Since Q4 ‟08, CNOOC and PetroChina shares have risen by > 100%, outperforming Sinopec by 59% and 32% respectively. This was fueled by a bullish crude oil price outlook on the back of global economic recovery. However, we believe that this performance gap is looking increasingly unjustified.
Fundamentally, we believe that Sinopec‟s strong earnings outlook in 2010e and 2011e is not reflected in share price, largely as a result of the market‟s misconception on domestic oil product pricing. Sinopec currently trades at consensus P/E multiples of 8x for 2010e and 7.5x for 2011e (even lower on our numbers), while CNOOC and PetroChina look fairly valued, despite having a similar earnings CAGR.
On the trading front, owning CNOOC appears to be seen as a proxy for rising oil prices but the stock looks increasingly over-owned. The risk of taking on the “obvious long” is that share price momentum will slow as the room for further upside shrinks and that if sentiment turns and oil prices fall, CNOOC will be exposed to the biggest share price downside.
We recommend that investors rotate from fairly valued CNOOC and PetroChina into a better-valued Sinopec. We initiate on Sinopec with a 3 star Buy rating and price target of HKD10.10 (49% upside).