 Global Research 7 July 2016

Sinopec Equities

EPS 22% above consensus in 2017E China Oil Companies, Major

12-month rating Buy Raising global oil price forecasts Following our upgrade to UBS Brent crude oil price forecasts from US$42.4/bbl to 12m price target HK$7.90 US$46.1/bbl (16E) and from US$55/bbl to US$60/bbl (17E), we are raising our pre-ex Prior: HK$7.70 EPS estimates for Sinopec by 10% in each of 2016E and 2017E to Rmb0.27/sh and Price HK$5.39 Rmb0.50/sh, respectively. We make no major changes to our other major operating assumptions and continue to assume Brent crude oil prices of US$70/bbl (18E) and RIC: 0386.HK BBG: 386 HK

US$75/bbl (19E). While volatility in oil prices and share prices is inevitable, we continue Trading data and key metrics to view risks skewed to the up-side over the next 1-3 years. 52-wk range HK$6.22-3.88 Good fundamentals, oil price leverage, and deep value Market cap. HK$669bn/US$86.2bn Sinopec is our top pick among China oil and chemical sector stocks. We believe the Shares o/s 25,513m (ORD) company represents an attractive combination of good fundamentals, oil price leverage Free float 94% and deep value. We view Sinopec's refining business as a cash cow where margins will Avg. daily volume ('000) 93,875 benefit from a mismatch in product price / oil cost adjustments as prices rise; marketing Avg. daily value (m) HK$499.7 as having good exposure to gasoline demand and option on convenience store growth; Common s/h equity (12/16E) Rmb683bn petrochemical exposed to an extended olefin up-cycle; and finally an E&P business that P/BV (12/16E) 0.8x gives operational leverage to rising oil prices and large natural gas reserves potential. EPS (UBS, diluted) (Rmb) Stock looking cheap if assuming US$60/bbl Brent in 2017E From To % ch Cons. 12/16E 0.24 0.27 10 0.27 If assuming US$60/bbl Brent (17E), Sinopec is trading on EV/DACF of 4.1x (vs. 5-yr avg 12/17E 0.45 0.50 10 0.41 6.7x and 10-yr avg 7.9x); EV/EBITDA of 3.5x (vs. 5-yr avg 4.8x and 10-yr avg 5.8x); 12/18E 0.61 0.61 NM 0.53 P/CEPS of 3.3x (vs. 5-yr avg 4.3x and 10-yr avg 4.9x); PE of 9.2x (vs. 5-yr avg 10.6x and 10-yr avg 11.3x); and PB of 0.7x (vs. 5-yr avg 1.1x and 10-yr avg 1.3x). Peter Gastreich Analyst Valuation: Raise price target to HK$7.9/sh from HK$7.7/sh [email protected] Our price target is set at a 25% discount to our NAV estimate (downstream segments +852-2971 6121 pegged to peer multiples of 6-9x EV/EBITDA, E&P at US$75/bbl Brent, 10% WACC). Benson Chen, CFA Analyst [email protected] +852-3712 2597

Highlights (Rmbm) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Net earnings (UBS) 61,344 51,256 36,559 32,216 60,065 74,357 82,497 82,244 EPS (UBS, diluted) (Rmb) 0.50 0.44 0.30 0.27 0.50 0.61 0.68 0.68 CEPS (UBS, diluted) (Rmb) 1.17 1.21 1.10 1.13 1.41 1.56 1.65 1.67 DACF (UBS) 168,709 160,524 154,824 152,833 189,089 212,464 224,273 227,779 Net DPS (Rmb) 0.24 0.24 0.18 0.15 0.22 0.25 0.27 0.27

Profitability/valuation 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Production (000 boe/d) 1,213 1,316 1,285 1,229 1,248 1,281 1,296 1,297 ROACE (UBS) % 6.9 4.9 4.6 4.6 8.0 9.6 10.1 9.9 EV/DACF (UBS) x 4.9 6.0 7.0 5.3 4.1 3.6 3.3 3.2 Price/CEPS (UBS, diluted) x 4.3 4.5 4.4 4.1 3.3 3.0 2.8 2.8 P/E (UBS, diluted) x 10.0 12.5 15.9 17.4 9.3 7.5 6.8 6.8 Net dividend yield % 4.9 4.4 3.8 3.2 4.8 5.3 5.9 5.9 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of HK$5.39 on 06 Jul 2016 17:09 HKT

