The first sector I am going to break-out is the Chinese energy sector, primarily because this sector has the highest market cap of all the sectors I outlined in my last piece. There are 5 Chinese and HK ADRs withing the energy sector: PetroChina (PTR), Sinopec (SNP), CNOOC (CEO), Yanzhou Coal Mining (YZC), and Gushan Environmental Energy (GU).
Chinese & HK Energy Sector ADRs
Source: Bloomberg, analyst targets are an average provided by Bberg &for reference only
The Companies:
PetroChina (PTR, Neutral): PetroChina Company Limited explores, develops, and produces crude oil and natural gas. The Company also refines, transports, and distributes crude oil and petroleum products, produces and sells chemicals, and transmits markets and sells natural gas. All of PTR’s oil and gas production and reserve facilities are located within China.
(Bloomberg)
PTR’s outlook in a nutshell: China’s continued strong economic growth should support increased demand for natural gas and petroleum products. However, domestic production of crude oil and natural gas has not and will not be able to keep up with the demand for refined energy products. This means PTR and other energy companies will have to rely more heavily on imported energy products. Currently, China imports roughly 50% of its crude oil, and we anticipate this percentage will rise, as China is now a net importer of oil. One of the catalysts behind the pickup of energy imports is the government’s oil tax rebate which rebates 75% of the 17% VAT tax on crude imports, and a full discount on the importation of gas and diesel. Currently, it appears this discount will stay in place through 3Q08, but it will be important to watch. It is likely that without these imports China could face more significant domestic energy shortages. All in all we believe that PTR’s margins will continue to come under pressure, and the ADR has limited upside, especially verses other ADR plays. With this said however, we believe PTR is in the better position than SNP. The reason being PTR holds the majority in both domestic crude oil and natural gas production. (Expected Q208 Earnings Report 8/21/08)
Events which could improve outlook:
- Slowdown in global oil prices.
- Increase in domestic price caps in gas.
- New oil field discoveries.
Events which could deteriorate outlook:
- Sharp rise in global oil prices.
- End to energy import tax rebate.
- New or stronger government regulations which could increase PTR’s cost.
PTR vs. Hang Seng
Source: Bloomberg
Sinopec (SNP, Underperform): China Petroleum and Chemical Corporation (Sinopec) explores for and produces crude oil and natural gas in China. The Company also owns refineries that make petroleum and petrochemical products such as gasoline, diesel, jet fuel, kerosene, ethylene, synthetic fibers, synthetic rubber, synthetic resins, and chemical fertilizers. In addition, Sinopec trades petrochemical products. SNP is currently China’s largest oil refiner.(Bloomberg)
SNP’s outlook in a nutshell: Like PTR, Sinopec is expected to face difficultly due to high oil prices compressing margins. Unlike, PTR however, SNP is much more vulnerable to the current government tax reductions for crude importation; SNP currently imports roughly 80% of the crude oil it refines. Good news for SNP is that it appears the VAT reductions should remain in place through Q3, but any changes to that could significantly impact SNP’s bottom line.
