Oil prices & refining

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Rating

Hold

Asia China Energy Oil & Gas

Company

Sinopec

Date

3 July 2012

Forecast Change

Oil prices & refining

Reuters Bloomberg Exchange Ticker

0386.HK 386 HK HKG 0386

Forecasts And Ratios

Year End Dec 31 2010A 2011A 2012E 2013E 2014E

Sales (CNYm) 1,913,182.0 2,505,683.4 2,570,952.9 2,665,125.0 2,837,916.4 EBITDA (CNYm) 164,227.0 169,346.4 161,372.2 180,860.5 196,772.2 DB Net Profit (CNY) 71,800.0 73,035.8 62,429.0 71,783.5 78,649.9

DB EPS FD(CNY) 0.83 0.84 0.72 0.83 0.91

OLD DB EPS FD(CNY) 0.87 0.84 0.87 1.02 1.13

% Change -4.3% -0.3% -16.9% -18.4% -19.8%

PER (x) 6.9 7.6 7.8 6.8 6.2

EV/EBITDA (x) 4.3 4.6 4.8 4.6 4.4

DPS (net) (CNY) 0.21 0.30 0.26 0.29 0.32

Yield (net) (%) 3.7 4.7 4.6 5.2 5.7

Source: Deutsche Bank estimates, company data

Reducing ... estimates and target price

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.

Price at 3 Jul 2012 (HKD) 6.87 Price target - 12mth (HKD) 7.65 52-week range (HKD) 9.63 - 6.45

HANG SENG INDEX 19,736

David Hurd, CFA Research Analyst (+852) 2203 6242 [email protected]

Grace Lee Research Associate (+852) 2203 8267 [email protected]

Key changes

Price target 8.61 to 7.65 ↓ -11.1%

Sales (FYE) 2,707,877 to 2,570,953

↓ -5.1%

Op prof margin (FYE)

4.1 to 3.7 ↓ -10.1%

Net profit (FYE)

75,104.6 to 62,429.0

↓ -16.9%

Price/price relative

5.0 6.0 7.0 8.0 9.0 10.0

7/10 1/11 7/11 1/12

Sinopec

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute 0.1 -18.9 -12.3

HANG SENG INDEX 6.3 -5.1 -11.9

DB has lowered its oil price forecasts 2012-15. On the back of lower oil prices, we have also lowered our earnings estimates and target price for Sinopec (SNP). In our previous model we turned around 2011 refining losses in 3-years.

In this model we assume a 5-year turn-around period. We see no progress on refining policy issues in China. We have cut back a bit on our chemical estimates 2013-15, modeling only a modest pick-up relative to 2012e. Hold on balanced risk/reward.

Below consensus oil price forecasts

We have lowered our Brent & WTI oil price estimates. Our new Brent estimates (2012-15) are: US$ 106.6/ bbl; US$ 104/ bbl, US$ 110 and US$ 110 for our terminal 2015e oil price. Our previous estimates were US$ 117.5, US$

120, US$ 125 and US$ 125/ bbl respectively. Bloomberg consensus figures for Brent 2012-15e are US$ 115, US$ 115, US$ 113 and US$ 117.50/ Brent.

Investment thesis

Our SNP investment thesis remains unchanged. We are skeptical of market- based oil product price reforms in China. As for SNP Group asset injections, we question 1) where the cash will come from to pay for acquisitions, and 2) why SNP Group would burden SNP Corp with more development Capex (Brazil) but only intermediate term (2014-16) associated production growth. We maintain our Hold rating on balanced SNP risk/reward.

Valuation/Risk/Reward headline

We value Sinopec from a DCF model. Our WACC is 6.7% which consists of a CoE of 7.6% and an after tax CoD of 4.1%. We use a DB standard China Rfr of 3.1% and ErP of 5.8%. Our TG rate is 1.5% which we believe is SNP’s LT production growth capacity. The principal risks to our Hold rating include: 1) higher / lower than anticipated oil prices; 2) policy changes different from those articulated in this report; and 3) short term E&P asset injections.

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Page2 Deutsche Bank AG/Hong Kong Model updated:03 July 2012

Running the numbers Asia

China Oil & Gas Sinopec

Reuters: 0386.HK Bloomberg: 386 HK

Hold

Price (3 Jul 12) HKD 6.87

Target Price HKD 7.65

52 Week range HKD 6.45 - 9.63

Market Cap (m) HKDm 595,646

USDm 76,781

Company Profile

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.

