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					 Energy – Oil & Gas | Sector Rating Change                                                                                        17 October 2012


OVERWEIGHT                                                       China Oil Sector
Company                  Code             TP          Rating
H/HK shares                                                      Turning more positive
CNOOC Limited           883 HK       HK$15.64         HOLD
MIE Holdings           1555 HK       HK$2.65           BUY       While we do not expect a military conflict between Israel and Iran in
PetroChina              857 HK       HK$12.19          BUY       the near future, we see oil prices staying at high levels in 4Q12 (ICE
Sinopec                 386 HK       HK$8.62           BUY       Brent at around US$110/bbl). Despite the lack of progress in the
A shares                                                         reform of refined product prices so far in 2012, the profitability of
                                                                 domestic refineries has improved since July. The expected
PetroChina           601857 CH      RMB10.94           BUY
                                                                 expansion of the pilot scheme for the natural gas price reform should
Sinopec              600028 CH      RMB7.29            BUY
                                                                 translate into higher profits for upstream gas sellers like PetroChina.
All figures subject to rounding
                                                                 Profitability is improving or at least staying firm for the various
                                                                 segments along the oil and gas value chain. We upgrade our sector
Key Highlights of this Report                                    call from NEUTRAL to OVERWEIGHT with BUY ratings on all but one
   Latest views on oil prices.                                   stock under our coverage.
   Updates on fuel price reforms.
   Development of unconventional natural gas                     Key Factors for Rating
   benefits oil service companies more than oil
   companies                                                         Any warfare between Israel and Iran looks unlikely in the near future given the
   3Q12 results preview for PetroChina and Sinopec.                  diverging tones in the speeches given by the Israeli Prime Minister and US
                                                                     President at the United Nations meeting in late September. However, we still
                                                                     expect oil prices to stay firm in 4Q12, with ICE Brent at around US$110/bbl,
                                                                     thanks to the quantitative easing by the US and Japan, the possible spill-over of
                                                                     the civil war in Syria and the likely decline in Iran’s oil output.
                                                                     We increase our 2012 forecast for the average price of ICE Brent from
                                                                     US$111.8/bbl to US$112/bbl and maintain our 2013 and 2014 forecasts at
                                                                     US$107.5/bbl and US$102.4/bbl, respectively. We maintain our long-term
                                                                     forecast for ICE Brent at US$90/bbl.
                                                                     Despite the lack of progress in the reform of the pricing mechanism for key
                                                                     refined products, the profitability of domestic refineries has improved since July
                                                                     on lower oil cost and then higher gasoline price and diesel price in August and
                                                                     September. Domestic jet fuel price also gained in all three months in 3Q12 as it
                                                                     now tracks the Singapore price with a one-month time lag.
                                                                     PetroChina has incurred huge losses on imported natural gas given the lack of
                                                                     real progress in the natural gas pricing reform. Until recently, it is reported that
                                                                     the new proposal to expand the pilot scheme for the natural gas pricing reform
                                                                     to Sichuan Province and Chongqing Municipality has been submitted for
                                                                     approval. Based on our rough estimates, a RMB0.4/cubic metre (cu m) increase
                                                                     in the city gate price in the Sichuan-Chongqing area should result in a 4%
                                                                     increase in PetroChina’s 2013E earnings.
                                                                     China plans to raise the output of unconventional natural gas to meet the
                                                                     growing demand. The second round of tender for shale gas blocks is underway.
                                                                     The investment in unconventional gas may not generate decent return for
                                                                     operators at the initial stage. However, it will definitely benefit the oil service
                                                                     companies.

                                                                 Key Risks to Rating
                                                                     Sharp fall in oil prices and hence refined product prices.
                                                                     Lack of progress in the fuel price reform and poor implementation of the
                                                                     existing pricing mechanism.

BOCI Research Limited                                            Top BUYs
Energy: Oil & Gas                                                    H/ Hong Kong shares: PetroChina, MIE Holdings

 Lawrence Lau, CFA                                                   A shares: PetroChina
 (852) 3988 6418
 lawrence.lau@bocigroup.com




BOCI research is available electronically on www.bociresearch.com.
                                              Table of Contents
        OIL PRICES TO STAY HIGH IN 4Q12...........................................................3

        PRICE REFORMS – LITTLE PROGRESS SO FAR ...........................................6

        DEVELOPMENT OF UNCONVENTIONAL NATURAL GAS ...............................10

        FORECASTS AND RATINGS......................................................................13

        COMPANY REPORTS

                  CNOOC LIMITED (883 HK) .............................................................................15
                  MIE HOLDINGS (1555 HK) ..............................................................................17
                  PETROCHINA (857 HK/601857 CH) ................................................................21
                  SINOPEC (386 HK/600028 CH).......................................................................26

        APPENDIX. BASICS ABOUT CHINA ...........................................................31

        LISTED COMPANIES IN THIS REPORT .......................................................33




17 October 2012                        China Oil Sector                                                                     2
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                               OIL PRICES TO STAY HIGH IN 4Q12
                               Figure 1. Spot Price of ICE Brent (5-year chart)
                                 (US$/bbl)
                                150

                                130

                                110

                                 90

                                 70

                                 50

                                 30
                                      10/07

                                              03/08

                                                      08/08

                                                              01/09

                                                                      06/09

                                                                              11/09

                                                                                      04/10

                                                                                              09/10

                                                                                                      02/11

                                                                                                              07/11

                                                                                                                      12/11

                                                                                                                              05/12

                                                                                                                                      10/12
                               Source: Bloomberg


                               Triggered by the strikes by oilfield workers in Scandinavia, oil prices had seen a decent
                               rebound from late June 2012 onwards. The price of ICE Brent surged from US$90/bbl
                               all the way to US$117/bbl in less than two months before fluctuating between
                               US$110/bbl and US$120/bbl, partly helped by the increasing likelihood of a military
                               conflict between Israel and Iran. Some even expected Israel to launch an attack on
                               Iran’s nuclear facilities in late September.
                               However, a clear difference in the tone of the speech made by the leaders of Israel
                               and the US before the General Assembly of the United Nations in late September has
                               rendered it unlikely for Israel to initiate any military action against Iran in the near
                               future. The Israeli Prime Minister demanded a clear red line to be drawn to deter the
                               progress of Iran’s nuclear enrichment programme. On the other hand, the US
                               President said there was still time to pressure Iran to abandon its nuclear programme
                               through sanctions.
                               Although the chance of a sudden supply disruption owing to warfare with Iran is very
                               slim, we still expect oil prices to remain high in 4Q12, with the spot price of ICE Brent
                               fluctuating around US$110/bbl. It is mainly due to the abundant supply of liquidity,
                               the possible spill-over of the civil war in Syria and a possible decline in Iran’s oil
                               output.
                               On 13 September 2012, the US’s Federal Reserve announced that it would buy
                               US$40bn worth of mortgage-backed securities every month until the outlook of the
                               job market improves. This asset-buying programme, generally referred to as the third
                               round of quantitative easing (QE3), will be the largest release of liquidity following the
                               global financial crisis if it lasts over 35 months. The sizes of the two previous rounds
                               of quantitative easing, QE1 (from November 2008 to June 2009) and QE2 (from
                               November 2009 to June 2011), were US$1,300bn-1,400bn and US$600bn,
                               respectively.
                               On 19 September 2012, Bank of Japan announced that it would expand its
                               asset-buying programme by JPY10trn to JPY55trn up to the end of 2013. The
                               pumping of more liquidity into the system by major central banks will inevitably lead
                               to higher inflation. The prices of commodities, including crude oil, should remain high.
                               On the other hand, the price of the futures of ICE Brent surged 4% on 4 October as
                               the parliament of Turkey approved Turkish troops to move across the border into
                               Syria after five civilians living in a village close to the border were killed by a shell fired
                               from Syria. While the civil war has been dragging on for a long time, any spill-over to
                               its neighbours raises the concern of potential supply disruption as many of them are
                               oil-exporting countries.




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                               In addition, the oil output of Iran has been gradually declining since the imposition of
                               stricter US sanctions and EU oil embargo in July. The preliminary Iranian oil output
                               reached 2.85m bbl/day in September 2012, down 22% from the level in June. We
                               cannot rule out further tightening of the US’s sanctions given the lack of progress in
                               the negotiation over Iran’s nuclear programme.
                               Iran has tried to get away from the sanctions and embargo by reflagging its oil tankers
                               as tankers of other countries. However, this reflagging trick has been noticed by the
                               US. As a result, Tanzania and Sierra Leone deregistered a total of 45 oil tankers that
                               were illegally reflagged in their countries by agents reportedly acting on behalf of Iran.
                               The US government is tracking another 22 Iranian oil tankers which are believed to
                               have been reflagged under the small Pacific island nation of Tuvalu. With these
                               improper export channels being disrupted, the oil output of Iran is likely to fall further.
                               In August 2012, the excess oil production capacity of OPEC excluding Iran was 3.24m
                               bbl/day. While other OPEC members can make up for the possible shortfall left behind
                               by Iran, the buffer for further supply disruption is limited. Especially, the global
                               demand for crude oil should remain high in 4Q12 as the winter comes in the Northern
                               Hemisphere. Based on the estimation of IEA, the global crude oil demand will increase
                               by 210,000 bbl/day to 90.58m bbl/day in 4Q12.


                               Figure 2. Iran’s Oil Output
                                (m bbl/day)
                                3.9

                                3.7

                                3.5

                                3.3

                                3.1

                                2.9

                                2.7
                                      01/10

                                                03/10

                                                         05/10

                                                                 07/10

                                                                          09/10

                                                                                    11/10

                                                                                            01/11

                                                                                                    03/11

                                                                                                               05/11

                                                                                                                        07/11

                                                                                                                                09/11

                                                                                                                                          11/11

                                                                                                                                                    01/12

                                                                                                                                                            03/12

                                                                                                                                                                    05/12

                                                                                                                                                                                07/12

                                                                                                                                                                                        09/12
                               Sources: IEA, Bloomberg


                               Figure 3. Global Oil Demand (quarterly)
                                (m bbl/day)
                                92
                                91

                                90

                                89

                                88

                                87
                                86

                                85
                                                                                                                       3Q12E


                                                                                                                                  4Q12E

                                                                                                                                                  1Q13E


                                                                                                                                                            2Q13E

                                                                                                                                                                            3Q13E


                                                                                                                                                                                        4Q13E
                                         1Q11


                                                        2Q11

                                                                   3Q11


                                                                                  4Q11

                                                                                            1Q12


                                                                                                        2Q12




                               Source: IEA




17 October 2012               China Oil Sector                                                                                                                                                  4
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                               Under our base-case oil price forecasts, we assume no military conflict affecting major
                               oil-producing countries in the Middle East. The average spot price of ICE Brent
                               reached US$112.3/bbl in 9M12. We fine-tune our full-year 2012 forecast from
                               US$111.8/bbl to US$112/bbl by assuming the average price in 4Q12 to be US$111/bbl.
                               We leave our 2013 and 2014 forecasts at US$107.5/bbl and US$102.4/bbl,
                               respectively. In addition, we maintain our long-term forecast for ICE Brent at
                               US$90/bbl.


                               Figure 4. Forecasts for ICE Brent
                               (US$/bbl)                   1Q                 2Q      3Q           4Q        Average
                               2012E                     118.1              109.5   109.3        111.0         112.0
                               2013E                     109.3              108.0   107.0        105.7         107.5
                               Source: Bloomberg, BOCI Research estimates
                               *Actual data for 1Q-3Q12




17 October 2012               China Oil Sector                                                                      5
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                               PRICE REFORMS – LITTLE PROGRESS SO FAR
                               Key Refined Product Prices
                               While the NDRC has been mulling over the reform of the pricing mechanism for
                               domestic prices of gasoline and diesel for a long time, there has been limited progress
                               in the past seven months. It even missed the best window to introduce the reform
                               (2Q12) as we believe it is easier to implement in a falling oil price environment. Now,
                               we consider the reform unlikely to be introduced before the 18th National Congress of
                               the Communist Party of China (CPC), which is scheduled for 8 November 2012 as the
                               Chinese government intends to maintain the status quo before then.
                               We still expect two main changes under the new mechanism. First, the review period
                               will be shortened from 22 days to 10 days. Whenever the 10-day moving average oil
                               price varies by 4% from the level of the last price adjustment, it can trigger a change
                               in refined product prices. Secondly, an independent institution instead of the NDRC
                               will set the price caps based on the mechanism. Chinese oil companies can set their
                               own prices as long as they do not exceed the price caps.
                               However, even without a new mechanism, the old mechanism introduced in early
                               2009 has been implemented rather effectively this year. So far in 2012, the NDRC has
                               raised the prices of gasoline and diesel four times and lowered them three times.
                               Especially from June 2012 onwards, the 22-day rule has been strictly followed.


                               Figure 5. Historical Prices and Forecasts for Gasoline and Diesel in China
                               (RMB/tonne)                             Ex-factory price of          Ex-factory price of
                               Price since                  #90 gasoline (including taxes)   #0 diesel (including taxes)
                               1/1/2009                                              5,580                         4,970
                               15/1/2009                                             5,440                         4,810
                               25/3/2009                                             5,730                         4,990
                               1/6/2009                                              6,130                         5,390
                               30/6/2009                                             6,730                         5,990
                               29/7/2009                                             6,510                         5,770
                               2/9/2009                                              6,810                         6,070
                               30/9/2009                                             6,620                         5,880
                               10/11/2009                                            7,100                         6,360
                               14/4/2010                                             7,420                         6,680
                               1/6/2010                                              7,190                         6,460
                               26/10/2010                                            7,420                         6,680
                               22/12/2010                                            7,730                         6,980
                               20/2/2011                                             8,080                         7,330
                               7/4/2011                                              8,580                         7,730
                               9/10/2011                                             8,280                         7,430
                               8/2/2012                                              8,580                         7,730
                               20/3/2012                                             9,180                         8,330
                               10/5/2012                                             8,850                         8,020
                               9/6/2012                                              8,320                         7,510
                               11/7/2012                                             7,900                         7,110
                               10/8/2012                                             8,290                         7,480
                               11/9/2012                                             8,840                         8,020
                               1/3/2013E                                             8,440                         7,620
                               1/4/2014E                                             8,040                         7,220
                               Source: NDRC, BOCI Research estimates




17 October 2012               China Oil Sector                                                                         6
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                               On the other hand, after pegging the domestic jet fuel prices to the FOB price in
                               Singapore by setting the price of the current month based on the average price in
                               Singapore in the previous month, the system has been working well since August
                               2011. The following chart shows the jet fuel price in China has very closely followed
                               that of Singapore with a one-month time lag. This has somewhat helped the
                               profitability of domestic refineries as the international jet fuel price basically tracks the
                               crude oil price.