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This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 24. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Sinopec Buy (Price target HK$7.90)

UBS Research THESIS MAP a guide to our thinking and what's where in this report OUR THESIS IN PICTURES

PIVOTAL QUESTIONS Q: Will higher oil prices result as limited E&P investments slow global supply growth? Yes. We believe limited new global oil project FIDs will start to limit supply growth. Despite rising inventories, indicators like declining US oil production may limit downside risk to near-term oil prices. more Q: Will delays to chemical capacity in China support margins for Sinopec? Yes. We believe chemicals will make up 22-37% of Sinopec’s total EBIT in 2016-17. We also believe there is risk that non-oil based chemical capacity could be canceled or delayed. more Q: Could non-fuel retail sales drive strong growth at Sinopec's marketing subsidiary? Yes. We expect non-fuel sales will be identified as a major company growth driver for Sinopec's five- year planning period and we believe the market is undervaluing the opportunity. more

UBS VIEW Recovering oil prices will benefit Sinopec's entire integrated complex. Gas reserve potential is large, the balance sheet looks better than ever, dividend pay-out ratios are higher, and corporate governance has improved. We see non-fuel sales in the marketing business as having large growth potential. Refining looks stable and limited capex ensures strong cash flow. We believe petrochemical supply is tight and evidence of regulatory delays could lead investors to expect an extended up-cycle.

EVIDENCE As the upstream oil industry fails to commit with FID to new upstream projects, we believe an incipient supply crisis could begin to emerge after 2018 (see global oil report by Jon Rigby). Our Evidence Lab report indicates drivers in China will be receptive to Sinopec's convenience store upgrades. Our petrochemical team's analysis indicates downside risk to chemical supply in China see Asia chemical (Tim Bush) and China chemical (Benson Chen) reports).

WHAT'S PRICED IN? Recovering oil prices will benefit Sinopec's entire integrated complex. Gas reserve potential is large, the balance sheet looks better than ever, dividend pay-out ratios are higher, and corporate governance has improved. We see non-fuel sales in the marketing business as having large growth potential. Refining looks stable and limited capex ensures strong cash flow. We believe petrochemical supply is tight and evidence of regulatory delays could lead investors to expect an extended up-cycle. more 

UPSIDE / DOWNSIDE SPECTRUM

0386.HK Price HK$5.39 EPS (UBS) P/E (UBS) Upside to Downside (Rmb) Implied 4 to 1 10.0 9.0 9.30 = 0.79 x 10.1x Upside: +73% 8.0 7.90 = 0.50 x 13.6x Price Target: +47% 7.0

6.0 5.0 4.50 = 0.09 x 43.0x Downside: -17% 4.0 06 Jul +12 mo. 3.0 2014 2015 2016

Value drivers Brent Brent Refining Marketing Chemical 2017E Long-term EBIT margin (fuel) margin (US$/bbl) (US$/bbl) (US$/bbl) (Rmb/t) (Rmb/t) $9.30 upside US$70 US$90 US$4.0/bbl Rmb160/t Rmb80/t $7.90 target US$60 US$75 US$3.0/bbl Rmb140/t Rmb43/t $4.5 downside US$40 US$50 US$2.5/bbl Rmb90/t Rmb20/t

more COMPANY DESCRIPTION Sinopec is Asia's largest oil refining, retail refined product marketing, and petrochemical company by capacity. In 2015, the company's refinery throughput was 4.8m bpd, total... more 

Peter Gastreich, Analyst, [email protected], +852-2971 6121

Sinopec 7 July 2016  2

Sinopec UBS Research

OUR THESIS IN PICTURES return 

IRRs of MTO/PDH/CTO projects versus Brent (US$/bbl) 20% 15% 10% 5% 0% -5% Low oil prices and regulatory scrutiny could lead to a -10% chemical supply shortfall and extended up-cycle. -15% -20% -25% 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 MTO PDH CTO

Sinopec non-fuel sales (Rmb bn) 10.0 9.0 8.0 7.0 6.0 5.0 Sinopec's non-fuel sales effort has large potential and is 4.0 under-appreciated by the market 3.0 2.0 1.0 0.0 Q113 Q313 Q114 Q314 Q115 Q315 Q116

