We are maintaining our Neutral recommendation on Sinopec Shanghai Petrochemical Company Limited (SHI) with a target price of $42.
Sinopec Shanghai, one of China’s largest petrochemical companies, is poised to benefit from the country’s continuous demand growth and its strategic positioning in a fast growing economy. We also like Sinopec Shanghai’s unique vertically integrated business model, whereby the company can use its intermediate petrochemicals in manufacturing downstream products. Additionally, we expect the company to benefit from the improvement in the petrochemical market by way of demand stability.
However, we are concerned by the challenging overall environment for refining margins and volumes. Weak demand for refined products in the global downturn and increased capacity has squeezed margins throughout the industry. The rising crude oil prices also negatively impacted the company’s margins by increasing the cost of oil it buys to make refined products.
Considering these factors, we do not anticipate a significant upside and expect Sinopec Shanghai to perform in line with the broader market.
Established in 1993, Sinopec Shanghai is one of the largest petrochemical enterprises in China. The company’s principal activity involves the processing of crude oil into petrochemical products for sale.
Sinopec Shanghai’s highly integrated petrochemical complex processes crude oil into a wide range of synthetic fibers, resins and plastics, intermediate petrochemicals and petroleum products. A significant portion of its products are sold in the Chinese domestic market. Sinopec (SNP), a state-owned entity, currently holds a majority stake of 55.56% in Sinopec Shanghai.
The company operates in five segments: Petroleum Products, Resins and Plastics, Intermediate Petrochemical Products, Synthetic Fibers and Other, which accounted for 40%, 26%, 18%, 6% and 10%, respectively, of its fiscal 2009 net sales.
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