                               Figure 6. China Jet Fuel Price vs. Singapore Jet Fuel Price
                                  (RMB/tonne)
                                8,100
                                7,900
                                7,700
                                7,500
                                7,300
                                7,100
                                6,900
                                6,700
                                6,500
                                              07/11

                                                       08/11

                                                               09/11

                                                                         10/11

                                                                                    11/11

                                                                                            12/11

                                                                                                     01/12

                                                                                                                 02/12

                                                                                                                         03/12

                                                                                                                                 04/12

                                                                                                                                            05/12

                                                                                                                                                       06/12

                                                                                                                                                               07/12

                                                                                                                                                                         08/12

                                                                                                                                                                                     09/12

                                                                                                                                                                                             10/12
                                                                   Jet fuel - China                                                                 Jet fuel - Singapore

                               Source: Bloomberg, NDRC, BOCI Research


                               Figure 7. Estimated Simplified Refining Margin for Sinopec
                                (US$/bbl)
                                12

                                 8

                                 4

                                 0

                                (4)

                                (8)
                                      01/10


                                                      04/10


                                                                 07/10


                                                                                 10/10


                                                                                             01/11


                                                                                                         04/11


                                                                                                                         07/11


                                                                                                                                    10/11


                                                                                                                                                     01/12


                                                                                                                                                                 04/12


                                                                                                                                                                                 07/12


                                                                                                                                                                                             10/12



                               Source: BOCI Research estimates


                               Under the current refined product prices, the profitability of domestic refineries will be
                               maximised if the price of ICE Brent can stay at US$110/bbl. It is the oil price floor
                               below which a cut in domestic refined product prices will be triggered.
                               Based on our oil price forecasts and the existing pricing mechanism, we now expect
                               the NDRC to cut the prices of gasoline and diesel by RMB400/tonne at the beginning
                               of March 2013 and April 2014. Despite these cuts, we still expect the profitability of
                               the domestic refineries to improve over time.




17 October 2012               China Oil Sector                                                                                                                                                       7
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                               Natural Gas Price
                               In December 2011, the NDRC launched the pilot programme for the reform of the
                               natural gas pricing mechanism in Guangdong and Guangxi Provinces. Under this
                               programme, the maximum city gate price of natural gas at the benchmark market
                               (Shanghai) is linked to the prices of imported fuel oil and liquefied petroleum gas (LPG)
                               based on the following formula.


                               P natural gas= K x (α x P     fuel oil   x (H natural gas / H fuel oil) + β x P LPG x (H natural gas / H   LPG))   x
                               (1 + R)
                               where
                               P   natural gas   = Price of natural gas (in RMB/cu m)
                               P   fuel oil   = Price of imported fuel oil (in RMB/kg)
                               P   LPG   = Price of imported LPG (in RMB/kg)
                               K = Discount factor, temporarily fixed at 0.9
                               α = Weight of fuel oil (0.6)
                               β= Weight of LPG (0.4)
                               H   natural gas   = Heat content of natural gas (8,000kCal/cu m)
                               H   fuel oil   = Heat content of fuel oil (10,000kCal/kg)
                               H   LPG=       Heat content of LPG (12,000kCal/kg)
                               R = VAT of natural gas (13%)


                               The maximum city gate prices in different provinces and cities are based on the price
                               at the benchmark market adjusted for the difference in gas transmission distances
                               and the direction of the flow of gas. The maximum city gate prices for natural gas in
                               Guangdong Province and Guangxi Province are fixed at RMB2.74/cu m and
                               RMB2.57/cu m, respectively.
                               Disappointedly, there has not been any real progress on the gas price reform in
                               almost 10 months following the launch of the first batch of pilots. It had been
                               expected that the pilot scheme would be expanded at least to cover the more affluent
                               areas in China like Shanghai and the Yangtze River Delta. However, nothing has been
                               realised. It seems that any price reform will be put on hold until the new leaders in
                               China are confirmed. Hence, we do not expect any progress before the CPC meeting
                               in November.
                               As a result, China’s natural gas importers, mainly PetroChina, have taken a big blow as
                               the cost of imported gas is mostly higher than selling price in the domestic market.
                               The situation was especially difficult for PetroChina in 2Q12 as the price of imported
                               piped natural gas from Central Asia was higher as it tracked the international oil price
                               with a time lag of one quarter. The company even posted a loss at its natural gas and
                               pipeline segment in 2Q12 as the profit from the sales of domestically-produced
                               natural gas could not offset the huge loss arising from the imports of piped natural gas
                               from Central Asia and the imports of LNG in a low season despite the rebate of VAT on
                               imported gas.
                               The new gas prices are just above the imported LNG price in Guangdong but much
                               lower than those of other gas sources in Guangdong Province and the LPG price in
                               Guangxi Province. The reform did not drive up the end-user gas price in these two
                               provinces.
                               However, in other areas, the reform of the natural gas pricing mechanism is likely to
                               result in a higher city gate price. This will increase the cost of the natural gas
                               distributors in the affected areas. In order to pass the increase in the cost to
                               residential users, they need to hold public consultations. While it is simpler to raise the
                               gas price of industrial users, we are not sure if the NDRC would like to see higher cost
                               pressure on those industrial natural gas users amid declining profitability for most
                               industries.



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                               Recently, the new proposal to expand the pilot scheme for the gas price reform has
                               been submitted to the relevant authorities for approval according to China Securities
                               Journal. Sichuan Province and Chongqing Municipality is likely to be the second batch
                               of pilots. These areas account for about 20% of the natural gas sales of PetroChina.
                               According to our rough estimation, a RMB0.4/cu m increase in the city gate price will
                               boost PetroChina’s 2013E earnings by 4%.
                               To be conservative, we assume no increase in the natural gas price in China in all
                               forecast periods. Any such increase will thus be a bonus.




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                               DEVELOPMENT OF UNCONVENTIONAL NATURAL
                               GAS
                               In order to better protect the environment, the Chinese government promotes the use
                               of natural gas given its clean emission after combustion. According to its latest plan,
                               the National Energy Administration (NEA) targets to raise the share of natural gas in
                               China’s primary energy sources from 4% in 2010 to 8% in 2015. Based on NEA’s
                               estimation, China’s consumption of natural gas will reach 260bn cu m by 2015,
                               implying a CAGR of 19% between 2010 and 2015.
                               As it is unlikely that the domestic output of conventional natural gas can meet the
                               increase in demand, the Chinese government is promoting alternative supply sources.
                               In addition to imports, the government also encourages the development of
                               unconventional natural gas, mainly including coal-bed methane (CBM) and shale gas.


                               Figure 8. Natural Gas Supply from Various Sources – 2010 vs. 2015E
                                                                        2010               2015E              Growth
                                                                   (bn cu m)            (bn cu m)                (%)
                               Domestic output
                                Natural gas                              94                  151                   60
                                Coal bed methane*                         4                   21                  506
                                Shale gas                                 0                    7                  NA
                                Coal to gas                               0                   50                   NA

                               Imports
                                Piped natural gas                         4                   52                1,365
                                LNG                                      13                   37                  189

                               Total supply                             114                  317                  177
                               Source: BOCI Research



                               Coal-bed Methane (CBM)
                               According to the latest round of national assessment of oil and gas resources, China
                               has geological CBM resources of about 36.8trn cu m trapped in areas with depth of
                               less than 2,000m, similar to the size of conventional natural gas resources. This
                               makes China the third largest country in the world in terms of CBM resources, just
                               behind Russia and Canada.
                               China started the exploration and production of CBM back in 1996 with the
                               establishment of China United Coal-Bed Methane (CUCBM), a 50-50 JV between China
                               National Coal Group (CNCG) and CNPC (later transferred to PetroChina). However,
                               not much progress was made in the early days owing to the disputes arising from the
                               separation of mining rights of CBM and coal. There was also a lack of transmission
                               infrastructure. The 50-50 shareholding structure of CUCBM also made decisions
                               difficult when the two partners had divided opinions.
                               In April 2009, PetroChina withdrew from CUCBM to start its own CBM business by
                               selling its stake to CNGC. CNOOC, the parent of CNOOC Limited, acquired a 50%
                               stake in CUCBM from CNCG for RMB1.2bn in December 2010. PetroChina and CUCBM
                               have then become the two major players in pure CBM extraction projects in China.
                               CBM is the kind of unconventional gas expected to see the most significant surge in
                               output. According to the 12th 5-year Plan (5YP) for CBM released by the NDRC, China
                               plans to ramp up its CBM output to 30bn cu m in 2015, up 2.3x from the level in 2010.
                               Qinshui Basin and Eastern Ordos Basin will be the two major bases for pure CBM
                               projects. The volume of CBM to be commercially utilised is expected to grow even
                               faster with the utilisation of CBM produced at coal mines projected to increase from
                               31% in 2010 to 60% in 2015. Assuming the rate of commercial utilisation of CBM from
                               pure CBM projects remains at 80%, the overall volume of CBM for commercial
                               utilisation will jump 5x to about 21bn cu m over the same period.


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                               To transmit the increasing gas output to the market, the central government plans to
                               build 13 CBM transmission pipelines with a total length of 2,054km and a total
                               capacity of 12bn cu m per year in the 12th 5YP period.


                               Figure 9. Key CBM Targets under 12th 5YP
                                                                                                2010         2015 target
                               Increase in geological CBM reserves (bn cu. m)        198 in 11th 5YP   1,000 in 12th 5YP

                               CBM output (bn cu. m)                                             9.0               30.0
                                Pure CBM projects                                                1.5               16.0
                                Extraction from coal mines                                       7.5               14.0

                               CBM from coal mines commercially utilised (bn cu m)               2.3                 8.4

                               No. of households with CBM supply (m)                           1.89                3.20
                               CBM-fuelled power generation capacity (MW)                      750                2,850
                               Source: NDRC



                               Shale Gas
                               According to IEA, China has the largest developable shale gas resources in the world,
                               with geological resources and developable resources of 100trn cu m and 36trn cu m,
                               respectively.
                               China is relatively late in terms of the development of shale gas. In view of the huge
                               success in developing and producing shale gas in the US, China has decided to speed
                               up the development of its sizeable shale gas resources, with the Ministry of Land and
                               Resources (MLR) designating shale gas as an independent type of minable resources
                               in December 2011. As China’s shale gas deposits are usually deeper and a lot of
                               resources are in the mountainous areas in central and western China, simply copying
                               the technologies used in the US may not work. In addition, China has not yet
                               mastered the core technologies used in the development of shale gas, including
                               horizontal drilling and multi-stage fracturing.
                               In March 2012, NEA promulgated the Shale Gas Development Plan (2011-15), in
                               which the agency proposed four main targets for the 12th 5YP. The key targets
                               include:
                               (i)       To basically complete the national survey and appraisal of resource potential
                                         of shale gas, and to provide an initial understanding of the size and
                                         distribution of shale gas resources; to select 30-50 blocks for long-term
                                         development and another 50-80 blocks with favourable conditions;
                               (ii)      Through exploration, to discover total proved geological reserves of 600bn
                                         cu m and recoverable reserves of 200bn cu m; shale gas output to reach
                                         6.5bn cu m in 2015;
                               (iii)     To establish geological survey and resource assessment methods for shale
                                         gas appropriate for China’s geological conditions and to develop key
                                         exploration and development technologies and supporting equipment;
                               (iv)      To standardise the technical specifications in the areas of survey, appraisal,
                                         resource reserves, analysis of test results, exploration and development and
                                         environmental protection for shale gas.
                               MLR launched the first round of tender for shale gas in June 2011. Only six
                               state-owned companies, including the three Chinese oil majors, were invited to
                               participate in the tender. Out of the four blocks in Guizhou Province and Chongqing
                               Municipality, only two were taken up.




17 October 2012               China Oil Sector                                                                       11
                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Figure 10. Blocks Awarded in First Round of Shale Gas Tender
Block                                      Company                    Area      Exploration          Committed          No. of wells
                                  winning the tender                                 period              capex          to be drilled
                                                                    (sq km)         (years)            (RMB m)
Nanchuan, Chongqing-Guizhou                Sinopec                    2,198               3                590                    11
Xiangxiushan, Chongqing-Guizhou         Henan CBM                     2,039               3                240                    10
Source: MLR


                                            To accelerate the development of shale gas, MLR has relaxed the qualifications of
                                            participants in the second round of tender launched in September 2012. All
                                            companies registered in China and Sino-foreign joint ventures majority-owned by
                                            Chinese companies with registered capital more than RMB300m and qualifications in
                                            oil and gas exploration (or those that have teamed up with companies with such
                                            technical qualifications) can participate in the tender. A total of 20 blocks with total
                                            areas of over 20,000sqkm in 8 provinces have been put up for tender. The tender will
                                            close on 25 October and the results will be announced on the same day.


                                            Figure 11. Brief Details of Blocks for Second Round of Shale Gas Tender
                                            Province/municipality                   No. of blocks                         Total area
                                                                                                                             (sqkm)
                                            Guizhou                                 5                                         5,370
                                            Chongqing                               3                                         3,295
                                            Hunan                                   5                                         4,211
                                            Hubei                                   2                                         2,676
                                            Jiangxi                                 1                                            598
                                            Anhui                                   1                                            497
                                            Zhejiang                                1                                            580
                                            Henan                                   2                                         2,774
                                            Total                                   20                                       20,002
                                            Source: MLR


                                            While we are not sure if the companies which obtain the shale gas blocks in the tender
                                            can make money, we do expect oil services to benefit first. Those companies are
                                            required to invest at least RMB30,000/sqkm per year in the three-year exploration
                                            period. It will translate into a total service bill of RMB1.8bn in three years. More
                                            importantly, this is just the second round of tender, and we believe there will be the
                                            third and even more rounds in the future. Among the Hong Kong-listed companies,
                                            potential beneficiaries will be China Oilfield Services, Anton Oilfield and SPT Energy.
                                            Among them, the private oil service providers (the latter two) will be better off as the
                                            tender is now open to private companies which would prefer private service providers.