Price Performance

5.0 6.0 7.0 8.0 9.0 10.0

Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11Jan 12Apr 12

Sinopec HANG SENG INDEX (Rebased)

Margin Trends

3 5 6 8 9 11

09 10 11 12E 13E 14E

EBITDA Margin EBIT Margin

Growth & Profitability

0 5 10 15 20

-10 0 10 20 30 40 50

09 10 11 12E 13E 14E

Sales growth (LHS) ROE (RHS)

Solvency

0 5 10 15 20

0 10 20 30 40 50 60

09 10 11 12E 13E 14E

Net debt/equity (LHS) Net interest cover (RHS

David Hurd, CFA

+852 2203 6242 [email protected]

Fiscal year end 31-Dec 2009 2010 2011 2012E 2013E 2014E

Financial Summary

DB EPS (CNY) 0.71 0.83 0.84 0.72 0.83 0.91

Reported EPS (CNY) 0.71 0.83 0.84 0.72 0.83 0.91

DPS (CNY) 0.18 0.21 0.30 0.26 0.29 0.32

BVPS (CNY) 4.3 4.8 5.4 5.9 6.4 7.0

Weighted average shares (m) 86,702 86,702 86,702 86,702 86,702 86,702 Average market cap (CNYm) 453,929 493,612 555,076 487,468 487,468 487,468 Enterprise value (CNYm) 665,168 699,086 779,482 775,141 823,317 863,066 Valuation Metrics

P/E (DB) (x) 7.3 6.9 7.6 7.8 6.8 6.2

P/E (Reported) (x) 7.3 6.9 7.6 7.8 6.8 6.2

P/BV (x) 1.41 1.34 1.25 0.96 0.87 0.80

FCF Yield (%) 7.7 13.9 nm nm nm nm

Dividend Yield (%) 3.4 3.7 4.7 4.6 5.2 5.7

EV/Sales (x) 0.5 0.4 0.3 0.3 0.3 0.3

EV/EBITDA (x) 4.9 4.3 4.6 4.8 4.6 4.4

EV/EBIT (x) 7.9 6.7 7.4 8.2 7.6 7.3

Income Statement (CNYm)

Sales revenue 1,345,052 1,913,182 2,505,683 2,570,953 2,665,125 2,837,916 Gross profit 354,593 430,698 474,138 474,944 511,961 552,718

EBITDA 134,918 164,227 169,346 161,372 180,860 196,772

Depreciation 50,487 59,223 64,006 67,151 73,038 77,918

Amortisation 0 0 0 0 0 0

EBIT 84,431 105,004 105,341 94,221 107,822 118,854

Net interest income(expense) -7,105 -7,312 -7,657 -10,123 -12,660 -14,630

Associates/affiliates 2,997 5,390 4,152 4,152 4,152 4,152

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 245 611 2,540 2,540 2,540 2,540 Profit before tax 80,568 103,693 104,376 90,789 101,854 110,916 Income tax expense 16,084 25,689 26,120 23,140 24,850 27,046

Minorities 2,724 6,204 5,220 5,220 5,220 5,220

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 61,760 71,800 73,036 62,429 71,783 78,650

DB adjustments (including dilution) 0 0 0 0 0 0

DB Net profit 61,760 71,800 73,036 62,429 71,783 78,650

Cash Flow (CNYm)

Cash flow from operations 135,802 182,399 81,647 134,553 148,236 159,699 Net Capex -100,840 -113,651 -131,737 -172,000 -172,000 -172,000 Free cash flow 34,962 68,748 -50,090 -37,447 -23,764 -12,301

Equity raised/(bought back) 0 0 0 0 0 0

Dividends paid -13,872 -16,473 -19,942 -24,752 -23,344 -26,380 Net inc/(dec) in borrowings 18,684 28,247 -19,618 50,000 50,000 50,000 Other investing/financing cash flows -38,000 -79,544 96,709 0 0 0

Net cash flow 1,774 978 7,060 -12,199 2,892 11,319

Change in working capital 24,013 45,380 -46,733 3,904 2,346 2,063

Balance Sheet (CNYm)

Cash and other liquid assets 9,986 10,860 17,919 5,720 8,612 19,931 Tangible fixed assets 584,968 637,579 684,337 789,186 888,148 982,229

