Assessing China Petroleum & Chemical (SEHK:386) Valuation After Recent Share Price Weakness

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Recent share performance context

China Petroleum & Chemical (SEHK:386) has seen mixed returns recently, with the stock up about 1% over the past day but down around 2% over the past week and 5% over the past month.

See our latest analysis for China Petroleum & Chemical.

Zooming out, the share price has fallen about 20% over the past 90 days and 7% year to date, while the 1 year total shareholder return of 10% shows longer term momentum has been more resilient than recent trading suggests.

If recent energy moves have your attention, it can be useful to compare with companies exposed to the same long term themes and scan a wider field using the 33 power grid technology and infrastructure stocks

With China Petroleum & Chemical trading at HK$4.36, and indicators like its value score of 4 and current analyst price target, the key question is whether the stock is still undervalued or if the market is already pricing in future growth.

Preferred P/E of 12.6x: Is it justified?

On a headline basis, China Petroleum & Chemical’s current P/E of 12.6x, with the stock at HK$4.36, sits close to the Hong Kong Oil and Gas industry average and suggests the market is valuing its earnings broadly in line with sector peers.

The P/E ratio compares the current share price to earnings per share and gives you a quick sense of how much investors are paying for each unit of profit. For a large integrated energy and chemical company with a wide range of activities, it is a common yardstick because earnings are a key driver of value. In this case, forecasts point to earnings growth of 13.8% per year compared with 12.8% for the wider Hong Kong market.

Where things get interesting is when that 12.6x P/E is set against both peers and an estimated fair P/E. The stock is described as good value relative to the Hong Kong Oil and Gas industry average of 12.7x, yet it screens as expensive versus a peer group average of 11.3x, which signals the market may be assigning a premium to its earnings compared with similar companies. At the same time, the estimated fair P/E of 17.2x is materially higher than the current multiple, which implies there is room for the market’s valuation to move closer to that level if the earnings outlook and quality justify it.

Explore the SWS fair ratio for China Petroleum & Chemical

Result: Price-to-earnings of 12.6x (ABOUT RIGHT)

However, there are clear risks, including revenue that recently slipped 0.6% and annual net income growth of 13.8% that may not continue if industry conditions change.

Find out about the key risks to this China Petroleum & Chemical narrative.

Another view on value: DCF signals a wider gap

While the P/E of 12.6x suggests China Petroleum & Chemical is roughly in line with the Hong Kong Oil and Gas industry, the SWS DCF model paints a different picture. With the stock at HK$4.36 versus a DCF estimate of HK$19.41, the shares screen as heavily undervalued. Which signal should you pay more attention to?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out China Petroleum & Chemical for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 214 high quality undervalued stocks. If you save a screener we even alert you when new companies match — so you never miss a potential opportunity.

Next Steps

With mixed signals on value and sentiment, it makes sense to check the numbers directly, weigh the trade off between concerns and potential upsides, and then decide where you stand using the 2 key rewards and 1 important warning sign

Looking for more investment ideas?

If you are weighing up China Petroleum & Chemical, it is worth broadening your watchlist and seeing how other opportunities stack up on quality, value and income potential.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include 0386.HK.

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