17 October 2012                         China Oil Sector                                                                          12
                            THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
                               FORECASTS AND RATINGS
                               Figure 12. Summary of Forecasts
                                                                      Old        New    Change
                                                                 forecast    forecast      (%)
                               Oil price
                               ICE Brent (US$/bbl)
                               2012E                               111.8       112.0         0
                               2013E                               107.5       107.5         -
                               2014E                               102.4       102.4
                               Long-term                            90.0        90.0         -

                               CNOOC Limited
                               EPS (RMB)
                               2012E                               1.268       1.268         -
                               2013E                               1.176       1.244         6
                               2014E                               1.252       1.262         1
                               NAV (HK$)
                               2012E                               13.41       13.72         2

                               MIE Holdings
                               EPS (RMB)
                               2012E                               0.251       0.245       (2)
                               2013E                               0.361       0.354       (2)
                               2014E                               0.375       0.371       (1)

                               PetroChina
                               H shares
                               EPS (RMB)
                               2012E                               0.687       0.679       (1)
                               2013E                               0.715       0.713       (0)
                               2014E                               0.675       0.657       (3)
                               A shares
                               EPS (RMB)
                               2012E                               0.687       0.679       (1)
                               2013E                               0.715       0.713       (0)
                               2014E                               0.675       0.658       (3)

                               Sinopec
                               H shares
                               EPS (RMB)
                               2012E                               0.566       0.615         9
                               2013E                               0.759       0.765         1
                               2014E                               0.847       0.811       (4)
                               A shares
                               EPS (RMB)
                               2012E                               0.547       0.596         9
                               2013E                               0.740       0.746         1
                               2014E                               0.828       0.792       (4)
                               Source: BOCI Research estimates




17 October 2012               China Oil Sector                                              13
                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
                                                 We have summarised our new oil price forecasts and the EPS forecasts for oil
                                                 companies under our coverage in Figure 12. There are no significant earnings
                                                 changes. The changes in EPS are mainly to reflect our new refined product price
                                                 forecasts and the higher-than-expected increases in gasoline and diesel prices in
                                                 September 2012. We trim the earnings of MIE mainly to reflect the expected lower
                                                 realised oil price for its oilfields in China after the recent narrowing of the price
                                                 premium of Daqing oil to Brent.


                                                 Figure 13. Daqing Oil vs. ICE Brent
                                                  140
                                                  130
                                                  120
                                                  110
                                                  100
                                                    90
                                                    80
                                                    70
                                                    60
                                                          01/10
                                                                  03/10

                                                                          05/10

                                                                                  07/10

                                                                                           09/10

                                                                                                   11/10

                                                                                                           01/11

                                                                                                                   03/11

                                                                                                                           05/11

                                                                                                                                   07/11

                                                                                                                                            09/11

                                                                                                                                                    11/11

                                                                                                                                                            01/12

                                                                                                                                                                    03/12
                                                                                                                                                                            05/12

                                                                                                                                                                                    07/12

                                                                                                                                                                                            09/12
                                                                                          ICE Brent                                                                  Daqing

                                                 Source: Bloomberg


                                                 We are not changing any recommendation this time. As we have upgraded Sinopec
                                                 during the interims, we have three BUYs out of four Hong Kong-listed oil companies
                                                 under our coverage. All the A-share-listed oil companies are also rated BUY. Hence,
                                                 we upgrade our sector call from NEUTRAL to OVERWEIGHT.
                                                 Our top pick is PetroChina, for the expected increase in pilot areas for the gas price
                                                 reform in the medium term. Over the longer term, MIE should also offer good value
                                                 given its low valuations. Although Sinopec is likely to see strong quarter-on-quarter
                                                 recovery in earnings in 3Q12, this should already be partly in the price.


Figure 14. Earnings Sensitivity to Oil Price and Refined Product Prices
                                                                                                                                   CNOOC        MIE
                                                                                                                                   Limited Holdings PetroChina                              Sinopec
Earnings impact of US$1/bbl increase in crude oil price
 2012E                                                                                                                                     1.2%             2.4%             (2.0%)         (11.4%)
 2013E                                                                                                                                     1.3%             1.7%             (2.1%)          (9.7%)

Earnings impact of 1% increase in refined product prices
 2012E                                                                                                                                      NA                NA               4.7%            15.8%
 2013E                                                                                                                                      NA                NA               4.6%            13.2%

Earnings impact of US$1/bbl increase in crude oil price and 1% increase in refined product prices
 2012E                                                                                                                                     1.2%             2.4%               2.7%                 4.4%
 2013E                                                                                                                                     1.3%             1.7%               2.5%                 3.5%
Source: BOCI Research estimates




17 October 2012                               China Oil Sector                                                                                                                                        14
                                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
 Target Price Change                                                                                                                                                       17 October 2012


HOLD Target Price:side CNOOC Limited
       2%
                   HK$15.64
                   Prior TP: HK$15.61 Still pending
883 HK
Price: HK$15.94                       We increase our 2013-14 earnings forecasts by 1-6% after fine-tuning
TP Basis: Premium to appraised NAV    our model. Even so, we now expect flat earnings for the coming two
Sector Rating: OVERWEIGHT             years under our oil price forecasts. Its higher output is likely to be
                                      offset by lower oil prices. The company’s proposed acquisition of
                                      Nexen, its biggest-ever overseas acquisition, is still pending the
Trading Summary                       approvals from various governments. The opposition from some
         HK$                          politicians will only increase the uncertainty of the outcome.
                                                                Tu rn o v e r (H K $ m )
2 0 .0
1 9 .0                                                                                     2 11 6
1 8 .0
                                                                                           1616
1 7 .0
1 6 .0
                                                                                                     Key Factors for Rating
1 5 .0
1 4 .0
                                                                                           111 6
                                                                                                         Output growth is expected to accelerate from 2013 onwards as the company
1 3 .0                                                                                     616           strives to achieve its target output CAGR of 6-10% for 2011-15 after seeing flat
1 2 .0                                                                                                   output in 2011 and possibly 2012.
11 .0                                                                                      11 6
         1     1    1      2     2        2   2     2    2      2      2        2

                                                                                                         However, the company’s earnings are expected to be flat in the coming two
         1
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               /    1
                    /      1
                           /     1
                                 /        1
                                          /   1
                                              /     1
                                                    /    1
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         0     1
               1    2      1     2        3   4     5    6      7      8        9
         1
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                    /      0
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                                                         /      0
                                                                /      0
                                                                       /        0
                                                                                /
         7     7    7      7     7        7   7     7    7      7      7        7

                                                                                                         years under our base-case oil price forecasts where we expect oil prices to
         1     1    1      1     1        1   1     1    1      1      1        1



                                                                                                         soften gradually over time.
                   C N O O C L im ite d                 H S C E I IN D E X

(%)                                           YTD        1M           3M              12M
Absolute                                      7.9        6.6          6.4             15.7               The proposed acquisition of Nexen is unlikely to be highly value-enhancing in
                                                                                                         the near future based on the consensus forecast of Nexen’s earnings.
Relative to HSCEI                             5.0       (2.5)        (6.4)             6.3
                                                                                                         Depending on the funding sources, the earnings enhancement is estimated at
                                                                                                         between 1% (100% financed by bonds at a coupon rate of 5%) and 5% (100%
Shares outstanding (m)                                                          44,659                   financed by cash on hand).
Free float (%)                                                                      29                   Valuations are not attractive given the stable earnings outlook.
Market cap. (HK$ m)                                                            711,868
3M avg. daily turnover (HK$ m)                                                     838
Net debt/equity (%) (2012E)                                                   Net cash               Key Risks to Rating
Major shareholder (%)                                                                                    Oil prices rise sharply.
 CNOOC                                                                                      66           Acquisitions at bargain prices.
Source: Company data, Bloomberg, BOCI Research
Closing prices are as of 16 October 2012
                                                                                                     Valuation
                                                                                                         We increase our 2012E NAV from HK$13.41 to HK$13.72 after updating our
                                                                                                         model. Nevertheless, the five-year average premium of its share price to our
                                                                                                         estimated NAV has narrowed from 16% to 14% since our last report in late
                                                                                                         August. Hence, we only marginally increase our target price from HK$15.61 to
                                                                                                         HK$15.64.


                                                                                                    Investment Summary
                                                                                                    Year ended 31 Dec                        2010       2011     2012E       2013E      2014E
                                                                                                    Revenue (RMB m)                       180,036    240,944    225,892     216,200    214,676
                                                                                                      Change (%)                                71         34        (6)         (4)        (1)
                                                                                                    Net profit (RMB m)                     54,410     70,255     56,817      55,732     56,569
                                                                                                    Fully diluted EPS (RMB)                 1.214      1.567      1.268       1.244      1.262
                                                                                                      Change (%)                              84.8      29.1      (19.1)       (1.9)        1.5
                                                                                                    Consensus EPS (RMB)                          -          -     1.455       1.454      1.443
                                                                                                    Previous EPS (RMB)                           -          -     1.268       1.176      1.252
                                                                                                     Change (%)                                  -          -          -         5.8        0.8
BOCI Research Limited
                                                                                                    Fully diluted P/E (x)                     10.6        8.2       10.2       10.4       10.2
Energy: Oil & Gas
                                                                                                    CFPS (RMB)                                1.59      2.61        2.11       2.01       2.11
 Lawrence Lau, CFA                                                                                  P/CF (x)                                   8.1        4.9        6.1         6.4        6.1
 (852) 3988 6418                                                                                    EV/EBITDA (x)                              5.8        4.6        4.6         4.5        4.2
 lawrence.lau@bocigroup.com                                                                         DPS (RMB)                               0.394      0.432      0.323       0.360      0.380
                                                                                                    Yield (%)                                  3.1        3.4        2.5         2.8        2.9
                                                                                                    Source: Company data, BOCI Research estimates

BOCI research is available electronically on www.bociresearch.com.
Income Statement (RMB m)                                                          Cash-flow Statement (RMB m)
Year ended 31 Dec                 2010      2011 2012E 2013E 2014E                Year ended 31 Dec                  2010      2011      2012E      2013E      2014E
Revenue                        180,036 240,944 225,892 216,200 214,676            Pre-tax profit                   72,603     92,565     84,102     82,263     83,163
Cost of sales                (104,964) (146,648) (139,706) (132,512) (130,889)    Depreciation & amortisation      26,756     30,521     35,343     36,360     40,402
Operating expenses (exclude     22,829 26,832 31,423 32,352 36,303                Net interest expenses               504        511      (624)      (976)    (1,467)
depreciation & amortisation)
                                                                                  Change in working capital      (13,542)     19,758    (1,918)        197      (997)
EBITDA                          97,901 121,128 117,609 116,041 120,090
                                                                                  Tax paid                       (15,038)   (24,638)   (22,310)   (27,285)   (26,531)
Depreciation & amortisation   (26,756) (30,521) (35,343) (36,360) (40,402)
                                                                                  Other operating cash flows        (336)    (2,154)      (275)      (669)      (285)
Operating profit (EBIT)         71,145 90,607 82,266 79,681 79,689
                                                                                  Cash flow from operations        70,947   116,563      94,318     89,889     94,285
Net interest                     (504)     (511)       624       976     1,467
income/(expenses)                                                                 Net purchase of fixed assets   (39,641)   (60,706)   (69,705)   (59,760)   (55,167)
Other gains/(losses)             1,962     2,469     1,212     1,606     2,008    Decrease/(increase) in         (21,139)        484          0          0          0
Pre-tax profit                  72,603 92,565 84,102 82,263 83,163                invest.
Tax on profit                 (18,193) (22,310) (27,285) (26,531) (26,594)        Other investing cash flows     (12,317)   (26,314)          0          0          0
Minority interests                   0         0          0         0         0   Cash flow from investing       (73,097)   (86,536)   (69,705)   (59,760)   (55,167)
Net profit                      54,410 70,255 56,817 55,732 56,569                Net increase in equity                0      (256)          0          0          0
Core net profit                 54,410 70,255 56,817 55,732 56,569                Net increase in debt             13,211      2,552      8,626    (1,786)      (359)
EPS (RMB)                        1.214     1.567     1.268     1.244     1.262    Dividends paid                 (14,390)   (20,877)   (15,645)   (16,966)   (16,519)
Core EPS (RMB)                   1.214     1.567     1.268     1.244     1.262    Other financing cash flows        (495)    (2,057)        196        539      1,059
DPS (RMB)                        0.394     0.432     0.323     0.360     0.380    Cash flow from financing        (1,674)   (20,638)    (6,822)   (18,213)   (15,819)
Revenue growth (%)                  71        34        (6)       (4)       (1)   Change in cash                  (3,824)      9,389     17,790     11,917     23,299
EBIT growth (%)                     76        27        (9)       (3)         0   Cash at beginning of year        43,485     39,263     48,154     65,944     77,861
EBITDA growth (%)                   74        24        (3)       (1)         3   Free cash flow to firm          (1,532)     31,223     26,031     31,917     41,343
EPS growth (%)                      85        29       (19)       (2)         2   Free cash flow to equity         10,997     32,187     33,435     28,882     39,818
Core EPS growth (%)                 85        29       (19)       (2)         2
                                                                                  Source: Company data, BOCI Research estimates
Source: Company data, BOCI Research estimates

                                                                                  Key Ratios
Balance Sheet (RMB m)
                                                                                  Year ended 31 Dec              2010     2011 2012E 2013E 2014E
As at 31 Dec                     2010 2011 2012E 2013E 2014E                      Profitability (%)
Cash & cash equivalents        39,263 48,154 65,944 77,861 101,160                EBITDA margin                   54.4     50.3    52.1     53.7     55.9
Receivables                    19,680 20,662 42,260 40,447 40,162                 EBIT margin                     39.5     37.6    36.4     36.9     37.1
Inventories                     3,975 4,380 5,834 4,513 2,934                     Pre-tax margin                  40.3     38.4    37.2     38.0     38.7
Other current assets           36,466 58,727 51,043 51,043 51,043                 Net profit margin               30.2     29.2    25.2     25.8     26.4
Total current assets           99,384 131,923 165,081 173,864 195,299             Liquidity (x)
Fixed assets                  186,678 220,567 254,929 278,329 293,093             Current ratio                    1.5      1.9     2.0      2.3      2.6
Intangible assets               1,148 1,033       968     904     839             Interest coverage               63.4     53.1 103.6       98.2 105.1
Other long term assets         31,220 30,741 31,041 31,336 31,621                 Net debt to equity (%)     Net cash Net cash Net cash Net cash Net cash
Total long-term assets        219,046 252,341 286,939 310,568 325,553             Quick ratio                      1.4      1.8     1.9      2.2      2.6
Total assets                  318,430 384,264 452,020 484,432 520,852             Valuation (x)
Creditors                      18,056 20,424 27,952 25,014 22,153                 P/E                             10.6      8.2    10.2     10.4     10.2
Short-term debt                21,194 19,919 1,786        359     357             Core P/E                        10.6      8.2    10.2     10.4     10.2
Other current liabilities      29,173 29,873 53,742 51,485 52,171                 Core P/E @ target price         10.4      8.1    10.0     10.2     10.0
Total current liabilities      68,423 70,216 83,480 76,859 74,681                 P/B                              2.7      2.2     1.9      1.7      1.5
Long-term borrowings            9,859 18,076 30,950 30,325 29,319                 P/CF                             8.1      4.9     6.1      6.4      6.1
Other long-term liabilities    24,382 33,116 32,337 32,337 32,337                 EV/EBITDA                        5.8      4.6     4.6      4.5      4.2
Share capital                      949    949     949     949     949             Activity ratios
Reserves                      214,817 261,907 304,304 343,963 383,566             Inventory days                  12.4     10.4    13.3     14.2     10.4
Shareholders' equity          215,766 262,856 305,253 344,912 384,515             Accounts receivables days       33.2     30.6    50.8     69.8     68.5
Minority interests                   0      0       0       0       0             Accounts payables days          34.1     29.1    39.1     44.7     40.1
Total liabilities & equity    318,430 384,264 452,020 484,432 520,852             Returns (%)
Book value per share (RMB)        4.83   5.88    6.84    7.72    8.61             Dividend payout ratio           32.3     27.5    25.4     28.8     30.0
Tangible assets per share (RMB) 4.80     5.86    6.81    7.70    8.59             Return on equity                27.9     29.4    20.0     17.1     15.5
Net debt/(cash)per share (RMB) (0.18) (0.23) (0.74) (1.06) (1.60)                 Return on assets                19.0     19.6    13.3     11.5     10.8
Source: Company data, BOCI Research estimates                                     Return on capital employed      32.7     33.5    26.2     22.8     20.7
                                                                                  Source: Company data, BOCI Research estimates