Forecast versus historic new oil supply (mn bpd) 12

10

8

6 Evidence is gathering that upstream oil markets are not seeing necessary investment in upstream projects. 4

2

0 2009-2015 2015-2021

Residual downstream value on US$50/bbl long-term Brent

Brent assumed Implied residual Peer Implied UBS valuation downstream value Group Discount at US$75/bbl at US$50/bbl Brent Valuation US$50/bbl Marketing 9.0x EV/EBITDA 6.0x 11.0x -45% Refining 6.0x EV/EBITDA 6.0x 6.4x -6% Chemical 6.0x EV/EBITDA 6.0x 7.2x -17% Sinopec's downstream business looks undervalued on a Other Book value Book value na na Brent oil futures curve scenario

Sources for exhibits above: Company data, UBS Res earch

Sinopec 7 July 2016  3

Sinopec UBS Research

PIVOTAL QUESTIONS return 

Q: Will higher oil prices result as limited E&P investments slow global supply growth?

UBS VIEW Yes. We believe limited new global oil project FIDs will likely lead to limited supply growth after 2017. In the near term, we believe short-cycle indicators like the decline in US and Chinese oil production may limit downside risks. However, we would not expect an extended rise in oil prices to ensue until global inventories begin to decline, which we expect from 2H16.

EVIDENCE We see evidence that OPEC's strategy to regain market share and flush out high-cost producers is taking hold. Non-OPEC production is beginning to decline, for example in the US and China, the top two oil consumers and among the top four producers. This suggests imports could surprise to the upside unless demand disappoints. UBS tracks global FID for new oil projects; a supply shortfall could emerge after 2018 (see 2 February 2016 UBS report by Jon Rigby). Finally, the IEA forecasts just about 4mn bpd of new oil supply during 2015-2021 versus nearly 11mn bpd during 2009-2015. All the while as OPEC production ramps up, the result will be reduce spare OPEC capacity.

WHAT'S PRICED IN? We believe most global upstream and integrated oil stocks are pricing in long- term oil prices below our long-term forecast. We believe that, as the market continues to gather evidence that supply shortfalls could be emerging toward the end of this decade, the oil futures curve will eventually shift upwards, and this would likely raise equity market valuations for E&P-related stocks.

Non-OPEC oil production down; long-term supply growth limited:

Figure 1: US oil production (LHS) and change YoY (RHS) (kbpd)

10,000 2,000

9,000 1,500 8,000 1,000 7,000 500 6,000 0 5,000 (500) 4,000 3,000 (1,000) 2,000 (1,500) Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Crude production (kbpd) YoY change (5 wk mov avg)

Source: EIA

Sinopec 7 July 2016  4

Figure 2: US oil production y/y (kb/d)

2,500 1,800

2,000 1,500 1,500 1,200 1,000

500 900

0 ` 600 -500 300 -1,000

-1,500 0 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Crude NGLs Other liquids/biofuels US oil rig count (RHS)

Source: EIA, UBS estimates,

Figure 3: China oil production (LHS) and change YoY (RHS) (kbpd)

4,500 500 4,350 400 4,200 300 4,050 200 3,900 100 3,750 - 3,600 (100) 3,450 3,300 (200) 3,150 (300) 3,000 (400) Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Crude production ('000 bpd) YoY Change

Source: NBS We believe the following could eventually lead oil prices up:

. We believe the very fact that so many small and large oil producers are experiencing pain is a key reason to believe that we will not see necessary reinvestment in upstream capacity at the current oil price levels.

. We expect markets to remain overall oversupplied in the near term but to reach equilibrium by 2H16 and potentially move into shortfall by 2018.

Sinopec 7 July 2016  5

Figure 4: UBS S/D balance and implied global stock change (Mb/d)

3.0

2.0

1.0

0.0

-1.0

-2.0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16E 1Q17E 3Q17E 2018E 2020E Misc/to balance Floating storage/oil in transit OECD stock change Total stock change & misc - implied global over(under) supply Source: UBS estimates, IEA, EIA, OPEC

. While the ongoing deluge of new long-cycle projects hitting the market will likely continue into 2017 (the result of investment decisions made when oil prices were high), it is these very projects that will not, in our view, see capital commitments under the low oil price environment.

. In a 2 February 2016 UBS report, Jon Rigby highlighted that global FID's for new upstream oil projects were significantly below trend in 2015 and could continue to be so in 2016 so long as oil prices remain weak. There is a risk therefore that the industry could be headed for an incipient supply crisis, according to the report.

