Shanghai Petrochem Nears Ceiling

Shanghai Petrochemical’s (SHI - Analyst Report) exposure to the fast-expanding Chinese economy and strong petrochemical product demand make us confident of strong volume growth. However, revocation of government price controls in the future, higher crude oil prices and increased competition are some of the major concerns for the company.

As expected, the company’s first half 2008 net profit declined by more than 50% from the year-ago period. The company expects profits to fall further in the second half of the year. Thus, we rate the stock a Hold with a six-month target price of $33.

On August 27, Shanghai Petrochemical reported first-half 2008 results. In the first six months of 2008, the company recorded a net loss of $47.72 million, compared to a profit of $230 million in the prior-year period. The company reported diluted loss per ADS of $0.01 in the first half of 2008.

Substantial increase in international crude oil prices has affected earnings. For the same period, the company reported an operating loss of $264 million. For the six-month period ended June 30, SHI’s turnover was $4.2 billion, up 22.55% year over year.
 
By 2010, SHI is expected to have 16 million tons of crude oil processing capacity and 1.60 million tons of production capacity of ethylene, 0.95 million tons of synthetic resin and plastics and 1.40 million tons of chemical fiber raw material and synthetic fiber, enabling a strong foothold in international markets.

As a part of its growth strategy, the company entered into a joint venture with Kuwait's national oil company, Kuwait Petroleum Company, to build an oil refinery with oil processing capacity of 300,000 barrels per day. The project is estimated at $5.5 billion.

Read the full analyst report on SHI