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Eric Ng

Two of China's most significant businesses are expected to post sharply higher profits next week.

Sinopec, China's second-largest oil company, and China Southern Airlines are expected to report higher net profits for last year compared with 1999.

Sinopec, which has integrated operations in oil exploration, refining and distribution, is forecast to report net profit of 17.74 billion yuan (about HK$16.62 billion), slightly above a forecast of not less than 17.05 billion yuan in its listing prospectus.

The consensus forecast is 279 per cent higher than 1999 profit of 4.67 billion yuan. However, the company, which has higher exposure to downstream oil refining and marketing activities than upstream production compared with rival PetroChina, is facing an increasingly cloudy earnings outlook amid the global economic slowdown, analysts said.

Weaker demand has already depressed prices and profit margins for refined-oil products such as plastic, diesel and kerosene since late last year.

Theoretically, if the prices of crude oil processing companies' refined oil products move in tandem with crude oil prices, their profit margin should not suffer.

But that only applies when demand for refined products is steady. In periods of economic slowdown, weakening demand would bite into profit margins.

HSBC Securities analyst Gordon Kwan said in a research note earlier this month that Sinopec's 'diminishing earnings visibility supersedes attractive valuation'.

Mr Kwan said weaker-than-expected product demand this year had already been manifested in subsidiary Sinopec Zhenhai Refining & Chemical's capacity utilisation of 66 per cent in February, down from 89 per cent a year earlier.

Yesterday, Zhenhai and sister company, plastic-producer Beijing Yanhua Petrochemical, reported respective net profits of 420.77 million yuan and 347.75 million yuan last year, 6.9 per cent and 18.7 per cent lower than Multex Global Estimates' consensus forecast.

Elsewhere, management at Jilin Chemical, a subsidiary of competitor PetroChina's parent China National Petroleum Corp, also indicated earlier this week the company's crude oil processing volume had dropped 100,000 tonnes, or about 10 per cent year on year, in the first quarter.

However, the firm's oil production operations, which enjoyed buoyant oil prices throughout last year, should mitigate part of the refining profit-margin woes.

Salomon Smith Barney analyst Thomas Hilboldt said in a research note earlier this week that he expected Sinopec's refining operation to post a small loss and its oil production operation would account for 75 per cent of cash flow.

Meanwhile, analysts expected China Southern Airlines to post a sharp rise in net profit for last year.

Multex forecast a net profit of 542.43 million yuan last year, up 558 per cent from 82.4 million yuan in 1999.

Like fellow carrier China Eastern Airlines, the company's profitability was affected by sharply higher jet fuel prices last year but both are expected to receive cost-pressure relief this year in line with the expected fall in oil prices.

However, their performance diverged in the first two months of this year, during which China Southern registered 8.3 per cent year on year passenger traffic growth while China Eastern managed growth of only 1.4 per cent, according to research reports by BNP Paribas Peregrine.

China Eastern reported a disappointing net profit of 175.53 million yuan for last year which, although 108 per cent higher than 1999, was only about half the market's expectation.

Both airlines are expected to benefit from industry restructuring which will merge seven carriers controlled by industry regulator Civil Aviation Administration of China into three pillar carriers - China Southern, China Eastern and unlisted Air China.



Sinopec looks at twofold increase while China Southern Airlines predicts 558pc climb