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Sinopec - ADS (SNP)

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We are maintaining our Underperform recommendation on Sinopec - ADS, aka China Petroleum & Chemical (SNP) following its first quarter 2012 results. The company's quarterly profit registered a 35.2% decline, owing to slower domestic economic growth.

Moreover, increases in the price of international crude oil amidst government caps on fuel prices, prevented the company from fully passing on spiraling costs to consumers, thereby hurting refining margins.

The company's weak guidance for this year also leads us to recommend caution. We believe that Sinopec's matured domestic oil fields and associated rising costs will continue to be an overhang on its operations as natural declines become pricier to counterbalance. Other risk factors, such as technological failure and geo-political disturbance, also add to our negative sentiment.

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