Goodwill/intangible assets 0 0 0 0 0 0

Associates/investments 20,336 24,890 27,521 31,673 35,825 39,977 Other assets 262,552 321,825 414,563 424,150 434,052 455,100 Total assets 877,842 995,154 1,144,341 1,250,729 1,366,637 1,497,238 Interest bearing debt 218,369 209,903 234,830 284,830 334,830 384,830 Other liabilities 260,620 334,883 402,354 415,845 428,093 451,204 Total liabilities 478,989 544,786 637,184 700,675 762,923 836,034 Shareholders' equity 375,661 419,047 472,141 509,819 558,258 610,528

Minorities 23,192 31,321 35,016 40,236 45,456 50,676

Total shareholders' equity 398,853 450,368 507,157 550,055 603,714 661,204

Net debt 208,383 199,043 216,911 279,110 326,218 364,899

Key Company Metrics

Sales growth (%) -7.4 42.2 31.0 2.6 3.7 6.5

DB EPS growth (%) 107.5 16.3 1.7 -14.5 15.0 9.6

EBITDA Margin (%) 10.0 8.6 6.8 6.3 6.8 6.9

EBIT Margin (%) 6.3 5.5 4.2 3.7 4.0 4.2

Payout ratio (%) 25.3 25.4 35.6 35.6 35.6 35.6

ROE (%) 17.5 18.1 16.4 12.7 13.4 13.5

Capex/sales (%) 7.5 5.9 5.3 6.7 6.5 6.1

Capex/depreciation (x) 2.0 1.9 2.1 2.6 2.4 2.2

Net debt/equity (%) 52.2 44.2 42.8 50.7 54.0 55.2

Net interest cover (x) 11.9 14.4 13.8 9.3 8.5 8.1

Source: Company data, Deutsche Bank estimates

Reducing oil price forecasts

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Deutsche Bank AG/Hong Kong Page3

Slowing demand / increasing supplies

We are lowering our DB oil price estimates for WTI and Brent for 2012 through terminal 2015e. Our new oil and gas price deck is presented below:

Figure 1: Current DB oil price forecasts – new as of 03 July 2012 3-Jul-12

WTI (USD/bbl)

Brent (USD/bbl)

WTI- Brent Spread (USD/bbl)

US Gas Henry Hub (USD/mmBtu)

Oil (WTI) /Gas Ratio

2009 62.1 62.7 -0.58 4.16 14.9

2010 79.6 80.3 -0.73 4.38 18.2

Q1 2011 94.6 105.5 -10.9 4.20 22.5

Q2 2011 102.3 117.0 -14.7 4.38 23.4

Q3 2011 89.5 112.1 -22.6 4.06 22.1

Q4 2011 94.1 110.1 -16.1 3.48 27.0

2011 95.1 111.1 -15.9 4.03 23.6

Q1 2012E 102.9 118.4 -15.4 2.51 41.0

Q2 2012E 94.2 110.2 -15.9 2.27 41.5

Q3 2012E 88.0 98.0 -10.0 2.75 32.0

Q4 2012E 90.0 100.0 -10.0 2.90 31.0

2012E 93.8 106.6 -12.8 2.61 36.4

Q1 2013E 90 99 -9.0 3.80 23.7

Q2 2013E 93 102 -9.0 3.60 25.8

Q3 2013E 100 107 -7.0 3.70 27.0

Q4 2013E 100 108 -8.0 3.90 25.6

2013E 95.8 104.0 -8.3 3.75 25.5

2014E 100.0 110.0 -10.0 4.25 23.5

2015E 100.0 110.0 -10.0 4.75 21.1

Source: Deutsche Bank

Current Bloomberg consensus forecasts 2012-15e for Brent are US$ 115, US$ 115, US$

113 and US$ 117.5/ bbl. We are US$ 7 – 10/ bbl below street consensus.

