Why the Sinopec stock price finally looks poised for outperformance

The sell-off surrounding Chinese stocks offers investors an opportunity to buy quality companies at a cheaper valuation. One such undervalued stock is Sinopec Shanghai Petrochemical (SHA: 600688) which is a holding subsidiary of China Petrochemical

Sinopec is one of the largest refining-chemical integrated petrochemical companies in China and an important manufacturer of refined oil products as well as intermediate petrochemical products, synthetic resins, and synthetic fibers in the country.

The company has a crude oil processing capacity of 16 million tons per year while its organic chemicals production capacity stands at 4.28 million tons each year.

Due to a subdued pricing environment in the past decade, shares of Sinopec have gained just 7.5% since January 2012, underperforming the broader indices by a wide margin. However, rising crude oil prices and a rotation in market preferences – from growth to cyclicals – have meant the stock has surged over 20% in the last six months.

Further, it offers investors a tasty dividend yield of 6.9%, making it attractive for those seeking a passive income stream.

What impacted the Sinopec stock price in 2021?

In the first nine months of 2021, the world economy staged a rebound as lockdown restrictions were relaxed and vaccination rollouts gained pace. China’s economy registered a GDP growth of 9.8% year over year in this period and expanded by almost 5% in Q3 of 2021. This coupled with rising oil prices which were up 66% as well as demand for natural gas positively impacted the top-line for Sinopec.

Further, domestic demand for refined oil products recovered at a steady pace while demand for major chemicals also experienced an uptick. Amid a robust demand and pricing environment, Sinopec focused on expanding its markets and lowering costs, allowing it to increase net income by 150% year over year in the first three quarters of 2021.

Sinopec which is Asia’s largest oil refiner expects natural gas prices to surge by 20% in Q4 due to peak winter heating demand and surging import costs, according to a report from Reuters. In the first three quarters of the year, gas sales prices were already higher by 17.4%.

The natural gas demand arising out of China is forecast to increase by 10% in Q4 as households in the country are shifting away from coal.

Long-term contract signed with Venture Global LNG

Sinopec recently signed a 20-year LNG (liquified natural gas) contract with a U.S.-based LNG producer and exporter Venture Global LNG to purchase 4 million tons of LNG each year. According to agreement terms, Venture Global will supply LNG from its Louisiana plant while Sinopec will purchase LNG resources totaling 3.8 million tons annually. 

Sinopec President, Ma Yongsheng explained, “Sinopec has been vigorously promoting the high-quality development of the natural gas business and improving clean energy supply guarantee capabilities to continuously build a better life.

“The LNG contract with Venture Global LNG reflects the two companies’ high consensus on supporting the global energy transformation and realizing the “dual carbon” goals of reaching peak carbon and achieving carbon neutrality.”

We can see that the Sinopec stock price could be poised to benefit from rising commodity prices and higher demand for natural gas which should impact its top-line positively in the near term.

Read Asia Markets’ guide on how to buy Chinese stocks from the U.S.