-6%and-12%returns,respectively.Oil price 7%lower vs.1H18Gas business likely to improve YoYGas import lossRealized oil price and cost profileUpstream prod
24、uction growthRefinery,marketing and chemical segments likely toshow no improvementRefinery marginMarketing EBITDividend announcementAll-in cost to remain stableProduction plan on trackRealized oil price and cost profileProduction and capex executionEarnings likely to miss consensus due to weakerchem
25、ical segmentChemical EBITRefinery margin4 Oil Price Forecast UpdatesAs the oil price has recovered from 4Q18(Exhibit 6),the forward curve has shifted toBackwardation from Contango since the end of January 2019.However,the oil price hasweakened since May due to concerns on the global oil demand outlo
26、ok,so we haveseen a downward shift of the forward curve for Brent since May.Exhibit 4:China Big 3 share price performance vs.major indices and the oil price,2019 YTD8595105115125135145BrentMSCI ChinaCNOOCMSCI Asia x JpnIndexMSCI World EnergyMSCI Asia x JpnEnergySinopecPetroChina17%12%10%8%8%4%-6%-12
27、%-20%-10%0%10%20%BrentMSCI ChinaMSCI Asia xJpn IndexCNOOCMSCI WorldEnergyMSCI Asia xJpn EnergySinopecPetroChinaSource:Refinitiv,Morgan Stanley ResearchExhibit 5:World Energy stock performance,2019 YTD67%53%50%23%20%19%16%15%11%10%9%8%8%7%5%4%4%4%3%3%-1%-2%-3%-3%-5%-6%-8%-10%-12%-12%-15%-20%-10%0%10%
28、20%30%40%50%60%70%80%APC.NGAZPq.LHES.NPBR.NNVTKq.LEC.NLKOHyq.LCVX.NRELI.NSXOM.NRDSb.LCNOOCROSNq.LSU.TOIMO.TOBP.LTOTF.PAPTT.BKENI.MICNQ.TOCXO.NREP.MCONGC.NSCOP.NMRO.NSinopecMUR.NCLR.NEQNR-OSPetroChinaOXY.NWorld Energystock performance%-2019 YTDSource:Refinitiv,Morgan Stanley Research5As the 2019-21 o
29、il price assumptions we model are benchmarked to the latest Brentforward curve(Exhibit 7),we revise up our oil price assumptions for 2019 and 2020 by17%and 9%,respectively,while cutting our 2021 assumption by 8%relative to our lastpublished model(Exhibit 8).The latest forward curve suggests oil pric
30、es of US$64.9/bblin 2019,US$61.6/bbl in 2020 and US$59.6/bbl in 2021.We also cut our long-term oilprice assumption to US$60/bbl from US$65/bbl,consistent with our global oil pricestrategists latest view(The Oil Manual:OPEC:Fighting an Uphill Battle(2 Jul 2019)Exhibit 6:Brent forward curve has shifte
31、d to Backwardation555759616365676971Sep-19Sep-20Sep-21Sep-22Sep-23Sep-24Brent Future Price(US$/bbl)7/23/20197/12/20197/5/20196/28/20195/3/2019Source:Bloomberg,Morgan Stanley ResearchExhibit 7:Brent forward curve,July 23,201955.057.059.061.063.065.067.069.071.073.0US$/bbl2019E2020EBrent Future Price2
32、021ESource:Bloomberg,Morgan Stanley Research estimates.Note:Jan-July 2019 are historical prices.Exhibit 8:Changes in oil price assumptionsBrent(US$/bbl)201920202021LTNew64.961.659.660.0Old55.456.565.065.0Chg%17%9%-8%-8%Source:Bloomberg,Morgan Stanley Research estimates6 Downgrade Industry View to In
33、-Line;Like OFS,Would AvoidDownstreamWe downgrade our industry view to In-Line,as we see less positive developments in thefundamentals,potentially capping stock performance in the next 6-12 months.Forupstream,as we cut our long-term oil price forecast to US$60/bbl,this implies limitedupside,given tha
34、t the spot price currently stands at US$64.As for downstream,wereiterate our view that the chemicals business is passing through a downturn while thereis overcapacity risk in refinery and marketing since the launch of several large projects(Hengli and Zhejiang).Within our coverage universe,we like t
35、he oilfield services(OFS)group,as China willlikely maintain robust capital spending in the next 2-3 years to boost domesticproduction and ease the pressure from rising reliance on imports.Thanks to resilientupstream spending,we expect most oilfield services companies to achieve ongoingearnings recov
36、ery in 2019-2021.For more details regarding our view on the OFS group,please refer to Oilfield Services:1H19 Preview:Strong Recovery to Come(17 Jul 2019)and Oilfield Services:Shale Oil Revolution in China?(18 Feb 2019).Regarding downstream,including refinery,marketing and chemicals,we maintain anega