Our previous oil price forecasts which were last set on 27 March 2012 are below:

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Page4 Deutsche Bank AG/Hong Kong Figure 2: PREVIOUS DB oil price forecasts -

27-Mar-12

WTI (USD/bbl)

Brent (USD/bbl)

WTI- Brent Spread (USD/bbl)

US Gas Henry Hub (USD/mmBtu)

Oil (WTI) /Gas Ratio

2009 62.1 62.7 -0.58 4.16 14.9

2010 79.6 80.3 -0.73 4.38 18.2

Q1 2011 94.6 105.5 -10.9 4.20 22.5

Q2 2011 102.3 117.0 -14.7 4.38 23.4

Q3 2011 89.5 112.1 -22.6 4.06 22.1

Q4 2011 94.1 110.1 -16.1 3.48 27.0

2011 95.1 111.1 -15.9 4.03 23.6

Q1 2012E 103.0 118.7 -15.7 2.70 38.5

Q2 2012E 106.0 119.0 -13.0 2.65 40.0

Q3 2012E 106.0 115.0 -9.0 2.75 38.5

Q4 2012E 108.0 117.0 -9.0 2.90 37.2

2012E 105.7 117.5 -11.8 2.75 38.5

2013E 113.0 120.0 -7.0 3.75 30.1

2014E 117.0 125.0 -8.0 4.25 27.5

2015E 115.0 125.0 -10.0 4.75 24.2

The following excerpts are taken from a broader research piece published 03 July 2012, by DB Chief Oil Economist, Soozhana Choi, who sets DB oil price forecasts:

Demand-side worries driven by mounting fears about the fate of the Eurozone and patchy economic data out of the US and China that spurred concerns growth may not be as robust as anticipated have turned market attention away from supply-side risks.

Going into the third quarter, demand-side fears are set to persist as growth rates are downgraded and as markets now face a more ample supply picture thanks to Saudi efforts to boost output. Consequently, we have lowered our oil price forecast to reflect our economics research team’s macro outlook as well as the looser fundamental oil balance. We forecast Brent will average roughly USD107/bbl this year while WTI will average roughly USD94/bbl.

Our economists revised down global growth for this year to 3.2% versus the prior forecast of 3.5%. While the revision is notably downward, they see global growth remaining above 3%. Growth meaningfully below 3% is what we would associate with a far uglier fundamental oil balance and weaker oil price outlook.

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Deutsche Bank AG/Hong Kong Page5 Figure 3: DB Global GDP forecasts (14 June 2012)

y-o-y % change 2008 2009 2010 2011 2012E 2013E

US 0.2 -3.5 3.0 1.7 2.3 2.6

Europe 0.0 -4.5 1.8 1.5 -0.4 0.2

Japan -1.2 -6.3 4.0 -0.7 3.1 1.4

China 9.6 9.2 10.3 9.2 7.9 8.4

Asia (x Japan) 6.8 5.6 9.5 7.3 6.4 6.9

Latin America 4.3 0.0 6.3 4.3 3.3 4.0

G7 0.6% -3.5% 2.9% 1.4% 1.7% 1.8%

World 2.8% -1.1% 5.1% 3.6% 3.2% 3.6%

Notes: DB Global Economics Perspective 14 June 2012.

Red - most recent adjustment has been down; Blue - most recent adjustment has been up.

While the recent OPEC meeting resulted in no change to official quotas, the group would have to reduce production by 1.6 mln bbl/day in order to comply with the official OPEC target.

Despite the weaker outlook, it’s worth noting that the key bullish supply issues – tensions regarding Iran’s suspected nuclear weapons program, rising sectarian violence in Iraq and ongoing unrest in Middle Eastern/North African countries facing political transitions – continue to lurk and may very well reassert themselves on the oil market radar before the year is out.

Our 2014 and 2015 forecast has also been trimmed to USD110/bbl for Brent and to USD100/bbl for WTI. These adjustments to our longer-term forecast acknowledge the faster-than-expected growth in shale oil production in the US and the potential impact that will have on not only the US but the global oil balance as rising US production does much to potentially reverse a long-term downtrend in non-OPEC output. Wood Mackenzie projects US shale oil production will rise from 1.5 mln b/d this year to 4 mln b/d by the end of this decade.

Soozhana Choi – DB Chief Oil Economist; 03 July 2012

We suspect that the Saudis have not cut back on production and are oversupplying the market for three reasons: 1) to instill a bit of discipline into OPEC members that continue to produce above quota (Iran; Venezuela; UAE; Algeria); 2) to insure the world that there will be sufficient supply despite sanctions against Iran which take effect beginning July and are estimated to reduce Iranian oil supplies by 1mm / day; and 3) to add pressure on the Iranian regime to cease and desist its nuclear meanderings.

Oddly enough, we suspect that if the Iranians were to back down from their nuclear ambitions, the Saudis might feel more compelled to reduce domestic production and allow for oil prices to rise once again.