Figure 5: Major upstream project FIDs – plateau production by year (kboe/d)

10,000 50

9,000 45

8,000 40

7,000 35

6,000 30

5,000 25

4,000 20

3,000 15

2,000 10

1,000 5

0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2016 risked Conventional Deepwater Heavy Oil / Oil Sands LNG Other/unconventional gas No. projects (RHS)

Source: UBS estimates, Company Data, WoodMackenzie. Note: UBS' upstream database tracks identifiable major projects at around the 30kboe/d threshold or larger as a means of sampling key project trends.

. The IEA recently predicted that 4.1mn bpd of oil supply will be added globally between 2015 and 2021. This would be down sharply from the total growth of 11mn bpd during 2009-2015. The drop in supply growth

Sinopec 7 July 2016  6

comes as upstream investment is being significantly curtailed in response to low oil prices. According to Bloomberg, IEA Executive Director Fatih Birol said "It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil- security surprises in the not-too-distant- future.”

Figure 6: Global upstream capex (US$ bn)

600

500

US$ capex down 44% 400

300

200

100

0 2014 2015 2016 2017 Global Integrateds North America E&P International E&P EM Integrateds / E&P

Source: UBS estimates, Company Data. Note: based on UBS' global oil and gas coverage universe of 79 integrated and E&P companies. Figure 7: Global oil production capacity growth (2015-2020E) (mn bpd)

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 US UK Iran Iraq UAE Libya Brazil Qatar APAC Russia Nigeria Algeria Kuwait Mexico Angola Norway Canada Ecuador Indonesia Colombia Argentina Other FSU Venezuela Other Africa Other Saudi Arabia Saudi Other Europe Other

Other Latin America Latin Other Source: UBS estimates, IEA, EIA, OPEC, WoodMackenzie

Sinopec 7 July 2016  7

Figure 8: Sensitivity of EPS and free cash flow to Brent crude oil price

2017E 2017E 2017E 2017E 2017E 2017E 2017E Brent US$30/bbl US$40/bbl US$50/bbl US$60/bbl US$70/bbl US$80/bbl US$90/bbl Segment EBIT E&P (68,809) (46,032) (23,255) (477) 22,300 43,128 61,636 Refining 35,414 35,414 35,414 35,414 35,414 35,414 35,414 Chemicals 17,491 17,491 17,491 17,491 17,491 17,491 17,491 Marketing 37,643 37,643 37,643 37,643 37,643 37,643 37,643 Other 0 0 0 0 0 0 0 EBIT 21,739 44,516 67,293 90,071 112,848 133,676 152,184 EBITDA 131,920 154,697 177,474 200,252 223,029 243,857 262,365 Interest exp. (4,570) (4,647) (4,723) (4,799) (4,875) (4,952) (5,031) Interest income 3,000 3,000 3,000 3,000 3,000 3,000 3,000 Investment income 450 450 450 450 450 450 450 Associate income 8,000 8,000 8,000 8,000 8,000 8,000 8,000 FX loss (4,412) (4,412) (4,412) (4,412) (4,412) (4,412) (4,412) EBT 24,207 46,907 69,608 92,310 115,011 135,762 154,191 Income tax (7,155) (12,830) (18,505) (24,181) (29,856) (35,044) (39,651) Minorities (12,477) (12,477) (12,477) (12,477) (12,477) (12,477) (12,477) Net profit 4,575 21,600 38,626 55,652 72,678 88,241 102,063 EPS (Rmb/sh) 0.04 0.18 0.32 0.46 0.60 0.73 0.84 Pre-ex EPS (Rmb/sh) 0.07 0.21 0.36 0.50 0.64 0.77 0.88

US$30/bbl US$40/bbl US$50/bbl US$60/bbl US$70/bbl US$80/bbl US$90/bbl Net profit 4,575 21,600 38,626 55,652 72,678 88,241 102,063 FX loss 4,412 4,412 4,412 4,412 4,412 4,412 4,412 minorities 12,477 12,477 12,477 12,477 12,477 12,477 12,477 Exploration expense 9,428 9,428 9,428 9,428 9,428 9,428 9,428 Depreciation 110,181 110,181 110,181 110,181 110,181 110,181 110,181 Operating cash flow (ex WC) 141,073 158,098 175,124 192,150 209,176 224,739 238,561 Capex (77,798) (82,985) (88,171) (93,358) (98,545) (103,731) (108,918) Free cash flow 63,275 75,113 86,953 98,792 110,631 121,008 129,643 FCF (Rmb/sh) 0.52 0.62 0.72 0.82 0.91 1.00 1.07 Source: UBS estimates

Sinopec 7 July 2016  8

Sinopec UBS Research

PIVOTAL QUESTIONS return 

Q: Will delays to chemical capacity in China support margins for Sinopec?

