Despite record crude-oil prices, Core Pacific-Yamaichi has placed a 'buy' recommendation on Zhenhai Refinery (1128), citing better-than-market performance in its core business.
Zhenhai's net profit in the first half of the year surged 143 per cent to 1.277 billion yuan, much higher than expectations. Net margin was 6.9 per cent, up 2.8 percentage points from a year ago.
Revenue grew 44 per cent to 18.58 billion yuan, driven by the increase in demand for refined oil products.
Rising oil prices are especially worrying for mainland refiners, as increases in costs cannot be passed onto customers due to price controls. Core Pacific-Yamaichi expects the central government to approve a domestic price increase next month or in October, closing the gap between domestic refining margins and international margins.
Zhenhai maintained high refining margins during the first half of the year even though its prices were frozen while crude-oil costs rose significantly, albeit the government had approved some small price hikes.
Zhenhai's oil throughput for the first half rose 30 per cent to 8.11 million tonnes. Core Pacific-Yamaichi predicts that next year, total throughput volume will rise 12 per cent to 270 million tonnes, as domestic demand for diesel, gasoline and fuel oil is soaring.