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Page6 Deutsche Bank AG/Hong Kong

Refining

Yet one more iteration

For full year 2011, Sinopec booked refining losses of Rmb 35.7bn. Sinopec’s consolidated operating income for full year 2011 was Rmb 105.3bn. The refining losses are material. The refining losses could add 34% to operating income, overnight – if that is what the government wanted. Will the government issue checks to the refineries to partially cover the losses, as was the case 2005-2007? Will the government change the refined product policy in order to support capex into the industry? Will the government

“aggressively” apply the current policy in order to slowly whittle away the losses? No one knows, but as long as the government can claim overall profitability at these companies, we suspect a divisional loss here and there makes little difference.

We used to argue that the losses were a black mark, an embarrassment, on the government’s policy to gradually move China to a more market based system.

However, the government put up with 4 consecutive years of growing losses (2005-07), apparently without batting an eye. More recently, talks of a change in the refining policy, which heated up April – October 2011, have again faded for naught. The government seems to have acquiesced in the refiners’ most recent move to reduce refining losses by short-changing the government on its Windfall Profit Tax.

Acquiescence to us suggests that the government has no immediate plans to help out the refiners from a policy perspective.

In the beginning of 2012, we made the decision to revert SNP’s 2011 losses to a break even position, equally over a three-year period. We believe we have caught a timely moment in terms of 2012, in that both SNP and PetroChina have lowered their oil input prices, rather arbitrarily in our view. But how do we justify another Rmb 15bn in improved refining earnings for 2013 and again in 2014?

What we do know is that there is no precedent of the government actively managing away previous refining losses by changes to policy. Ultimately the losses of 2005-2007, disappeared when the price of crude collapsed in 2008. We suspect that the government’s 2005-07 policy of issuing checks to partially cover the losses is a relic of the past. Actually, we never did figure out how the refiners accounted for the government checks – was there additional equity issued to the Parent company or maybe there was a “gift” reserve account established as a Corp liability?

The government’s recent re-application of the 2009 refining policy, suggests to us that SNP’s 2011 loss of Rmb 35.7bn maybe frozen in time. The most recent price adjustment was roughly 6% down for both gasoline & diesel, after a 9.5% drop in the oil price index. This makes sense to us as product prices represent 100% of revenue while oil input costs represent roughly 70-80% of operating costs. It does not seem to us as if the government is trying to reduce the refining losses.

The average annual refining loss at Sinopec 2003-2010 was ~ Rmb 13.3bn pa. If we very gradually whittle away SNP’s 2011 refining losses over the coming 8-years, through 2018 (which is the terminal year for our DCF model), average losses in the refining segment 2012-18e would be ~ Rmb 11.5bn pa. That is good enough for us. It gives us a more gradual / non-distorting pick up in SNP earnings (2012-18); it gives us an approximate break even balance (Rmb +735 mm) in 2018, our terminal DCF year;

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Deutsche Bank AG/Hong Kong Page7 and it gives us an average annual refining loss over the coming 8-years years fairly

consistent with the average annual loss over the previous 8-years.

At one point we had considered assigning an annual refining loss to Sinopec (2012-18) equal to its Rmb 13.3bn average annualized loss 2003-10. But assigning a Rmb 13.3bn loss to SNP’s terminal (DCF) year wrecked havoc with our DCF fair value target price.

Capex (into refining) is a requirement, regardless of the losses.

Chemicals

Sinopec’s earnings surprised to the upside for most of 2010 and 2011. Strong earnings surprises came from a strong chemical business. In 2012, operating income from SNP’s chemical business collapsed. In 1Q11, SNP reported Rmb 9.3bn in operating income from its chemical business. In 1Q12, SNP reported Rmb 1.3bn in operating income from its chemical business.

DB’s regional chemical analyst, Shawn Park sees a relatively modest recovery (+20%) in plastic spreads 2013 / 2012, with even more modest increases in the years following 2013. We have slightly trimmed our chemical (operating income) expectations for the coming years, by roughly Rmb 6.0-8.0 bn pa 2013-20e. Our 2012e operating income for SNP’s chemical division remains unchanged at Rmb 9.6bn.

Our operating income estimates by division can be found in Figure 4.