UBS VIEW Yes. While the market is mostly aware of the benefits of lower crude oil prices for Asia's oil-based petrochemical producers and the risks of delays in non-oil base chemical projects (coal-based for example), we believe little attention is being paid to growing safety and regulatory scrutiny following the Tianjin industrial accident. We believe olefins and poly-olefins projects are at risk.

We expect limited supply to lead to higher spreads and better earnings for companies with exposure to olefins and poly-olefins. We see Sinopec as being positioned to capture the opportunity given the company has about 20mn tons of combined ethylene and propylene capacity and about 14mn tons of combined polyethylene and polypropylene capacity.

EVIDENCE We believe regulatory tightening is a multi-year theme that could play out in China, as the country: 1) moves towards global safety and technical standards for the production, transport and storage of hazardous chemicals; and 2) puts more emphasis on the environment, in line with its 13th Five-Year Plan. If China continues to see limited project approvals, this could manifest itself in slower than expected new supply after 2018.

For detailed evidence, please refer to the following reports from our Asia oil and petrochemical team:

. Asia petrochemical sector: "Regulatory crack-down to curtail supply growth" (18 January, 2016) by Tim Bush.

. China petrochemical sector: "Chemical capacity disruption" (22 February, 2016) by Benson Chen.

WHAT'S PRICED IN? Following the outperformance of chemical stocks since last year, we believe the market has factored in the positive impact of lower oil prices on naphtha- based producers. However, we think the upside risk from an extended industry up-cycle, due to regulatory delays, may not be priced in. As concerns Sinopec, we believe the market has focused too much on the company's exposure to crude oil while its solid downstream exposure has been overlooked.

Chemical supportive amidst low oil price environment

While Sinopec's chemical segment EBIT was near break-even from 2012-14, a surge in chemical margins, coupled with a decline in E&P profitability, resulted in the segment contributing a supportive 38% of EBIT in 2015 and forecast 32% of EBIT in 2016. We expect margins to remain strong contributing to 16-19% of EBIT in 2017-2018 and believe upside risks existing in particular after 2018 as limited incremental olefin capacity comes online in China.

Sinopec 7 July 2016  9

Figure 9: Operating profit breakdown for Sinopec

Operating profit (Rmb m): 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E E&P 47,149 71,631 70,054 54,793 47,057 (17,418) (32,695) (477) 14,443 Refining 15,855 (35,780) (11,444) 8,599 (1,954) 20,959 34,029 35,414 35,736 Marketing 30,760 44,696 42,652 35,143 29,449 28,855 34,784 37,643 41,230 Chemical 15,037 26,732 1,178 868 (2,181) 19,682 17,186 17,491 17,202 Other (2,342) (2,640) (2,443) (3,412) (1,063) 384 - - - TOTAL 106,459 104,639 99,997 95,991 71,308 52,462 53,304 90,071 108,611 Source: Company data, UBS estimates

Figure 10: Sinopec chemical segment EBIT and cash flow (Rmb m)

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E EBIT (13,200) 13,779 15,011 26,732 1,178 868 (2,181) 19,682 17,186 17,491 Depreciation 8,463 8,584 8,848 8,457 8,883 10,757 12,130 11,996 12,880 13,321 Estimated tax 3,300 (3,445) (3,753) (6,683) (295) (217) 545 (4,921) (4,297) (4,373) CAPEX (20,622) (25,207) (12,894) (15,015) (18,996) (19,189) (15,850) (17,471) (10,800) (11,340) Cash flow (22,059) (6,289) 7,212 13,491 (9,230) (7,781) (5,356) 9,287 14,970 15,100 Source: Company data, UBS estimates

Figure 11: Asia petrochemical spread forecasts (US$/t)