17 October 2012                               CNOOC Limited                                                                                                      16
                                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
 Target Price Change                                                                                                                                                       17 October 2012


       BUY                                24% side
                                          Target Price: HK$2.65
                                                                                                     MIE Holdings
                                             Prior TP: HK$2.64                                       Cheap and fast growing
1555 HK
Price: HK$2.14                                                                                       MIE is a rapidly-growing oilfield developer and oil producer. We
TP Basis: Sum of parts                                                                               expect its net oil output to post a 19% CAGR for 2012-14, mainly
                                                                                                     driven by the substantial growth at its projects in Kazakhstan. We
Sector Rating: OVERWEIGHT                                                                            have not included any additional output from the horizontal wells in
                                                                                                     China. We trim our 2012-14 earnings forecasts by 1-2% after
                                                                                                     factoring in a lower realised oil price as the premium of Daqing oil to
                                                                                                     ICE Brent has narrowed recently. Despite this, the company’s shares
                                                                                                     are still cheap at the current level. We reiterate our BUY call.
Trading Summary
       HK$                                                       Tu rn o v e r (H K $ m )
4 .0
                                                                                            80
3 .5
                                                                                            70        Key Factors for Rating
                                                                                                          We expect MIE to post a 16% CAGR in core EPS for 2012-14 despite the
3 .0                                                                                        60
                                                                                            50
2 .5
                                                                                            40            gradual decline in oil prices in our base case. With the oil output from projects
2 .0                                                                                        30
                                                                                            20
                                                                                                          in Kazakhstan expected to jump 1.7x, MIE’s net oil output should grow 19%
1 .5
                                                                                            10            YoY on average in the coming two years.
                                                                                                          The potential additional output from the horizontal drilling in China will provide
1 .0                                                                                        0
       1     1   1     2      2       2    2      2   2      2         2        2
       1
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       0     1   2     1      2       3    4      5   6      7         8        9

                                                                                                          further upside to oil output in China.
       1
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       7     7   7     7      7       7    7      7   7      7         7        7
       1     1   1     1      1       1    1      1   1      1         1        1


                 M IE H o ld in g s                   H S C E I IN D E X
                                                                                                          The production sharing scheme for its oil projects in China will provide
(%)                                       YTD          1M    3M 12M                                       downside protection in case oil price drops.
Absolute                                  (0.5)        3.5 (2.8) 2.0                                      The experience in shale oil projects in the US and coal-bed methane projects in
Relative to HSCEI                         (3.3)       (5.6) (15.7) (7.5)                                  China will better prepare the company to invest in shale gas projects in China
                                                                                                          in future.
Shares outstanding (m)                                                                2,648               Low valuations.
Free float (%)                                                                           28
Market cap. (HK$ m)                                                                   5,666
                                                                                                      Key Risks to Rating
3M avg. daily turnover (HK$ m)                                                           14
Net debt/equity (%) (2012E)                                                              53               Sharp fall in oil prices.
Major shareholder (%)                                                                                     Delay in new projects/slower-than-expected ramp-up in production.
 Far Eastern Energy Limited (FEEL)                                                              54
Source: Company data, Bloomberg, BOCI Research                                                        Valuation
Closing prices are as of 16 October 2012
                                                                                                          We marginally increase our target price from HK$2.64 to HK$2.65, which is still
                                                                                                          based on the sum-of-parts method.
BOCI Research Limited
Energy: Oil & Gas
                                                                                                     Investment Summary
 Lawrence Lau, CFA                                                                                   Year ended 31 Dec                         2010      2011    2012E       2013E     2014E
 (852) 3988 6418                                                                                     Revenue (RMB m)                          1,805     2,827     3,612       4,375     4,330
 lawrence.lau@bocigroup.com
                                                                                                       Change (%)                                  55       57        28          21       (1)
                                                                                                     Net profit (RMB m)                          421    1,106       655         960     1,020
                                                                                                     Fully diluted EPS (RMB)                  0.190     0.418     0.245       0.354     0.371
                                                                                                       Change (%)                             209.2     120.5     (41.3)       44.5        4.8
                                                                                                     Consensus EPS (RMB)                            -        -    0.302       0.359     0.380
                                                                                                     Previous EPS (RMB)                             -        -    0.251       0.361     0.375
                                                                                                      Change (%)                                    -        -     (2.4)       (1.9)     (1.1)
                                                                                                     Core EPS (RMB)                           0.207     0.232     0.269       0.357     0.359
                                                                                                       Change (%)                               54.7     12.1       15.7       33.0        0.4
                                                                                                     Fully diluted P/E (x)                        9.1      4.1       7.1         4.9       4.7
                                                                                                     Core P/E (x)                                 8.4      7.5       6.4         4.8       4.8
                                                                                                     CFPS (RMB)                                 0.46     0.44       0.66       0.80      0.72
                                                                                                     P/CF (x)                                     3.8      3.9       2.6         2.2       2.4
                                                                                                     EV/EBITDA (x)                                4.4      3.8       3.4         2.6       2.4
                                                                                                     DPS (RMB)                                0.030     0.036     0.025       0.036     0.039
                                                                                                     Yield (%)                                    1.7      2.1       1.4         2.1       2.2
                                                                                                     Source: Company data, BOCI Research estimates


BOCI research is available electronically on www.bociresearch.com.
                               Decent EPS Growth on Rapid Output Growth
                               In 2012, the company’s oil output in Kazakhstan is partly depressed by the lack of gas
                               processing capacity. The company is expanding the gas processing unit and the
                               bottleneck should be removed by next year. As the company continues to drill more
                               wells and resume the production at previously shut-in wells, we expect its oil output
                               to jump 1.7x from 2,885 bbl/day in 2012 to 7,809 bbl/day in 2014. Together with the
                               higher output in China, we expect the company’s total net oil output to post a 19%
                               CAGR in 2012-14. With the strong output growth, we estimate a 16% CAGR in MIE’s
                               core EPS for 2012-14.



                               Potential Upside from Horizontal Drilling
                               The company plans to drill 8 horizontal wells in its oilfields in northeast China, mostly
                               in 2H12. As the productivity of a horizontal well is about 4.3x that of a vertical well,
                               this should translate into higher output from those oilfields. There is room to further
                               revise up the forecasts for its oil output in China.



                               Downside Protection from Production Sharing Scheme
                               Under the production sharing contract (PSC) scheme for its oilfields in China, MIE’s
                               net output ranges from 48% to 80% of the gross output of these oilfields. The PSC
                               scheme enables the company to have a bigger share of the gross output of these
                               oilfields when oil prices fall. This will moderate the decline in earnings in case oil prices
                               fall.



                               Getting Prepared to Tap Shale Gas Market in China
                               MIE has invested in two shale oil companies in the US (61.25% working interest in
                               Condor and 7.94% working interest in White Hawk). This will provide the company
                               with the experience in horizontal drilling and multi-stage fracturing. The recent
                               investment in CBM in China will also call for horizontal drilling. Experience in shale oil
                               in the US and CBM in China will better equip the company to tap the huge shale gas
                               market in China going forward.



                               Low Valuations
                               The share price performance of the company has been mediocre in the past couple of
                               months as the interim earnings may have been disappointing to some investors. The
                               slower-than-expected progress in Kazakhstan has also raised concern among
                               investors. However, there was a RMB30m withholding tax provision in 1H12 arising
                               from the interest on shareholders’ loan to its Kazakhstan operations for all historical
                               periods. In addition, the slower-than-expected progress was due to the
                               longer-than-expected lead time in various procedures.
                               However, all these have been in the price. We do not expect further withholding tax
                               in the next few years after the company changed the exploration licences of some of
                               its blocks to production licences. Hence, the current low valuation (4.9x 2013E
                               earnings) offers a good entry point.




17 October 2012               MIE Holdings                                                                               18
                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
                               Figure 1. Key Assumptions
                                                                                        2011         2012E   2013E      2014E
                               Sales volume
                               Crude oil (m bbl)
                               China                                                    3.87          4.22    4.75        4.62
                               Kazakhstan - exports                                     0.03          0.98    2.04        2.68
                               Kazakhstan - domestic                                    0.00          0.05    0.11        0.14
                               US                                                       0.00          0.02    0.03        0.03
                               Total                                                    3.91          5.27    6.93        7.47

                               Average price of ICE Brent (US$/bbl)                    110.8         112.0   107.5       102.4

                               Realised oil price (US$/bbl)
                               China                                                   108.9         113.1   107.3       102.2
                               Kazakhstan - exports                                     90.0          91.4    86.9        81.8
                               Kazakhstan - domestic                                    31.0          53.9    53.9        53.9

                               Average opex before windfall tax (US$/BOE)
                               China                                                     35.5         41.8    47.2        45.1
                               Kazakhstan                                                66.9         63.0    44.9        42.7
                               Source: Company data. BOCI Research estimates


                               Figure 2. Sum-of-parts Valuation
                               Asset                                           Valuation method                Value per share
                                                                                                                        (RMB)
                               China and Kazakhstan operations                 DCF at 10%                                  2.82
                               US shale assets                                 Cost                                        0.05
                               CBM assets in China                             Cost                                        0.10
                               Net debt                                        2012E balance sheet                       (0.83)

                               Total (RMB)                                                                                2.14
                               Total (HK$)                                                                                2.65
                               Source: BOCI Research estimates




17 October 2012               MIE Holdings                                                                                  19
                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Income Statement (RMB m)                                                     Cash-flow Statement (RMB m)
Year ended 31 Dec                  2010       2011 2012E 2013E 2014E Year ended 31 Dec                          2010 2011 2012E 2013E 2014E
Revenue                            1,805     2,827 3,612 4,375 4,330 Pre-tax profit                              583 1,400       952 1,299 1,342
Cost of sales                      (736)     (925) (1,338) (1,717) (1,664) Depreciation & amortisation           529      542    794 1,097 1,027
Operating expenses (exclude           94     (261) (268)      (39) (120) Net interest expenses                     87     230    257     254     244
depreciation & amortisation)                                                Change in working capital            137       (6)   168     101 (111)
EBITDA                             1,163     1,641 2,005 2,618 2,545 Tax paid                                  (257) (264) (297) (339) (323)
Depreciation & amortisation        (529)     (542) (794) (1,097) (1,027) Other operating cash flows              (63) (731) (127) (286) (280)
Operating profit (EBIT)              634     1,099 1,211 1,521 1,518 Cash flow from operations                 1,015 1,170 1,746 2,126 1,899
Net interest income/(expenses)       (87)    (230) (257) (254) (244) Net purchase of fixed assets              (910) (2,247) (2,164) (2,086) (1,150)
Other gains/(losses)                   35      531      (2)     32      68 Decrease/(increase) in invest.           0        0     0       0       0
Pre-tax profit                       583     1,400     952 1,299 1,342 Other investing cash flows                (92)       39     0       0       0
Tax on profit                      (162)     (294) (297) (339) (323) Cash flow from investing                (1,003) (2,208) (2,164) (2,086) (1,150)
Minority interests                      0        0        0      0        0 Net increase in equity               540         0     0       0       0
Net profit                           421     1,106     655     960 1,020 Net increase in debt                       0 1,216      312       0       0
Core net profit                      460       614     717     968     985 Dividends paid                      (137)      (77)  (95)    (65)    (96)
EPS (RMB)                          0.190     0.418 0.245 0.354 0.371 Other financing cash flows                  (27)     (46)     0       0       0
Core EPS (RMB)                     0.207     0.232 0.269 0.357 0.359 Cash flow from financing                    377 1,094       218    (65)    (96)
DPS (RMB)                          0.030     0.036 0.025 0.036 0.039 Change in cash                              389        57 (200)    (25)     653
Revenue growth (%)                     55       57      28      21      (1) Cash at beginning of year            321      710    767     567     541
EBIT growth (%)                      163        73      10      26        0 Free cash flow to firm                 12 (1,037) (418)       40     749
EBITDA growth (%)                      69       41      22      31      (3) Free cash flow to equity               12     179 (106)       40     749
EPS growth (%)                       209       120    (41)      44        5 Source: Company data, BOCI Research estimates
Core EPS growth (%)                    55       12      16      33        0
Source: Company data, BOCI Research estimates
                                                                             Key Ratios
                                                                             Year ended 31 Dec                2010     2011    2012E   2013E   2014E
Balance Sheet (RMB m)                                                        Profitability (%)
As at 31 Dec                         2010        2011 2012E 2013E 2014E      EBITDA margin                    64.4      58.1    55.5    59.8    58.8
Cash & cash equivalents                710         767   567   541 1,194     EBIT margin                      35.1      38.9    33.5    34.8    35.1
Receivables                             26         211   269   326    323    Pre-tax margin                   32.3      49.5    26.4    29.7    31.0
Inventories                             37          52    75    96     93    Net profit margin                23.3      39.1    18.1    21.9    23.6
Other current assets                   383         502 1,355 1,553 1,374     Liquidity (x)
Total current assets                1,156       1,531 2,266 2,516 2,984      Current ratio                     1.3       1.0     1.2     1.2     1.6
Fixed assets                        3,024       5,267 6,263 7,262 7,392      Interest coverage                 7.3       4.7     4.6     5.9     6.0
Intangible assets                        2         584   571   558    545    Net debt to equity (%)           29.7      57.2    52.8    41.3    25.1
Other long term assets                  44          44    44    44     44    Quick ratio                       1.2       0.9     1.2     1.2     1.5
Total long-term assets              3,071       5,895 6,877 7,863 7,981      Valuation (x)
Total assets                        4,227       7,426 9,143 10,380 10,965    P/E                               9.1       4.1     7.1     4.9     4.7
Creditors                              527         687   937 1,116    999    Core P/E                          8.4       7.5     6.4     4.8     4.8
Short-term debt                         99           0    60     0      0    Core P/E @ target price          10.3       9.2     8.0     6.0     6.0
Other current liabilities              293         882   872   929    906    P/B                               2.3       1.5     1.1     0.9     0.8
Total current liabilities              919      1,570 1,869 2,045 1,904      P/CF                              3.8       3.9     2.6     2.2     2.4
Long-term borrowings                1,192       2,463 2,693 2,690 2,683      EV/EBITDA                         4.4       3.8     3.4     2.6     2.4
Other long-term liabilities            156         431   436   436    436    Activity ratios
Share capital                           18          18    18    18     18    Inventory days                   28.0      17.5    17.3    18.2    20.8
Reserves                            1,942       2,942 4,124 5,188 5,920      Accounts receivables days         7.8      15.3    24.2    24.8    27.3
Shareholders' equity                1,960       2,959 4,142 5,206 5,938      Accounts payables days          118.8      78.4    82.1    85.6    89.1
Minority interests                       0           4     4     4      4    Returns (%)
Total liabilities & equity          4,227       7,426 9,143 10,380 10,965    Dividend payout ratio            18.5       8.6    10.0    10.0    10.0
Book value per share (RMB)            0.74        1.12  1.56 1.97    2.24    Return on equity                 26.2      45.0    18.4    20.5    18.3
Tangible assets per share (RMB)       0.74        0.90  1.35 1.76    2.04    Return on assets                 11.5      14.9    10.1    11.5    10.8
Net debt/(cash)per share (RMB)        0.22        0.64  0.83 0.81    0.56    Return on capital employed       21.7      25.4    19.8    20.6    18.5
Source: Company data, BOCI Research estimates                                Source: Company data, BOCI Research estimates