Figure 4: Sinopec – estimates operating income by division

2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

Op Margin :

E&P 38.1% 37.4% 18.5% 27.9% 32.5% 31.4% 32.0% 33.7% 35.2% 34.8%

Mkting 5.0% 3.5% 3.9% 3.0% 3.3% 3.4% 3.4% 3.3% 3.2% 3.1%

Refining -1.9% -12.5% 3.3% 1.6% -3.0% -2.4% -1.6% -1.1% -0.7% -0.3%

Chemicals 5.7% -5.6% 6.4% 4.7% 6.5% 2.1% 2.4% 2.4% 2.5% 2.6%

Op Income :

E&P 48,766 66,569 19,644 47,149 71,631 69,224 68,086 72,172 74,077 74,270

Mkting 32,790 28,369 30,300 30,760 44,696 47,093 49,389 51,532 53,396 55,244

Refining (12,378) (102,040) 23,077 15,855 (35,780) (30,174) (20,537) (15,356) (10,605) (5,281)

Chemicals 13,306 (13,102) 13,615 15,037 26,732 9,621 11,894 12,243 12,754 13,312

SNP - Net Income : 56,533 29,769 61,760 71,800 73,036 62,429 71,783 78,650 84,234 89,737

US$/ bbl

Avg Price Brent 72.7 97.7 62.0 79.7 111.1 106.6 104.0 110.0 110.0 110.0

ASP Sinopec Oil 57.3 86.5 49.7 71.5 100.9 95.9 91.5 94.6 93.0 93.0

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Page8 Deutsche Bank AG/Hong Kong Valuation and risks

We value Sinopec from a DCF model (Figure 5). Our WACC is 6.7% which consists of a cost of equity (CoE) of 7.6%, an after tax cost of debt (CoD) of 4.1% and a 25.8% debt- to-capital ratio (we exclude SNP’s intercompany debt from this debt-to-capital ratio as it is an evergreen loan without cost). We use a Deutsche Bank standard China risk free rate (Rfr) of 3.1% and equity risk premium (ErP) of 5.8%. Our SNP terminal growth (TG) rate is 1.5%. We use a 1.5% terminal growth (TG) rate to reflect what we believe is a reasonable estimate of SNP’s long term BOE production growth capacity. Our fair value DCF price target for SNP is HK$ 7.65 / share.

Looking at more traditional valuations (Figure 8), we see SNP trading at 7.8x our 2012 estimates vs. 8.4x for global peers. We show SNP trading at an 7-8% P/E discount to global peers. Given the amount of government participation / intervention in SNP, we don’t see these discounts as being excessive / irrational. The reverse seems to be true when considering EV / EBITDA multiples where we show SNP (4.8x) trading at an 20%

premium to global peers (4.0x). SNP’s premium EV / EBITDA may be explained by its above average debt and consequentially high debt / equity multiple vs. global peers.

The principal risks to our Hold rating on SNP include: 1) materially higher / lower oil prices; 2) policy changes dramatically different from those articulated in this report; and 3) short term E&P asset injections from Sinopec Group to Sinopec Corp.

For every + / - US$ 1 change in the price of oil, we estimate that SNP’s net profit changes by roughly + / - 1.0%.

The introduction of China’s windfall profit tax in April 2006 has reduced the sensitivity of PRC oil companies’ net income to changes in oil prices.

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Deutsche Bank AG/Hong Kong Page9 Figure 5: Sinopec – DCF model

RMB = US$1 6.18 5.95 5.75 5.65 5.65 5.65 5.65

HK$ = US$1 7.79 7.79 7.79 7.79 7.79 7.79 7.79

Sinopec ^Terminal

DCF - RMB mm 2012F 2013F 2014F 2015F 2016F 2017F 2018F

Operating Income 94,221 107,822 118,854 127,522 135,458 143,880 146,740

Depreciation 67,151 73,038 77,918 82,722 87,529 92,117 96,497

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Income Tax -25% -23,084 -26,416 -29,119 -31,243 -33,187 -35,251 -35,951