US$/t 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Ethylene-Naphtha 464 354 371 475 643 671 610 590 525 Propylene-Naphtha 553 614 511 567 563 404 268 272 523 LDPE-Naphtha 792 716 468 673 757 806 693 642 747 LDPE-Ethylene 321 356 92 191 105 125 83 52 222 HDPE-Naphtha 544 501 490 624 739 779 669 617 696 HDPE-Ethylene 72 140 112 139 83 94 59 27 171 PP-Naphtha 651 665 532 610 672 639 589 700 680 PP-Propylene 81 32 6 26 92 223 321 428 157 PVC-Ethylene 439 474 370 373 328 284 350 400 425 Benzene-Naphtha 272 271 373 486 424 246 240 250 250 SM-(Benzene+Ethylene) 166 191 178 221 163 192 200 210 200 PS-SM 191 182 157 279 211 208 225 250 275 ABS 689 520 425 424 474 498 500 525 525 MEG-Ethylene 225 459 295 269 73 108 73 115 172 PX-Naphtha 406 715 667 663 441 407 364 315 425 PTA-PX 256 222 83 76 84 61 110 97 113 PTA-naphtha 529 701 530 520 380 334 420 475 400 PET-PTA-MEG 156 187 141 137 139 130 121 175 269 BD-naphtha 1,274 2,132 1,513 647 518 449 550 650 650 Average 425 496 385 389 363 350 339 357 391

Note: MEG = Monoethylene glycol; EO = Ethylene oxide; PTA = Purified terephthalic acid; BD = Butadiene; PET = Polyethylene terephthalate. Source: IHS, PCIX, UBS estimates

Sinopec 7 July 2016  10

Sinopec UBS Research

PIVOTAL QUESTIONS return 

Q: Could non-fuel retail sales drive strong growth at Sinopec's marketing subsidiary?

UBS VIEW Regarding Sinopec's non-fuel marketing plans, we believe there are two specific areas where investors have had concerns:

. Whether China's automobile drivers will be willing to spend money on items besides gasoline at petrol stations;

. Whether Sinopec is forging the right partnerships to execute its non-fuel strategy.

EVIDENCE Our recent Evidence Lab survey on petrol station convenience stores (CVS) indicates drivers are receptive to a modern petrol station CVS concept. Drivers indicate they are not averse to getting out of their cars to spend money if worthwhile non-fuel purchase options are available to them. In particular, drivers would like to see petrol station convenience store offerings that are on par with those of higher-end convenience stores.

Also UBS analysts who cover the stocks of Sinopec's investors and partners note significant progress in the partnerships has been under way. Investors and partners in Sinopec's marketing business include for example Tencent, Alibaba, Yihaodian, Haier Electronics, Huiyuan Juice, and New Focus Auto. The companies are keen to help Sinopec improve its logistics, procurement, and use of technology to grow its revenues and margins.

For details please see "China Energy and Retail Consumer: Evidence Lab survey on petrol station convenience stores positive for Sinopec" (15 January, 2016).

WHAT'S PRICED IN? Sinopec initially sold a 30% stake in its marketing division at roughly a 9x EV/EBITDA (in Sept 2014). This level is consistent with the global average 9-10x EV/EBITDA for retail fuel marketing and convenience store valuations. Given the share price performance since that time, and based on investor feedback, we believe the market is pricing in very limited value for the business.

Sinopec 7 July 2016  11

Figure 12: Sinopec's quarterly non-fuel sales in marketing division (Rmb bn)

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Q113 Q313 Q114 Q314 Q115 Q315 Q116

Source: Company data

Figure 13: Fuel and non-fuel marketing segment EBIT (Rmb mn)

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 2016E 2017E 2018E 2019E 2020E Marketing (fuel) Marketing (non-fuel)

Source: UBS estimates

Figure 14: Marketing segment cash flow (Rmb mn)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E EBIT 30,364 35,866 38,209 30,280 30,622 45,068 41,950 35,633 29,449 28,855 34,784 37,643 41,230 Depreciation 3,452 6,032 5,270 5,999 6,489 7,202 8,792 11,127 12,491 14,075 12,770 13,089 13,416 Estimated tax (7,591) (8,967) (9,552) (7,570) (7,656) (11,267) (10,488) (8,908) (7,362) (7,214) (8,696) (9,411) (10,308) CAPEX (11,319) (12,548) (14,796) (16,283) (26,168) (28,517) (27,232) (29,486) (26,989) (22,115) (17,900) (18,795) (19,735) Cash flow (Marketing) 14,906 20,384 19,131 12,426 3,288 12,486 13,023 8,366 7,589 13,601 20,958 22,526 24,604 Source: Company data, UBS estimates