17 October 2012                               MIE Holdings                                                                                       20
                                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
 Target Price Change                                                                                                                                                         17 October 2012
                                      857 HK                    601857 CH

Stock Rating                    BUY BUY                                                           PetroChina
Price                              HK$10.70                    RMB8.87                            A play on price reforms
Target Price                       HK$12.19                    RMB10.94
Prior TP                           HK$12.74                    RMB11.48                           In the past couple of days, PetroChina’s share prices regained some
Up/Downside                         +14%                         +23%                             momentum on the recent news in the natural gas pricing reform.
                                                                                                  Together with the smaller refining loss for 3Q12 after two rounds of
                                                             Preimum to H
TP Basis                       Sum of parts                                                       increases in refined product prices, the company’s earnings should
                                                              share target                        go on an uptrend in the near future after seeing a short-term bottom
Sector Rating                  OVERWEIGHT                    OVERWEIGHT                           in 2Q12. We reiterate our BUY calls on both the company’s H shares
                                                                                                  and A shares with slightly lower target prices.
Trading Summary — H shares                                                                         Key Factors for Rating
         HK$                                                    Tu rn o v e r (H K $ m )
1 4 .0                                                                                     1662
                                                                                                       According to China Securities Journal, the new proposal to expand the pilot
                                                                                                       area of the natural gas pricing reform has recently been submitted to the
                                                                                           1462
1 3 .0
                                                                                           1262
1 2 .0
                                                                                           1062        relevant authorities for approval. The Sichuan-Chongqing area is likely to be
11 .0                                                                                      862         the next area to launch the reform. This area is an important market to
1 0 .0
                                                                                           662
                                                                                           462
                                                                                                       PetroChina, accounting for around 20% of its total gas sales. Based on our
 9 .0
                                                                                           262         rough estimate, a RMB0.4/cu m increase in the city gate gas price will boost its
 8 .0
         1     1    1      2      2       2   2     2   2       2      2        2
                                                                                           62          2013E earnings by about 4%. To be conservative, we do not assume any
                                                                                                       increase in the natural gas price in our current forecasts.
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                   P e tro C h in a - H                 H S C E I IN D E X                             The company should see a smaller refining loss in 3Q12 after two rounds of
(%)                                           YTD        1M           3M              12M              increases in refined product prices in August and September 2012. It will be
Absolute                                      9.2        8.4         12.0             14.8             positive to the company if the NDRC reforms the pricing mechanism for key
                                                                                                       refined products (mainly by shortening the review period from 22 days to 10
Relative to HSCEI                             6.3       (0.7)        (0.9)             5.4             days) and adheres to the new mechanism.
                                                                                                       Decent dividend yield with a well-defined dividend policy (45% payout).
Shares outstanding (m)                                                        183,021
Free float (%)                                                                     12              Key Risks to Rating
Market cap. (HK$ m)                                                         1,958,324
                                                                                                       Continued huge loss from importing natural gas and LNG.
3M avg. daily turnover (HK$ m)                                                    641
Net debt/equity (%) (2012E)                                                        30                  Lack of further progress in the reform of natural gas pricing mechanism.
Major shareholder (%)
                                                                                                   Valuation
 CNPC                                                                                       87
                                                                                                       We lower our target price for its H shares from HK$12.74 to HK$12.19, which
Source: Company data, Bloomberg, BOCI Research
Closing prices are as of 16 October 2012
                                                                                                       is still based on the sum-of-parts method.
                                                                                                       We also trim our target price for its A shares from RMB11.48 to RMB10.94. We
                                                                                                       still set our target valuation based on the three-month average A-H premium of
                                                                                                       the company’s shares, which has slightly expanded from 10% to 11% since our
                                                                                                       last report in late August.
                                                                                                  Investment Summary — H shares
                                                                                                  Year ended 31 Dec                        2010         2011       2012E        2013E        2014E
                                                                                                  Revenue (RMB m)                     1,465,415    2,003,843    2,157,802    2,216,219    2,229,049
                                                                                                    Change (%)                                44           37            8            3            1
                                                                                                  Net profit (RMB m)                    139,992      132,961      124,207      130,410      120,336
                                                                                                  Fully diluted EPS (RMB)                 0.765        0.726        0.679        0.713        0.657
                                                                                                    Change (%)                              35.4        (5.0)        (6.6)          5.0        (7.7)
                                                                                                  Consensus EPS (RMB)                          -            -       0.755        0.835        0.906
                                                                                                  Previous EPS (RMB)                           -            -       0.687        0.715        0.675
                                                                                                   Change (%)                                  -            -        (1.2)        (0.3)        (2.7)
                                                                                                  Fully diluted P/E (x)                     11.3         11.9        12.8         12.1         13.2
BOCI Research Limited                                                                             CFPS (RMB)                                1.72        1.63         1.48         1.77         1.77
Energy: Oil & Gas                                                                                 P/CF (x)                                   5.0          5.3          5.9          4.9          4.9
                                                                                                  EV/EBITDA (x)                              5.9          5.8          5.9          5.5          5.6
 Lawrence Lau, CFA
                                                                                                  DPS (RMB)                               0.344        0.327        0.306        0.321        0.296
 (852) 3988 6418
 lawrence.lau@bocigroup.com                                                                       Yield (%)                                  4.0          3.8          3.5          3.7          3.4
                                                                                                  Source: Company data, BOCI Research estimates

BOCI research is available electronically on www.bociresearch.com.
Trading Summary — A shares                                                                          Investment Summary — A shares
1 2 .0
         RM B                                                         Tu rn o v e r (R M B
                                                                               m)                   Year ended 31 Dec                         2010            2011       2012E          2013E        2014E
11 .5
11 .0
                                                                                             7 11
                                                                                             6 11
                                                                                                    Revenue (RMB m)                      1,465,415       2,003,843    2,157,802      2,216,219    2,229,049
1 0 .5                                                                                       5 11     Change (%)                                 44              37            8              3            1
1 0 .0                                                                                       4 11
 9 .5                                                                                        3 11   Net profit (RMB m)                     139,871         132,984      124,230        130,433      120,359
 9 .0                                                                                        2 11
                                                                                                    Fully diluted EPS (RMB)                  0.764           0.727        0.679          0.713        0.658
 8 .5                                                                                        111
 8 .0
         1      1      1      2       2    2     2     2       2     2        2        2
                                                                                             11       Change (%)                               35.6           (4.9)        (6.6)            5.0        (7.7)
         1
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                                                                                                    Consensus EPS (RMB)                           -               -       0.724          0.789        0.847
         0      1      2      /       /    /     /     /       /     /        /        /
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                    P e tro C h in a - A                   F T S E C H IN A A 5 0                   Previous EPS (RMB)                            -               -       0.687          0.715        0.675
(%)                                            YTD          1M            3M 12M                     Change (%)                                   -               -        (1.2)          (0.3)        (2.7)
Absolute                                       (9.1)       (0.9)         (0.9) (11.3)               Fully diluted P/E (x)                      11.6            12.2        13.1           12.4         13.5
Relative to XIN9I                              (6.6)        1.3           4.5 (2.2)                 CFPS (RMB)                                 1.77            1.62        1.47           1.75         1.76
                                                                                                    P/CF (x)                                    5.0             5.5          6.0            5.1          5.0
Shares outstanding (m)                                                           183,021            EV/EBITDA (x)                               6.2             6.3          6.5            6.1          6.2
Free float (%)                                                                         2            DPS (RMB)                                0.344           0.327        0.306          0.321        0.296
Market cap. (RMB m)                                                            1,623,396            Yield (%)                                   3.9             3.7          3.4            3.6          3.3
3M avg. daily turnover (RMB m)                                                        91 Source: Company data, BOCI Research estimates
Net debt/equity (%) (2012E)                                                           36
Major shareholder (%)
 CNPC                                                                                        87     3Q12 Results Forecasts
Source: Company data, Bloomberg, BOCI Research                                                      PetroChina will announce its 3Q12 earnings on 31 October 2012. We expect the
Closing prices are as of 16 October 2012                                                            company’s earnings to fall 29% YoY for both H shares and A shares in 3Q12. On a
                                                                                                    quarter-on-quarter basis, we expect its earnings to grow 17% to RMB26.7bn for
                                                                                                    both H shares and A shares mainly on a smaller refining loss following the two
                                                                                                    rounds of increases in refined product prices in August and September. In addition,
                                                                                                    we should also see better profitability for its natural gas and pipeline segment as the
                                                                                                    cost of natural gas from Central Asia should fall in 3Q12 given its price adjustment on
                                                                                                    a quarterly basis according to international oil prices.
                                                                                                    For 9M12, we still expect the company’s earnings to fall 14% YoY to RMB88.7bn for
                                                                                                    both its H shares and A shares.


                                                                                                    Figure 1. Forecast of Operating Profit by Segment – 3Q12 (H shares)
                                                                                                    (RMB bn)                            3Q11            3Q12E         YoY %              2Q12       QoQ %
                                                                                                    Exploration & production              57.1            43.4          (24)              53.4        (19)
                                                                                                    Refining & chemicals                (17.4)            (9.1)         (48)            (18.1)         NA
                                                                                                    Refining                            (18.2)            (6.9)         (62)            (12.9)         NA
                                                                                                    Chemicals                              0.8            (2.2)          NA               (5.2)        NA
                                                                                                    Marketing                              4.4              4.7            5                3.9         18
                                                                                                    Natural gas & pipelines                2.5              3.4           34              (0.4)        NA
                                                                                                    Others                               (1.7)            (3.2)           87              (3.2)          -
                                                                                                    Total operating profit                44.9            39.2          (13)              35.8          10
                                                                                                    Sources: Company data, BOCI Research estimates


                                                                                                    Figure 2. Forecast of Operating Profit by Segment – 9M12 (H shares)
                                                                                                    (RMB bn)                                         9M11                  9M12E                     YoY %
                                                                                                    Exploration & production                         160.8                  157.2                       (2)
                                                                                                    Refining & chemicals                             (38.4)                 (38.0)                      NA
                                                                                                    Refining                                         (41.5)                 (30.2)                      NA
                                                                                                    Chemicals                                           3.1                  (7.8)                      NA
                                                                                                    Marketing                                          18.0                   14.7                     (19)
                                                                                                    Natural gas & pipelines                            13.2                    5.0                     (62)
                                                                                                    Others                                           (11.3)                  (9.1)                      NA
                                                                                                    Total operating profit                           142.4                  129.8                       (9)
                                                                                                    Sources: Company data, BOCI Research estimates




17 October 2012                                                         PetroChina                                                                                                                       22
                                                            THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
                               Figure 3. Sum-of-parts Valuation – H shares
                                                                                       2012E
                                                                 Valuation method   NAV/share
                                                                                       (RMB)
                               Exploration and production        DCF at 10%               7.80
                               Refining & Chemicals              1.2x BV                  1.93
                               Marketing                         1.2x BV                  1.00
                               Natural gas & pipelines           DCF at 10%               1.52
                               HQ expenses                       DCF at 10%             (0.42)
                               Associates & investments          Book value               0.46
                               Net cash/ (debt)                  Balance sheet          (1.92)
                               Minority interests                Balance sheet          (0.51)

                               NAV (RMB)                                                  9.86
                               NAV (HK$)                                                 12.19
                               Source: BOCI Research estimates