(Capex) -172,000 -172,000 -172,000 -172,000 -163,400 -155,230 -147,469

(Decrease) / Increase WC 3,904 2,346 2,063 2,729 1,720 1,424 0.0

Free CF -29,808 -15,210 -2,284 9,730 28,120 46,940 59,817

Fiscal Credits 0 0 0 0 0 0 0

Free CF (ex Tax) -29,808 -15,210 -2,284 9,730 28,120 46,940 59,817

Terminal Growth 1.5% Terminal

As % PV

6.0% (28,120) (13,537) (1,918) 7,707 21,013 33,091 891,968 98.0%

6.7% (27,937) (13,361) (1,881) 7,508 20,335 31,815 736,796 97.8%

8.0% (27,600) (13,040) (1,813) 7,152 19,138 29,580 540,289 97.6%

9.0% (27,347) (12,802) (1,764) 6,893 18,276 27,989 438,633 97.5%

10.0% (27,098) (12,570) (1,716) 6,646 17,460 26,497 362,832 97.5%

11.0% (26,854) (12,345) (1,670) 6,410 16,688 25,096 304,560 97.7%

12.0% (26,614) (12,126) (1,626) 6,184 15,956 23,781 258,683 97.9%

13.0% (26,379) (11,912) (1,583) 5,968 15,262 22,546 221,866 98.3%

14.0% (26,147) (11,704) (1,542) 5,761 14,605 21,385 191,855 98.8%

15.0% (25,920) (11,501) (1,502) 5,563 13,980 20,294 167,069 99.5%

16.0% (25,696) (11,304) (1,464) 5,374 13,388 19,266 146,370 100.3%

Net Shrs

Total PV Net Debt Minorities Associates Pres. Value Outst NPV / Shr WACC

910,204 218,043 35,016 25,692 682,837 86,702 7.88 6.0%

3-Yr Beta x HSI 78% 753,276 218,043 35,016 25,692 525,909 86,702 6.07 6.7%

Rf Rate China Local 3.1% 553,706 218,043 35,016 25,692 326,339 86,702 3.76 8.0%

Equity. Premium 5.8% 449,878 218,043 35,016 25,692 222,511 86,702 2.57 9.0%

Cost Equity 7.6% 372,050 218,043 35,016 25,692 144,684 86,702 1.67 10.0%

Cost Debt 3.1% 311,885 218,043 35,016 25,692 84,518 86,702 0.97 11.0%

Debt Risk Premium 2.4% 264,238 218,043 35,016 25,692 36,872 86,702 0.43 12.0%

After Tax Cost Debt 4.1% 225,769 218,043 35,016 25,692 (1,597) 86,702 (0.02) 13.0%

Debt / Capital 25.8% 194,213 218,043 35,016 25,692 (33,153) 86,702 (0.38) 14.0%

Avg. Cost Capital 6.7% 167,983 218,043 35,016 25,692 (59,383) 86,702 (0.68) 15.0%

145,935 218,043 35,016 25,692 (81,432) 86,702 (0.94) 16.0%

RMB 2012F 2013F 2014F 2015F 2016F 2017F 2018F

Total PV 753,276 (27,937) (13,361) (1,881) 7,508 20,335 31,815 736,796

Net Debt 218,043

Net Minorities 35,016

Associates 25,692

NPV Equity 525,909

Shrs Outs 86,702 Price ADR$ 89.35 Price HK$ 6.87

NPV / Share 6.07 Price A-Shr 6.27 DCF HK$ 7.65

WACC 6.7% Prem A to H -8.7% Upside 11.3%

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Page10 Deutsche Bank AG/Hong Kong Figure 6: Sinopec historical forward PE valuations

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

12/30/2006 3/30/2007 6/30/2007 9/30/2007 12/31/2007 3/31/2008 6/30/2008 9/30/2008 12/31/2008 3/31/2009 6/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 12/31/2011 3/31/2012 6/30/2012

P/E

12m F P/E P/E Mean

+ 1x SD - 1x SD

Sinopec

Figure 7: Sinopec historical PB-to-ROE valuations

0.5 1.0 1.5 2.0 2.5 3.0 3.5

- 5 10 15 20 25

12/30/2006 3/30/2007 6/30/2007 9/30/2007 12/31/2007 3/31/2008 6/30/2008 9/30/2008 12/31/2008 3/31/2009 6/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 12/31/2011 3/31/2012 6/30/2012 X

%

ROE (LHS) 12m Fwd P/B (RHS)

Mean 1yr Fwd P/B + 1x SD (1yr Fwd P/B) -1x SD (1yr Fwd PB)