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Sinopec UBS Research

WHAT'S PRICED IN? return 

Implied residual Peer Implied UBS valuation downstream value Group Discount at Assumed Brent US$75/bbl at US$50/bbl Brent Valuation US$50/bbl Marketing 9.0x EV/EBITDA 6.0x 11.0x -45% Refining 6.0x EV/EBITDA 6.0x 6.4x -6% Chemical 6.0x EV/EBITDA 6.0x 7.2x -17% Other Book value Book value na na Source: UBS estimates

Given that Sinopec's business is large and integrated into upstream oil & gas production, oil refining, petrochemicals and retail marketing, it is difficult in our view to isolate what the market might be paying for its various components. We suspect however that the market underappreciates the potential in the marketing and petrochemical segments. We also believe that Sinopec's share price has been overly penalized for the company's exposure to oil E&P.

As oil prices have declined, the company's exploration and production business has obviously moved into loss. However, Sinopec's downstream business segments including refining, petrochemicals and marketing have all been affected by inventory losses. Normally inventory loss would be considered one-off items on the back of oil price volatility.

However, with oil prices coming down for several quarters, inventory losses appeared almost as if to be recurring items. This led to a string of large consensus earnings downgrades beyond what the E&P exposure would have dictated, masked what has been much stronger downstream profitability, and ultimately proved very negative for sentiment.

Hence, we believe when oil prices begin to rise, the share price recovery will be equally dramatic. After several quarters of decline, a reversal in the oil price down- trend would benefit Sinopec's entire integrated complex (improving E&P, inventory restocking in chemicals, inventory gains in refining).

Sinopec 7 July 2016  13

Figure 15: Sinopec Enterprise value multiples

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

- 2003 2005 2007 2009 2011 2013 2015 2017E EV/DACF EV/EBITDA

Source: Company data, Bloomberg, UBS estimates Figure 16: Sinopec price-to-cash EPS

16

14

12

10

8

6

4

2

0 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Sinopec (Price/Cash EPS)

Source: Company data, Bloomberg, UBS estimates

Figure 17: Sinopec price-to-book

3.0

2.5

2.0

1.5

1.0

0.5

0.0 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 SNP 12m fwd PB Mean +1x Std Dev -1x Std Dev

Source: Company data, Bloomberg, UBS estimates

Sinopec 7 July 2016  14

Downstream valuation implies discount to peers on EV/EBITDA.

. We believe the market is likely valuing the upstream exploration and production business along the futures curve, which means a long-term oil price of around US$50-60/bbl. Under this scenario, we would value the upstream business at only about Rmb200bn.

. If we assumed a 25% discount of Sinopec's share price to its NAV, and we strip out the upstream E&P business valued under a futures curve scenario, the residual value for the downstream businesses (combined) would be just about 6.0x EV/EBITDA (16E).

. We believe this looks undervalued when compared to regional refining and chemical stocks, which now trade at 2017E average EV/EBITDA of 7.2x and 6.4x, respectively (range 3.7x to 9.4x and range 5.4x to 9.6x).

Asia refining and chemical comp valuations

PE EV/EBITDA Asia chemical comps: 2016E 2017E 2016E 2017E LG Chemical 12.4x 10.8x 6.3x 5.7x Petronas Chemical 20.4x 18.7x 8.4x 7.8x Lotte Chem. 12.3x 10.6x 4.5x 3.7x Shanghai Pet. 8.5x 10.5x 8.3x 9.4x PTTGC 11.0x 10.4x 6.1x 5.5x Average 12.9x 12.2x 6.7x 6.4x Asia refiner comps: 2016E 2017E 2016E 2017E Bharat Pet. 7.8x 13.7x 5.3x 7.3x Hindustan 5.3x 15.5x 5.5x 9.6x Reliance Ind. 10.7x 10.7x 8.9x 8.3x S-Oil 10.4x 11.0x 6.6x 6.4x SK Innovation 8.1x 10.6x 4.7x 5.4x Shanghai Pet. 8.5x 10.5x 8.3x 9.4x PTTGC 11.0x 10.4x 6.1x 5.5x Thai Oil 8.8x 9.8x 5.7x 5.8x Average 8.8x 11.5x 6.4x 7.2x Source: UBS estimates

. This also looks undervalued when compared to the comps for Sinopec's retail marketing business. We note that regional and global oil product marketing and petrol stations comps trade at average EV/EBITDA of around 10-11x (range 8.1x to 14.3x) while regional convenience store chains trade at average EV/EBITDA of 11.3x (range 6.7x to 17.4x).