17 October 2012               PetroChina                                                   23
                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Income Statement – H shares (RMB m)                                                    Cash-flow Statement – H shares (RMB m)
Year ended 31 Dec              2010       2011       2012E       2013E       2014E     Year ended 31 Dec                     2010         2011       2012E        2013E       2014E
Revenue                   1,465,415 2,003,843 2,157,802 2,216,219 2,229,049            Pre-tax profit                     189,305      184,215      174,298     183,003      168,866
Cost of sales           (1,013,813) (1,486,675) (1,666,121) (1,708,577) (1,732,746)    Depreciation & amortisation        113,209      138,073      155,866     174,862      188,101
Operating expenses        (150,615) (196,634) (160,859) (144,528) (133,527)            Net interest expenses                 4,338        8,212      11,949      16,080       16,014
(exclude depreciation &                                                                Change in working capital           31,741         1,377    (22,348)      (2,444)       (538)
amortisation)
                                                                                       Tax paid                          (26,169)     (46,379)     (38,256)    (36,603)     (38,431)
Operating profit (EBIT)     187,777 182,461 174,956 188,253 174,675                    Other operating cash flows            2,600      12,869     (11,291)    (10,831)     (10,206)
Depreciation &            (113,209) (138,073) (155,866) (174,862) (188,101)
                                                                                       Cash flow from operations          315,024      298,367      270,218     324,067      323,806
amortisation
                                                                                       Net purchase of fixed assets     (260,509)    (270,970)    (294,800)   (281,800)    (281,800)
EBITDA                      300,986 320,534 330,822 363,115 362,776
                                                                                       Decrease/(increase) in invest.    (29,320)       (5,385)           0            0           0
Net interest                 (4,338)    (8,212) (11,949) (16,080) (16,014)
inc./(expenses)                                                                        Other investing cash flows            1,621      (9,542)           0            0           0
Other gains/(losses)           5,866      9,966      11,291      10,830      10,205    Cash flow from investing         (288,208)    (285,897)    (294,800)   (281,800)    (281,800)
Pre-tax profit              189,305 184,215 174,298 183,003 168,866                    Net increase in equity                    0            0           0            0           0
Tax on profit               (38,513) (38,256) (36,603) (38,431) (35,462)               Net increase in debt                  (510)      85,785      112,302      35,552        9,463
Minority interests          (10,800) (12,998) (13,488) (14,162) (13,068)               Dividends paid                    (56,153)     (66,933)     (58,040)    (56,462)     (56,737)
Net profit                  139,992 132,961 124,207 130,410 120,336                    Other financing cash flows          (8,619)    (18,142)     (11,949)    (16,080)     (16,014)
Core net profit             139,992 132,961 124,207 130,410 120,336                    Cash flow from financing          (65,282)           710      42,313    (36,990)     (63,287)
EPS (RMB)                      0.765      0.726       0.679       0.713       0.657    Change in cash                    (38,466)       13,180       17,731        5,277    (21,281)
Core EPS (RMB)                 0.765      0.726       0.679       0.713       0.657    Cash at beginning of year           86,955       48,723       61,590      79,321       84,597
DPS (RMB)                      0.344      0.327       0.306       0.321       0.296    Free cash flow to firm              28,799       15,144     (23,007)      44,099       43,659
Revenue growth (%)                44         37            8          3            1   Free cash flow to equity            21,968       90,043       75,771      61,739       35,456
EBIT growth (%)                   31         (3)         (4)          8          (7)   Source: Company data, BOCI Research estimates
EBITDA growth (%)                 28           6           3         10            0
EPS growth (%)                    35         (5)         (7)          5          (8)
                                                                                       Key Ratios – H shares
Core EPS growth (%)               35         (5)         (7)          5          (8)
                                                                                       Year ended 31 Dec                   2010         2011        2012E       2013E        2014E
Source: Company data, BOCI Research estimates
                                                                                       Profitability (%)
                                                                                       EBITDA margin                        20.5         16.0         15.3         16.4        16.3
Balance Sheet – H shares (RMB m)                                                       EBIT margin                          12.8          9.1          8.1          8.5         7.8
As at 31 Dec                        2010     2011     2012E     2013E     2014E        Pre-tax margin                       12.9          9.2          8.1          8.3         7.6
Cash & cash equivalents           48,722 61,590 79,321 84,597 63,317                   Net profit margin                     9.6          6.6          5.8          5.9         5.4
Receivables                       45,005 53,822 60,453 62,089 62,449                   Liquidity (x)
Inventories                      134,888 182,253 223,864 226,001 226,475               Current ratio             0.7        0.7                        0.7          0.6         0.6
Other current assets              57,777 85,046 104,091 119,557 139,913                Interest coverage        29.7       16.8                       12.9         10.5         9.9
Total current assets             286,392 382,711 467,728 492,245 492,153               Net debt to equity (%)   18.3       23.7                       30.2         30.5        31.1
Fixed assets                   1,238,599 1,372,007 1,494,009 1,584,105 1,660,864       Quick ratio               0.4        0.4                        0.3          0.3         0.3
Intangible assets                 25,453 38,854 38,398 37,942 37,486                   Valuation (x)
Other long term assets           106,043 124,014 135,319 145,975 156,042               P/E                      11.3       11.9                       12.8         12.1        13.2
Total long-term assets         1,370,095 1,534,875 1,667,726 1,768,022 1,854,391       Core P/E                 11.3       11.9                       12.8         12.1        13.2
Total assets                   1,656,487 1,917,586 2,135,454 2,260,267 2,346,545       Core P/E @ target price  12.9       13.6                       14.5         13.8        15.0
Creditors                         97,361 113,411 139,304 140,634 140,929               P/B                       1.7        1.6                        1.5          1.4         1.3
Short-term debt                  102,268 137,698 264,448 370,537 441,898               P/CF                      5.0        5.3                        5.9          4.9         4.9
Other current liabilities        230,107 308,929 308,929 308,929 308,929               EV/EBITDA                 5.9        5.8                        5.9          5.5         5.6
Total current liabilities        429,736 560,038 712,681 820,100 891,756               Activity ratios
Long-term borrowings             131,352 180,675 166,243 95,528 33,482                 Inventory days           44.9       38.9                       44.5         48.1        47.7
Other long-term liabilities       85,270 94,327 94,327 94,327 94,327                   Accounts receivables days 9.2        9.0                        9.7         10.1        10.2
Share capital                    183,021 183,021 183,021 183,021 183,021               Accounts payables days   20.0       19.2                       21.4         23.1        23.1
Reserves                         755,905 819,724 885,892 959,840 1,023,440             Returns (%)
Shareholders' equity             938,926 1,002,745 1,068,913 1,142,861 1,206,461       Dividend payout ratio    45.0       45.0                       45.0         45.0        45.0
Minority interests                71,203 79,801 93,289 107,451 120,519                 Return on equity         15.7       13.7                       12.0         11.8        10.2
Total liabilities & equity     1,656,487 1,917,586 2,135,454 2,260,267 2,346,545       Return on assets          9.6        8.1                        6.8          6.8         6.0
Book value per share (RMB)           5.13     5.48      5.84      6.24      6.59                                15.9
                                                                                       Return on capital employed          14.0                       11.8         11.5        10.0
Tangible assets per share(RMB)       4.99     5.27      5.63      6.04      6.39 Source: Company data, BOCI Research estimates
Net debt/(cash)per share (RMB)       1.01     1.40      1.92      2.08      2.25
Source: Company data, BOCI Research estimates




17 October 2012                                 PetroChina                                                                                                                      24
                                    THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Income Statement – A shares (RMB m)                                                    Cash-flow Statement – A shares (RMB m)
Year ended 31 Dec              2010       2011       2012E       2013E       2014E     Year ended 31 Dec                 2010     2011     2012E     2013E     2014E
Revenue                   1,465,415 2,003,843 2,157,802 2,216,219 2,229,049            Pre-tax profit                 189,194 184,276 174,331 183,035 168,898
Cost of sales           (1,147,875) (1,683,311) (1,857,581) (1,897,692) (1,920,286)    Depreciation & amortisation    108,965 129,655 155,866 174,861 188,100
Operating expenses          (16,515)    (9,174)      25,716      39,702      49,127    Net interest expenses             4,845    8,880    11,949    16,080    16,014
(exclude depreciation &                                                                Change in working capital        43,998  (3,941) (31,341) (11,104) (10,390)
amortisation)
                                                                                       Tax paid                       (38,519) (38,269) (36,609) (38,437) (35,469)
Operating profit (EBIT)     192,060 181,703 170,072 183,368 169,790                    Other operating cash flows       15,474   16,310   (5,525)   (4,876)   (4,285)
Depreciation &            (108,965) (129,655) (155,866) (174,861) (188,100)
                                                                                       Cash flow from operations 323,957 296,911 268,670 319,559 322,869
amortisation
                                                                                       Net purchase of fixed assets (272,292) (288,457) (294,800) (281,800) (281,800)
EBITDA                      301,025 311,358 325,938 358,229 357,890
                                                                                       Decrease/(increase) in invest. (38,307)  (9,321)         0         0         0
Net interest                 (4,845)    (8,880) (11,949) (16,080) (16,014)
inc./(expenses)                                                                        Other investing cash flows       16,439  (1,264)         0         0         0
Other gains/(losses)           1,979     11,453      16,208      15,747      15,122    Cash flow from investing (294,160) (299,042) (294,800) (281,800) (281,800)
Pre-tax profit              189,194 184,276 174,331 183,035 168,898                    Net increase in equity                0        0         0         0         0
Tax on profit               (38,519) (38,269) (36,609) (38,437) (35,469)               Net increase in debt              (510)   86,235 112,302      35,552     9,463
Minority interests          (10,804) (13,023) (13,491) (14,164) (13,070)               Dividends paid                 (53,197) (63,300) (58,040) (56,462) (56,737)
Net profit                  139,871 132,984 124,230 130,433 120,359                    Other financing cash flows     (12,398)  (8,402) (12,138) (16,270) (16,204)
Core net profit             139,871 132,984 124,230 130,433 120,359                    Cash flow from financing       (66,105)   14,533    42,124 (37,180) (63,477)
EPS (RMB)                      0.764      0.727       0.679       0.713       0.658    Change in cash                 (36,308)   12,402    15,994       579 (22,408)
Core EPS (RMB)                 0.764      0.727       0.679       0.713       0.658    Cash at beginning of year        88,284   52,210    64,299    80,293    80,872
DPS (RMB)                      0.344      0.327       0.306       0.321       0.296    Free cash flow to firm           31,780      543 (24,555)     39,591    42,722
Revenue growth (%)                44         37            8          3            1   Free cash flow to equity         24,949   75,892    74,223    57,231    34,518
EBIT growth (%)                   29         (5)         (6)          8          (7)   Source: Company data, BOCI Research estimates
EBITDA growth (%)                 26           3           5         10            0
EPS growth (%)                    36         (5)         (7)          5          (8)
                                                                                       Key Ratios – A shares
Core EPS growth (%)               36         (5)         (7)          5          (8)
                                                                                       Year ended 31 Dec              2010       2011     2012E     2013E      2014E
Source: Company data, BOCI Research estimates
                                                                                       Profitability (%)
                                                                                       EBITDA margin                   20.5      15.5       15.1      16.2       16.1
Balance Sheet – A shares (RMB m)                                                       EBIT margin                     13.1       9.1        7.9       8.3        7.6
As at 31 Dec                     2010      2011     2012E     2013E     2014E          Pre-tax margin                  12.9       9.2        8.1       8.3        7.6
                                                                                       Net profit margin                9.5       6.6        5.8       5.9        5.4
Cash & cash equivalents         52,210 64,299 80,293 80,872 58,464
                                                                                       Liquidity (x)
Receivables                     45,005 53,822 60,453 62,089 62,449
                                                                                       Current ratio           0.7         0.7               0.8       0.7        0.6
Inventories                    134,888 182,253 223,864 226,001 226,475
                                                                                       Interest coverage      27.8       15.8               12.0       9.9        9.3
Other current assets            57,777 85,046 198,764 211,284 223,750
                                                                                       Net debt to equity (%) 18.0       23.5               36.0      36.2       36.5
Total current assets           289,880 385,420 563,374 580,247 571,138
                                                                                       Quick ratio             0.4         0.4               0.5       0.4        0.4
Fixed assets                 1,238,306 1,371,661 1,493,663 1,583,759 1,660,518
                                                                                       Valuation (x)
Intangible assets               40,289 54,882 46,534 45,320 44,106
                                                                                       P/E                    11.6       12.2               13.1      12.4       13.5
Other long term assets          87,893 105,565 116,870 127,526 137,593                 Core P/E               11.6       12.2               13.1      12.4       13.5
Total long-term assets       1,366,488 1,532,108 1,657,067 1,756,605 1,842,216         Core P/E @ target price14.3       15.1               16.1      15.4       16.6
Total assets                 1,656,368 1,917,528 2,220,441 2,336,852 2,413,354         P/B                     1.7         1.6               1.5       1.4        1.3
Creditors                      209,015 232,618 281,192 274,094 264,588                 P/CF                    5.0         5.5               6.0       5.1        5.0
Short-term debt                102,268 137,698 264,448 370,537 441,898                 EV/EBITDA               6.2         6.3               6.5       6.1        6.2
Other current liabilities      118,453 189,722 184,314 184,314 184,314                 Activity ratios
Total current liabilities      429,736 560,038 729,954 828,945 890,800                 Inventory days         39.7       34.4               39.9      43.3       43.0
Long-term borrowings           131,352 180,675 233,990 163,275 101,229                                         9.2
                                                                                       Accounts receivables days           9.0               9.7      10.1       10.2
Other long-term liabilities     85,179 94,249 94,249 94,249 94,249                     Accounts payables days 45.6       40.2               43.5      45.7       44.1
Share capital                  183,021 183,021 183,021 183,021 183,021                 Returns (%)
Reserves                       756,022 819,864 886,055 960,026 1,023,649               Dividend payout ratio  45.0       45.0               45.0      45.0       45.0
Shareholders' equity           939,043 1,002,885 1,069,076 1,143,047 1,206,670         Return on equity       15.7       13.7               12.0      11.8       10.2
Minority interests              71,058 79,681 93,172 107,336 120,407                   Return on assets        9.8         8.1               6.5       6.4        5.6
                                                                                                              16.7
                                                                                       Return on capital employed        13.9               11.3      10.8        9.4
Total liabilities & equity   1,656,368 1,917,528 2,220,441 2,336,852 2,413,354
Book value per share (RMB)        5.13      5.48      5.84      6.25      6.59 Source: Company data, BOCI Research estimates
Tangible assets per share(RMB) 4.91         5.18      5.59      6.00      6.35
Net debt/(cash)per share (RMB)    0.99      1.39      2.28      2.47      2.65
Source: Company data, BOCI Research estimates




17 October 2012                                 PetroChina                                                                                                        25
                                    THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
 Target Price Change                                                                                                                                                         17 October 2012
                                      386 HK                   600028 CH

Stock Rating                   BUY BUY                                                            Sinopec
Price                                 HK$7.82                  RMB6.12                            Braced for decent 3Q12 results
Target Price                          HK$8.62                  RMB7.29
Prior TP                              HK$8.41                   RMB7.52                           We expect Sinopec to post decent QoQ growth in earnings in 3Q12
                                                                                                  as the company benefited from the increases in refined product
Up/Downside                            +10%                      +19%                             prices in August and September. We change our forecasts slightly
                                                             Premium to H                         mainly to reflect the changes in our refined product price forecasts.
TP Basis                               P/B
                                                                shares                            The NDRC’s stronger adherence to the existing pricing mechanism
Sector Rating                 OVERWEIGHT                     OVERWEIGHT                           and probable reform of the existing system should improve earnings
                                                                                                  visibility. We reiterate our BUY calls on both its H shares and A
                                                                                                  shares.
Trading Summary — H shares
         HK$                                                    Tu rn o v e r (H K $ m )
                                                                                                   Key Factors for Rating
11 .0
1 0 .5
                                                                                           2040
                                                                                                       The profitability of Sinopec’s refining business has improved significantly
1 0 .0
  9 .5                                                                                     1540        following the increases in refined product prices in August and September.
  9 .0                                                                                                 According to our estimation, the company’s refining business should have been
  8 .5
  8 .0
                                                                                           1040
                                                                                                       profitable in September. In our base-case scenario of a gradual decline in crude
  7 .5
                                                                                           540
                                                                                                       oil prices over time, the company should see continuous improvement in
                                                                                                       profitability in future after hitting a bottom in 2Q12.
  7 .0
  6 .5
  6 .0                                                                                     40
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                                                                                                       The NDRC has been adhering more closely to the pricing mechanism for refined
                                                                                                       products in recent months, especially in terms of the timing of pricing
         7     7   7      7      7     7    7      7     7     7       7        7
         1     1   1      1      1     1    1      1     1     1       1        1


                   S in o p e c - H                    H S C E I IN D E X                              adjustment. If the NDRC can keep on following the mechanism closely or even
(%)                                        YTD          1M           3M              12M               introduce the long-awaited reform to the system, it will help to improve the
Absolute                                   (3.0)        9.5          16.7             8.9              visibility of Sinopec’s earnings.
Relative to HSCEI                          (5.8)        0.5          3.9             (0.5)             Low valuations: 1.1x 2012E P/B for H shares and 1.0x 2012E P/B for A shares.