Sinopec

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c as

Deutsche Bank AG/Hong Kong

Company Ticker

Trading

Currency Price Rating

Price Target % to TP

Mkt. Cap

US$bn 12F 13F 12F 13F 12F 13F 12F 13F 2011

1 3 F Integrated Global

Royal Dutch Shell plc RDSa.L GBP 2,160 Buy 2,475 14.6 218.6 8.3 7.7 2.8 3.0 1.1 1.0 16.3 15.1 15.1 BP BP.L GBP 432.5 Buy 500 15.6 127.8 6.6 6.4 3.2 4.2 1.0 0.9 15.5 14.6 28.5 ENI ENI.MI EUR 17.0 Buy 20 14.7 86.6 8.8 8.0 2.8 2.7 1.0 0.9 14.4 12.3 46.5 Total SA TOTF.PA EUR 36.0 Hold 42 16.7 108.8 7.1 6.5 2.8 2.6 1.1 1.0 16.2 16.1 26.2 Repsol YPF REP.MC EUR 12.8 Hold 15 17.4 20.7 8.6 8.3 4.1 3.8 0.6 0.5 8.4 8.2 62.0 Statoil STL.OL NOK 143.0 Buy 170 18.9 77.2 8.8 8.9 1.8 1.8 1.5 1.4 17.8 16.2 31.9 ExxonMobil XOM.N USD 85.3 Buy 100 17.2 399.1 10.4 9.4 6.2 5.7 2.4 2.1 23.7 23.1 5.6 Occidental Petroleum OXY.N USD 85.9 Buy 125 45.5 69.7 10.2 8.0 4.6 3.9 1.8 1.6 17.5 19.4 5.6 Chevron CVX.N USD 105.9 Buy 130 22.8 208.8 7.9 7.1 3.8 3.5 1.5 1.3 20.5 19.9 (4.8) Suncor Energy SU.TO CAD 29.4 Hold 37 25.7 45.2 7.7 6.1 4.0 3.1 1.0 0.8 14.1 14.9 18.1 Petrobras PBR.N USD 19.1 Hold 27 41.6 122.9 8.5 6.5 5.8 5.6 0.7 0.7 8.1 10.9 36.1 PTT PTT.BK THB 330.0 Hold 370 12.1 30.2 7.9 7.9 6.0 5.4 1.5 1.3 19.8 17.5 45.3 PetroChina 0857.HK HKD 10.0 Buy 10.85 8.5 259.6 9.7 9.2 5.0 4.8 1.4 1.3 15.3 16.7 23.8 Sinopec 0386.HK HKD 6.9 Hold 7.65 10.9 83.9 7.8 6.8 4.8 4.6 0.9 0.8 15.1 16.0 41.3

Mean 8.4 7.6 4.0 3.8 1.3 1.1 16.0 15.7 26.3

Median 8.4 7.8 3.9 3.7 1.1 1.0 16.3 15.6 27.4

Europe Mean 8.0 7.6 2.9 3.0 1.1 1.0 14.8 13.8 35.0

N. America Mean 9.0 7.6 4.7 4.0 1.7 1.5 19.0 19.3 6.1

Others Mean 8.2 7.2 5.9 5.5 1.1 1.0 13.9 14.2 40.7

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Sinopec 0386.HK 6.86 (HKD) 3 Jul 12 NA

*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=0386.HK

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. David Hurd

Historical recommendations and target price: Sinopec (0386.HK) (as of 7/3/2012)

1

2 3 4

5 6

7 8

9 10

11

0.00 2.00 4.00 6.00 8.00 10.00 12.00

Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12

Security Price

Date

Previous Recommendations Strong Buy

Buy

Market Perform Underperform Not Rated Suspended Rating Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 25/08/2010: Buy, Target Price Change HKD8.16 7. 29/08/2011: Hold, Target Price Change HKD8.40 2. 29/10/2010: Buy, Target Price Change HKD9.76 8. 04/10/2011: Hold, Target Price Change HKD8.51

3. 08/12/2010: Buy, Target Price Change HKD9.25 9. 04/01/2012: Upgrade to Buy, Target Price Change HKD10.94 4. 11/01/2011: Buy, Target Price Change HKD9.20 10. 26/03/2012: Downgrade to Hold, Target Price Change HKD9.54 5. 20/02/2011: Buy, Target Price Change HKD9.41 11. 09/05/2012: Hold, Target Price Change HKD8.61

6. 30/03/2011: Downgrade to Hold, Target Price Change HKD8.34

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Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share- holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Notes:

1. Newly issued research recommendations and target prices always supersede previously published research.

2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period

Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period

Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

5 9 %

3 6 %

5 %

1 1 % 1 3 % 8 %

0 50 100 150 200 250 300 350 400 450 500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

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Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively.

Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank.

EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures.

Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc.

Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless “Japan” or "Nippon" is specifically designated in the name of the entity.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.