37、tive bias.For refinery and marketing,we believe that Chinas EV+HSR(electricvehicles+high-speed rail)program is likely to become a disruptive force for product oildemand.In light of a weaker growth outlook for product oil demand but a more seriousovercapacity issue,we expect the refinery and marketin
38、g businesses to face toughercompetition in the next 2-3 years.For more details,please refer to Disruption Decoded:EVs+HSR:A Disruptive Force For China Oil Demand(5 Mar 2019).On chemicals,we think the industry will face a cyclical downturn from 2019 onwardafter four consecutive years of resilience.Ch
39、emical demand growth is likely todecelerate from 2019 while the supply should accelerate in both the PX and PEsegments,making it likely that chemical margins will turn negative starting this year.Formore details regarding our negative view on chemicals,please refer to China Energy&Chemicals:Turning
40、Bearish on Commodity Chemicals(2 Dec 2018).Exhibit 9:OFS versus MSCI World Energy Relative Performance4090140190240290340390440490540590640690OFS avgBrentMSCI World EnergyOFSvs.MSCI World Energy Relative Performance2009:BrentOFSMSCIWorld Energy2010:BrentOFSMSCIWorld Energy2016-now:Brent MSCIWorld En
41、ergy OFS2012 to Sept-14:OFSMSCI World EnergyBrentJul-14 to Jan-16:OFSMSCI World EnergyBrent2011:BrentMSCI WorldEnergyOFSUpcycleDowncycleOFSvs.MSCI World Energy Relative PerformanceRecovery54%15%43%BrentMSCIOFS72%32%47%BrentMSCIOFS-13%-14%-25%Brent MSCIOFS-8%22%162%BrentMSCIOFS-71%-46%-35%BrentMSCIOF
42、S122%26%3%BrentMSCIOFSSource:Refinitiv,Morgan Stanley ResearchNote:OFS performance based on our coverage.7Exhibit 10:Singapore GRM-50510152025Dubai Crack Sin Ref.Margin U$/BBLSingapore gasoline crack marginSingapore gasoil/diesel crack marginUS$/bblSingapore GRM-Gasoline vs.DieselSource:Bloomberg,Re
43、finitiv,Morgan Stanley ResearchExhibit 11:Sinopec GRM vs PetroChina and Singapore GRM(2)-24681012141Q132Q133Q134Q131Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q174Q171Q182Q183Q184Q181Q19GRM Comparison(US$/bbl)SinopecadjustedrefiningmarginPetroChinaAdjustedRefiningMarginSingaporeGRMSourc
44、e:Company data,Morgan Stanley Research estimatesExhibit 12:Sinopec Chemical EBIT20406080100120140(3,000)(2,500)(2,000)(1,500)(1,000)(500)-5001,0001,5002,0002,5001Q043Q041Q053Q051Q063Q061Q073Q071Q083Q081Q093Q091Q103Q101Q113Q111Q123Q121Q133Q131Q143Q141Q153Q151Q163Q161Q173Q171Q183Q181Q19US$/bblRmb/tonS
45、inopec Chemical EBIT vs.BrentSinopec Chemical EBIT per ton(LHS)Brent(RHS)Source:Company data,Morgan Stanley ResearchExhibit 13:Sinopec Shanghai Chemical Gross Profit-20406080100120(3)(2)(1)-12341H032H031H042H041H052H051H062H061H072H071H082H081H092H091H102H101H112H111H122H121H132H131H142H141H152H151H
46、162H161H172H171H182H18US$/bblRmb bnSinopec Shanghai Chemical Gross Profit vs BrentChemical Gross Profit(LHS)Brent(RHS)Source:Company data,Morgan Stanley Research8 CNOOC:More Growth Potential from Increasing ReservesAdhering to its production targets and Back to Growth strategyExploration for more re
47、serves is one of the key tasks at hand for CNOOC,and risingreserves should eventually contribute to a production boost.In January this year,CNOOC revised up its production guidance for 2019 and 2020 and guided for furthergrowth in production in 2021(Exhibit 14);this implies a 2018-21 production CAGR
48、 of4.4%.Moreover,during the 2018 results briefing,management set a longer-termproduction target of 2mn bpd in 2025.This represents a roughly 6.6%CAGR from 2018,on our estimates,and a further 30%increase after 2021.CNOOC has been strengthening E&P activities to support accelerated productiongrowth as
49、 well as a healthy reserve life.In 2018,five new projects,including Weizhou 6-13 oil field in the South China Sea has commenced production and contributed to thetotal production volume.In 1Q19,another two projects have also come on stream forproduction.While there was almost no production growth in
50、1Q19,CNOOC is confidentof achieving its full-year production target of 480-490mn boe for 2019,implying 1-3%YoY growth vs.that in 2018.We continue to appreciate CNOOCs back-to-growth strategy and expect such superiorgrowth to become the key re-rating catalyst.Best Cost Control among its peersCNOOC wa