Shares outstanding (m)                                                          86,819
Free float (%)                                                                      19             Key Risks to Rating
Market cap. (HK$ m)                                                            678,928                 The NDRC fails to keep up with its recent good records in adjusting the prices
3M avg. daily turnover (HK$ m)                                                     488                 of key refined products on a timely basis.
Net debt/equity (%) (2012E)                                                         61                 Prolonged weakness in demand and hence petrochemical prices.
Major shareholder (%)
 Sinopec Group                                                                             76
                                                                                                   Valuation
Source: Company data, Bloomberg, BOCI Research
Closing prices are as of 16 October 2012                                                               We increase our target price for its H shares from HK$8.41 to HK$8.62
                                                                                                       following the changes in our earnings forecasts. Our target valuation is still at
                                                                                                       1.2x 2012E P/B.
                                                                                                       As for its A shares, we trim our target price from RMB7.52 to RMB7.29 as the
                                                                                                       company’s three-month average A-H premium has narrowed from 9% to 3%
                                                                                                       since our last report in late August.
                                                                                                  Investment Summary — H shares
                                                                                                  Year ended 31 Dec                        2010         2011       2012E        2013E        2014E
                                                                                                  Revenue (RMB m)                     1,913,182    2,505,683    2,663,552    2,668,071    2,628,312
                                                                                                    Change (%)                                42           31            6            0          (1)
                                                                                                  Net profit (RMB m)                     71,782       73,225       56,845       70,726       74,960
                                                                                                  Fully diluted EPS (RMB)                 0.828        0.845        0.615        0.765        0.811
                                                                                                    Change (%)                              13.7          2.0       (27.2)        24.4           6.0
                                                                                                  Consensus EPS (RMB)                          -            -       0.688        0.865        0.912
                                                                                                  Previous EPS (RMB)                           -            -       0.566        0.759        0.847
                                                                                                   Change (%)                                  -            -          8.7          0.8        (4.3)
BOCI Research Limited                                                                             Fully diluted P/E (x)                      7.6          7.5         10.3          8.3          7.8
                                                                                                  CFPS (RMB)                                2.05        1.83          1.81        1.86         1.96
Energy: Oil & Gas
                                                                                                  P/CF (x)                                   3.1          3.5          3.5          3.4          3.2
 Lawrence Lau, CFA                                                                                EV/EBITDA (x)                              4.4          4.4          5.4          4.5          4.3
 (852) 3988 6418                                                                                  DPS (RMB)                               0.210        0.300        0.230        0.290        0.310
 lawrence.lau@bocigroup.com                                                                       Yield (%)                                  3.3          4.7          3.6          4.6          4.9
                                                                                                  Source: Company data, BOCI Research estimates

BOCI research is available electronically on www.bociresearch.com.
Trading Summary — A shares                                                    Investment Summary — A shares
9.0
      RMB                                              Turnover (RMB
                                                            m)
                                                                              Year ended 31 Dec                         2010           2011       2012E        2013E        2014E
8.5
                                                                       818
                                                                              Revenue (RMB m)                      1,913,182      2,505,683    2,618,861    2,624,583    2,586,052
                                                                       718
8.0
                                                                       618      Change (%)                                 42             31            5            0          (1)
7.5
7.0
                                                                       518    Net profit (RMB m)                      69,639         70,584       55,109       68,990       73,224
                                                                       418
6.5                                                                    318
                                                                              Fully diluted EPS (RMB)                  0.803          0.814        0.596        0.746        0.792
6.0                                                                    218      Change (%)                               11.1            1.4       (26.8)        25.2           6.1
5.5                                                                    118
                                                                              Consensus EPS (RMB)                           -              -       0.703        0.785        1.062
5.0                                                                    18
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                                                                              Previous EPS (RMB)                            -              -       0.547        0.740        0.828
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                                                                 1             Change (%)                                   -              -          9.0          0.8        (4.3)
                Sinopec - A                 FTSE CHINA A 50                   Fully diluted P/E (x)                       7.6            7.5         10.3          8.2          7.7
(%)                                YTD 1M                 3M          12M     CFPS (RMB)                                2.06           1.85          1.73        1.83         1.95
Absolute                          (15.0) (0.8)            4.3        (11.1)   P/CF (x)                                    3.0            3.3          3.5          3.3          3.1
Relative to XIN9I                 (12.5) 1.7              9.7         (1.9)   EV/EBITDA (x)                               4.4            4.4          5.4          4.5          4.3
                                                                              DPS (RMB)                                0.210          0.300        0.230        0.290        0.310
Shares outstanding (m)                       86,820                           Yield (%)                                   3.4            4.9          3.8          4.7          5.1
Free float (%)                                    4 Source: Company data, BOCI Research estimates
Market cap. (RMB m)                         531,335
3M avg. daily turnover (RMB m)                  131
Net debt/equity (%) (2012E)                      55 3Q12 Results Preview
Major shareholder (%)                               Sinopec will announce 3Q12 earnings on 29 October. While we expect the company
 Sinopec Group                                   76 to post a 24% YoY decline in earnings, we see them surging 38% QoQ to RMB15.3bn
Source: Company data, Bloomberg, BOCI Research      for its H shares and 39% QoQ to RMB15.1bn for its A shares. The key driver for the
Closing prices are as of 16 October 2012            QoQ growth in earnings is the smaller refining loss.
                                                                              For 9M12, we expect the company’s earnings to fall 35% YoY for both its H shares
                                                                              and A shares to RMB39.8bn and RMB38.8bn, respectively.


                                                                              Figure 1. Forecasts of Operating Profit by Segment – 3Q12 (H shares)
                                                                              (RMB bn)                               3Q11          3Q12E        YoY %          2Q12        QoQ %
                                                                              Exploration and production               20.6          17.1         (17)          20.9         (18)
                                                                              Refining                               (10.9)          (3.0)         NA           (9.3)         NA
                                                                              Marketing                                12.3          10.0         (19)          10.0            0
                                                                              Chemicals                                 7.3            1.0        (86)          (2.6)         NA
                                                                              Headquarters                            (0.7)          (0.5)        (26)          (0.5)           -
                                                                              Elimination                               0.4          (0.2)         NA           (0.2)           -
                                                                              Total                                    29.0          24.4         (16)          18.3           34
                                                                              Source: Company data, BOCI Research estimates


                                                                              Figure 2. Forecasts of Operating Profit by Segment – 9M12 (H shares)
                                                                              (RMB bn)                                          9M11                 9M12E                  YoY%
                                                                              Exploration and production                          55.3                  57.6                     4
                                                                              Refining                                          (23.1)                (21.5)                   (7)
                                                                              Marketing                                           31.9                  30.3                   (5)
                                                                              Chemicals                                           23.7                 (0.3)                   NA
                                                                              Headquarters                                       (1.3)                 (0.9)                  (35)
                                                                              Elimination                                          1.0                 (0.8)                   NA
                                                                              Total                                               87.5                  64.5                  (26)
                                                                              Source: Company data, BOCI Research estimates




17 October 2012                                           Sinopec                                                                                                               27
                                              THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
                             Figure 3. P/B Band Chart (H shares)
                                                                             2.0x   1.8x
                              13.0
                                                                                           1.5x
                              11.0
                                                                                           1.3x
                                                                                           1.2x
                               9.0
                                                                                           1.0x
                               7.0
                                                                                           0.8x
                               5.0
                                                                                           0.5x
                               3.0

                               1.0

                                     10/05
                                     01/06
                                     04/06
                                     07/06
                                     10/06
                                     01/07
                                     04/07
                                     07/07
                                     10/07
                                     01/08
                                     04/08
                                     07/08
                                     10/08
                                     01/09
                                     04/09
                                     07/09
                                     10/09
                                     01/10
                                     04/10
                                     07/10
                                     10/10
                                     01/11
                                     04/11
                                     07/11
                                     10/11
                                     01/12
                                     04/12
                                     07/12
                             Source: BOCI Research




17 October 2012              Sinopec                                                         28
                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Income Statement – H shares (RMB m)                                                  Cash-flow Statement – H shares (RMB m)
Year ended 31 Dec            2010       2011       2012E       2013E       2014E     Year ended 31 Dec               2010      2011 2012E 2013E 2014E
Revenue                 1,913,182 2,505,683 2,663,552 2,668,071 2,628,312            Pre-tax profit               103,663 104,565 81,197 101,024 107,071
Cost of sales         (1,743,553) (2,340,180) (2,512,326) (2,494,068) (2,446,857)    Depreciation &                59,253 63,816 70,598 75,388 79,995
Operating expenses         (5,402)      3,843      10,274      13,660      16,764    amortisation
(exclude depreciation                                                                Net interest expenses          7,312     7,657 11,140 12,686 12,613
& amortisation)                                                                      Change in working capital      1,057     3,606 11,309 (5,566) (5,899)
Operating profit          104,974 105,530          90,902 112,275 118,223            Tax paid                    (14,158) (29,798) (20,299) (25,256) (26,768)
(EBIT)                                                                               Other operating cash          20,548     8,433     3,325     3,354     3,353
Depreciation &            (59,253) (63,816) (70,598) (75,388) (79,995)               flows
amortisation                                                                         Cash flow from               177,675 158,279 157,270 161,630 170,366
EBITDA                    164,227 169,346 161,501 187,663 198,219                    operations
                                                                                     Net purchase of fixed      (113,763) (142,254) (172,800) (147,700) (147,700)
Net interest               (7,312)    (7,657) (11,140) (12,686) (12,613)
                                                                                     assets
inc./(expenses)
                                                                                     Decrease/(increase) in         6,503 (3,233)           0         0         0
Other gains/(losses)         6,001      6,692       1,434       1,435       1,461
                                                                                     invest.
Pre-tax profit            103,663 104,565          81,197 101,024 107,071            Other investing cash flows     1,368     4,456         0         0         0
Tax on profit             (25,681) (26,120) (20,299) (25,256) (26,768)               Cash flow from             (105,892) (141,031) (172,800) (147,700) (147,700)
Minority interests         (6,200)    (5,220)     (4,052)     (5,042)     (5,344)    investing
Net profit                  71,782     73,225      56,845      70,726      74,960    Net increase in equity             2         0         0         0         0
Core net profit             71,782     73,225      56,845      70,726      74,960    Net increase in debt        (19,313) 25,583 39,362 19,823 13,054
EPS (RMB)                    0.828      0.845       0.615       0.765       0.811    Dividends paid              (16,391) (19,469) (26,022) (19,968) (25,178)
Core EPS (RMB)               0.828      0.845       0.615       0.765       0.811    Other financing cash        (27,934) (16,287) (11,140) (12,686) (12,613)
DPS (RMB)                    0.210      0.300       0.230       0.290       0.310    flows
                                                                                     Cash flow from              (63,636) (10,173)      2,200 (12,831) (24,737)
Revenue growth (%)              42         31            6          0          (1)
                                                                                     financing
EBIT growth (%)                 16          1         (14)         24            5
                                                                                     Change in cash                 8,147     7,075 (13,330)      1,099 (2,071)
EBITDA growth (%)               13          3          (5)         16            6   Cash at beginning of year 10,018 18,140 25,197 11,867 12,966
EPS growth (%)                  14          2         (27)         24            6   Free cash flow to firm        72,443 18,832 (14,953) 14,317 23,038
Core EPS growth (%)             14          2         (27)         24            6   Free cash flow to equity      45,158 35,174 12,692 21,067 23,107
Source: Company data, BOCI Research estimates                                        Source: Company data, BOCI Research estimates


Balance Sheet – H shares (RMB m)                                                     Key Ratios – H shares
As at 31 Dec                   2010     2011 2012E 2013E 2014E                       Year ended 31 Dec              2010      2011    2012E     2013E     2014E
Cash & cash equivalents      18,140 25,197 11,867 12,966 10,895                      Profitability (%)
Receivables                  43,093 58,721 58,988 59,117 58,249                      EBITDA margin                    8.6       6.8       6.1       7.0      7.5
Inventories                 156,546 203,417 217,945 218,315 215,061                  EBIT margin                      5.5       4.2       3.4       4.2      4.5
Other current assets         42,450 55,420 165,871 115,108 101,972                   Pre-tax margin                   5.4       4.2       3.0       3.8      4.1
Total current assets        260,229 342,755 454,671 405,505 386,177                  Net profit margin                3.8       2.9       2.1       2.7      2.9
Fixed assets                630,299 677,247 774,960 843,479 908,333                  Liquidity (x)
Intangible assets             8,298     8,212     8,212     8,212     8,212          Current ratio                    0.8       0.8      0.9       0.9       0.9
                                                                                     Interest coverage               13.2      11.4      7.8       8.6       9.1
Other long term assets       96,996 116,314 117,749 119,170 120,604
                                                                                     Net debt to equity (%)          42.5      41.3     60.7      49.9      46.4
Total long-term assets      735,593 801,773 900,921 970,861 1,037,149
                                                                                     Quick ratio                      0.3       0.3      0.5       0.4       0.4
Total assets                995,822 1,144,528 1,355,592 1,376,366 1,423,326
                                                                                     Valuation (x)
Creditors                   132,528 177,002 195,889 193,618 188,633                  P/E                              7.6       7.5     10.3        8.3      7.8
Short-term debt              35,828 80,373 77,326 44,095 23,878                      Core P/E                         7.6       7.5     10.3        8.3      7.8
Other current liabilities   168,050 186,865 236,553 233,857 227,940                  Core P/E @ target price          8.4       8.3     11.3        9.1      8.6
Total current liabilities   336,406 444,240 509,768 471,570 440,451                  P/B                              1.3       1.2      1.1        1.0      0.9
Long-term borrowings        174,075 154,457 264,265 267,438 290,391                  P/CF                             3.1       3.5      3.5        3.4      3.2
Other long-term liabilities  34,305 38,487 38,487 38,487 38,487                      EV/EBITDA                        4.4       4.4      5.4        4.5      4.3
Share capital                86,702 86,702 86,819 86,819 86,819                      Activity ratios
Reserves                    332,902 385,626 417,184 467,941 517,723                  Inventory days                  31.2      28.1     30.6      31.9      32.3
Shareholders' equity        419,604 472,328 504,003 554,761 604,543                  Accounts receivables days        6.6       7.4      8.1       8.1       8.1
Minority interests           31,432 35,016 39,068 44,110 49,454                      Accounts payables days          21.9      22.5     25.5      26.6      26.5
Total liabilities & equity  995,822 1,144,528 1,355,592 1,376,366 1,423,326          Returns (%)
                                                                                     Dividend payout ratio           25.4      35.5     35.1      35.6      35.9
Book value per share (RMB)      4.84     5.45      5.81      6.39      6.96
                                                                                     Return on equity                18.0      16.4     11.6      13.4      12.9
Tangible assets per share(RMB) 4.74      5.35      5.71      6.30      6.87
                                                                                     Return on assets                 8.3       7.4      5.5       6.2       6.3
Net debt/(cash)per share (RMB) 2.21      2.42      3.80      3.44      3.49
                                                                                     Return on capital employed      16.3      15.3     11.2      12.6      12.6
Source: Company data, BOCI Research estimates
                                                                                     Source: Company data, BOCI Research estimates


17 October 2012                                Sinopec                                                                                                        29
                                   THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Income Statement – A shares (RMB m)                                                  Cash-flow Statement – A shares (RMB m)
Year ended 31 Dec            2010       2011       2012E       2013E       2014E     Year ended 31 Dec              2010      2011 2012E 2013E 2014E
Revenue                 1,913,182 2,505,683 2,618,861 2,624,583 2,586,052            Pre-tax profit               101,104 101,525 78,827 98,641 104,684
Cost of sales         (1,537,131) (2,093,199) (2,215,252) (2,197,591) (2,155,019)    Depreciation & amortisation 59,253 63,816 70,598 75,388 79,995
Operating expenses (214,270) (245,344) (247,580) (244,814) (238,304)                 Net interest expenses          7,312     7,657 11,140 12,686 12,613
(exclude depreciation                                                                Change in working capital     10,176 (4,146)       6,059 (6,304) (4,803)
& amortisation)                                                                      Tax paid                    (14,158) (25,774) (19,707) (24,660) (26,171)
Operating profit          102,528 103,324          85,430 106,789 112,733            Other operating cash flows 15,148 17,608           3,326     3,340     3,327
(EBIT)                                                                               Cash flow from               178,835 160,686 150,244 159,091 169,645
Depreciation &            (59,253) (63,816) (70,598) (75,388) (79,995)               operations
amortisation                                                                         Net purchase of fixed      (114,711) (142,813) (172,800) (147,700) (147,700)
EBITDA                    161,781 167,140 156,028 182,177 192,729                    assets
Net interest               (7,312)    (7,657) (11,140) (12,686) (12,613)             Decrease/(increase) in         4,835 (6,272)           0         0         0
inc./(expenses)                                                                      invest.
Other gains/(losses)         5,888      5,858       4,537       4,538       4,564    Other investing cash flows     2,794     4,534         0         0         0
                                                                                     Cash flow from investing (107,082) (144,551) (172,800) (147,700) (147,700)
Pre-tax profit            101,104 101,525          78,827      98,641 104,684
                                                                                     Net increase in equity             2         0         0         0         0
Tax on profit             (25,335) (25,774) (19,707) (24,660) (26,171)
                                                                                     Net increase in debt        (19,313) 25,583 39,362 19,823 13,054
Minority interests         (6,130)    (5,167)     (4,011)     (4,991)     (5,289)
                                                                                     Dividends paid              (16,473) (19,942) (26,022) (19,968) (25,178)
Net profit                  69,639     70,584      55,109      68,990      73,224    Other financing cash flows (27,822) (14,701) (11,140) (12,686) (12,613)
Core net profit             69,639     70,584      55,109      68,990      73,224    Cash flow from financing (63,606) (9,060)          2,200 (12,831) (24,737)
EPS (RMB)                    0.803      0.814       0.596       0.746       0.792    Change in cash                 8,147     7,075 (20,356) (1,441) (2,792)
Core EPS (RMB)               0.803      0.814       0.596       0.746       0.792    Cash at beginning of year     10,018 18,140 25,197           4,841     3,400
DPS (RMB)                    0.210      0.300       0.230       0.290       0.310    Free cash flow to firm        72,413 17,719 (21,979) 11,778 22,317
Revenue growth (%)              42         31            5          0          (1)   Free cash flow to equity      45,128 34,061        5,666 18,528 22,386
EBIT growth (%)                 14          1         (17)         25            6   Source: Company data, BOCI Research estimates
EBITDA growth (%)               12          3          (7)         17            6
EPS growth (%)                  11          1         (27)         25            6
                                                                                     Key Ratios – A shares
Core EPS growth (%)             11          1         (27)         25            6
                                                                                     Year ended 31 Dec               2010      2011    2012E    2013E     2014E
Source: Company data, BOCI Research estimates
                                                                                     Profitability (%)
                                                                                     EBITDA margin                     8.5       6.7      6.0       6.9       7.5
Balance Sheet – A shares (RMB m)                                                     EBIT margin                       5.4       4.1      3.3       4.1       4.4
As at 31 Dec                   2010     2011 2012E 2013E 2014E                       Pre-tax margin                    5.3       4.1      3.0       3.8       4.0
                                                                                     Net profit margin                 3.6       2.8      2.1       2.6       2.8
Cash & cash equivalents      18,140 25,197        4,841     3,400       608
                                                                                     Liquidity (x)
Receivables                  43,093 58,721 58,988 59,117 58,249
                                                                                     Current ratio           0.8        0.8               1.0      1.0       1.0
Inventories                 156,546 203,417 225,608 223,809 219,474
                                                                                     Interest coverage      12.9       11.2               7.3      8.2       8.7
Other current assets         31,671 40,253 210,721 153,975 136,757                   Net debt to equity (%) 42.4       41.1              54.5     45.5      42.9
Total current assets        249,450 327,588 500,158 440,301 415,087                  Quick ratio             0.3        0.3               0.6      0.5       0.5
Fixed assets                622,634 677,247 762,194 839,305 911,631                  Valuation (x)
Intangible assets            35,738 43,054 41,808 40,562 39,316                      P/E                     7.6        7.5              10.3       8.2       7.7
Other long term assets       77,567 82,164 82,164 82,164 82,164                      Core P/E                7.6        7.5              10.3       8.2       7.7
Total long-term assets      735,939 802,465 886,166 962,031 1,033,111                Core P/E @ target price 9.1        9.0              12.2       9.8       9.2
Total assets                985,389 1,130,053 1,386,324 1,402,332 1,448,199          P/B                     1.3        1.1               1.0       0.9       0.8
Creditors                   132,528 177,002 382,448 374,504 364,298                  P/CF                    3.0        3.3               3.5       3.3       3.1
Short-term debt              35,828 80,373 65,177 31,946 11,729                      EV/EBITDA               4.4        4.4               5.4       4.5       4.3
Other current liabilities   157,271 171,698 41,417 41,417 41,417                     Activity ratios
Total current liabilities   325,627 429,073 489,042 447,867 417,445                  Inventory days         35.4       31.4              35.3     37.3      37.5
                                                                                                             6.6
                                                                                     Accounts receivables days          7.4               8.2      8.2       8.3
Long-term borrowings        174,075 154,457 264,265 267,438 290,391
                                                                                     Accounts payables days 21.9       22.5              39.0     52.6      52.1
Other long-term liabilities  33,005 36,998 36,998 36,998 36,998
                                                                                     Returns (%)
Share capital                86,702 86,702 86,820 86,820 86,820
                                                                                     Dividend payout ratio  26.1       36.9              36.2     36.5      36.8
Reserves                    334,425 387,697 470,061 519,082 567,128
                                                                                     Return on equity       17.4       15.8              10.7     11.9      11.6
Shareholders' equity        421,127 474,399 556,880 605,902 653,948                  Return on assets        8.2        7.3               5.1      5.7       5.9
Minority interests           31,555 35,126 39,137 44,128 49,417                                             15.9
                                                                                     Return on capital employed        14.9              10.3     11.4      11.6
Total liabilities & equity  985,389 1,130,053 1,386,323 1,402,332 1,448,199 Source: Company data, BOCI Research estimates
Book value per share (RMB)      4.86     5.47      6.41      6.98      7.53
Tangible assets per share(RMB) 4.44      4.98      5.93      6.51      7.08
Net debt/(cash)per share (RMB) 2.21      2.42      3.74      3.41      3.47
Source: Company data, BOCI Research estimates



17 October 2012                                Sinopec                                                                                                        30
                                   THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
                               APPENDIX. BASICS ABOUT CHINA
                               China is a growing oil consumer. In 8M12, its apparent demand grew 3.8% YoY to
                               314.9m tonnes. However, domestic oil output slipped 0.7% YoY to 136.3m tonnes in
                               the same period. Net crude oil imports surged 7.4% YoY to 178.6m tonnes to make up
                               the shortfall. The dependence on imports increased from 55.2% in 2011 to 56.7% in
                               8M12. We expect China’s crude oil demand to grow 3% YoY in 2013 and 2014,
                               respectively.


                               Figure 1. China’s Apparent Crude Oil Demand vs. Oil Price

                                 (m tonnes)                                                                                                                                        (US$/bbl)
                                 45                                                                                                                                                    130
                                                                                                                                                                                       120
                                 40
                                                                                                                                                                                       110
                                 35                                                                                                                                                    100
                                                                                                                                                                                       90
                                 30
                                                                                                                                                                                       80
                                 25                                                                                                                                                    70
                                                                                                                                                                                       60
                                 20
                                                                                                                                                                                       50
                                 15                                                                                                                                                    40
                                      01/10
                                              03/10
                                                      05/10
                                                               07/10
                                                                        09/10
                                                                                 11/10
                                                                                           01/11
                                                                                                      03/11
                                                                                                              05/11
                                                                                                                      07/11
                                                                                                                              09/11
                                                                                                                                      11/11
                                                                                                                                                01/12
                                                                                                                                                          03/12
                                                                                                                                                                   05/12
                                                                                                                                                                            07/12
                                                       Apparent demand (LHS)                                                                      ICE Brent (RHS)

                               Sources: NBS, Bloomberg, BOCI Research


                               Figure 2. Sources of China’s Crude Oil Supply

                                  (m tonnes)
                                 26
                                 24
                                 22
                                 20
                                 18
                                 16
                                 14
                                 12
                                 10
                                      01/10

                                              03/10
                                                       05/10

                                                                07/10
                                                                         09/10

                                                                                   11/10

                                                                                              01/11
                                                                                                         03/11

                                                                                                                  05/11
                                                                                                                          07/11

                                                                                                                                  09/11

                                                                                                                                              11/11
                                                                                                                                                        01/12

                                                                                                                                                                  03/12
                                                                                                                                                                           05/12
                                                                                                                                                                                    07/12




                                                          Domestic output                                                                             Net imports

                               Sources: NBS, BOCI Research




17 October 2012               China Oil Sector                                                                                                                                              31
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                               Figure 3. China’s Apparent Gasoline Demand

                                 (m tonnes)
                                8.0
                                7.5
                                7.0
                                6.5
                                6.0
                                5.5
                                5.0
                                4.5
                                4.0
                                         1          2   3          4   5          6   7      8   9    10    11   12

                                             2007           2008           2009           2010       2011        2012

                               Source: NBS, BOCI Research


                               Figure 4. China’s Apparent Diesel Demand

                                 (m tonnes)
                                16
                                15
                                14
                                13
                                12
                                11
                                10
                                 9
                                 8
                                        1           2   3          4   5      6       7     8    9    10    11   12

                                             2007           2008           2009           2010       2011        2012

                               Source: NBS, BOCI Research




17 October 2012               China Oil Sector                                                                        32
                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
                               LISTED COMPANIES IN THIS REPORT
                               Anton Oilfield (3337 HK/HK$2.10, NR)
                               China Oilfield Services (2883 HK/HK$14.28; 601808 CH/RMB16.30, BUY)
                               CNOOC Limited (883 HK/HK$15.94, HOLD)
                               MIE Holdings (1555 HK/HK$2.14, BUY)
                               PetroChina (857 HK/HK$10.70; 601857 CH/RMB8.87, BUY)
                               Sinopec (386 HK/HK$7.82; 600028 CH/RMB6.12, BUY)
                               SPT Energy (1251 HK/HK$1.95, NR)




                               Prices as of 16 October 2012
                               All figures subject to rounding




17 October 2012               China Oil Sector                                                       33
                  THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
                                                     DISCLOSURE

The views expressed in this report accurately reflect the personal views of the analysts. Each analyst declares that neither he/she
nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the
analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other
benefits in connection with this report to any of the analysts, BOCI Research Limited and BOCI Group. Member companies of BOCI
Group confirm that they, whether individually or as a group (i) do not own 1% or more financial interests in any of the listed
corporations reviewed; or (ii) do not have any individuals employed by or associated with any member companies of BOCI Group
serving as an officer of any of the listed corporations reviewed. Certain member companies of BOCI Group are involved in making
a market in the securities of Sinopec, PetroChina and CNOOC Ltd. Certain member companies of BOCI Group has/have had
investment banking relationships with Sinopec, China Oilfield Services and CNOOC Ltd within the preceding 12 months.
This disclosure statement is made pursuant to paragraph 16 of the “Code of Conduct for Persons Licensed by or Registered with
the Securities and Futures Commission” and is updated as of 15 October 2012. Waiver has been obtained by BOC International
Holdings Limited from the Securities and Futures Commission of Hong Kong to disclose any interest the Bank of China Group may
have in this research report.




17 October 2012                       China Oil Sector                                                                          34
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