Sinopec 7 July 2016  15

Sinopec marketing business comp valuations

PE EV/EBITDA US petrol station CVS 2016E 2017E 2016E 2017E Casey's General Store * 29.4x 22.6x 12.5x 10.4x Murphy USA * 21.3x 16.5x 9.3x 8.1x CST Brands * 21.2x 24.5x 13.4x 14.3x Couche Tarde * 24.0x 20.4x 13.7x 11.5x Average 24.0x 21.0x 12.2x 11.1x Oil product marketing comps: 2016E 2017E 2016E 2017E Caltex (Australia) 16.2x 15.2x 8.6x 8.4x Ultrapar (Brazil) 20.8x 18.3x 10.1x 9.1x Petronas Dagangan (Malaysia) * 26.8x 27.0x 13.6x 13.9x Z-Energy 16.7x 12.8x 13.5x 9.3x Average 20.1x 18.3x 11.4x 10.2x Asia convenience store comps: 2016E 2017E 2016E 2017E Chengdu Hongqi 32.7x 26.3x 20.7x 17.4x CP All (Thailand) 29.4x 24.9x 18.5x 16.2x President Chain (Taiwan) 28.9x 26.2x 13.7x 12.1x Family Mart (Japan) * 24.5x 28.0x 8.9x 7.7x Lawson (Japan) * 22.8x 22.5x 8.1x 7.8x Seven & I HD (Japan) * 20.6x 20.4x 7.1x 6.7x Average 26.5x 24.7x 12.8x 11.3x Source: UBS estimates, *Bloomberg

Sinopec 7 July 2016  16

Sinopec UBS Research

UPSIDE / DOWNSIDE SPECTRUM return 

0386.HK Price HK$5.39 EPS (UBS) P/E (UBS) Upside to Downside (Rmb) Implied 4 to 1 Sinopec is trading at 10.0 HK$5.39at HK$4.3 (as of 06 9.0 9.30 = 0.79 x 10.1x Upside: +73% July,(as of 2016). 26 Feb, 2016). 8.0 7.90 = 0.50 x 13.6x Price Target: +47% 7.0

6.0 5.0 4.50 = 0.09 x 43.0x Downside: -17% 4.0 06 Jul +12 mo. 3.0 2014 2015 2016

Value drivers Brent Brent Refining Marketing Chemical 2017E Long-term EBIT margin (fuel) margin (US$/bbl) (US$/bbl) (US$/bbl) (Rmb/t) (Rmb/t) $9.30 upside US$70 US$90 US$4.0/bbl Rmb160/t Rmb80/t $7.90 target US$60 US$75 US$3.0/bbl Rmb140/t Rmb43/t $4.5 downside US$40 US$50 US$2.5/bbl Rmb90/t Rmb20/t

Risk to the current share price is still skewed to the upside

Upside (HK$9.3/sh): Our upside scenario would envision oil prices surprising on the upside with a US$70/bbl average (Brent) in 2017E which could arise if inventories begin to decline sooner and sharper than anticipated. At some point in the next 12 months, the scenario of geopolitical developments in one or more key OPEC countries and implied materially lower OPEC spare capacity could lead oil prices and the futures curve sharply higher to discount US$85/bbl long-term Brent. Our upside scenario assumes some of the cost efficiencies gained in the low oil price environment are maintained. Refining EBIT could be higher than expected following the rise in oil prices (timing difference of product price versus crude costs coupled with inventory gains). Chemical margins would exceed expectation on stronger than expected demand coupled with capacity delays.

Base (HK$7.9/sh): Our base case for Sinopec assumes US$60/bbl Brent (2017E) and long-term US$75/bbl Brent. We assume refinery profit of US$2.5/bbl (EBIT), chemical profit of Rmb43/t (EBIT), and fuel marketing profit of Rmb140/t (EBIT) (2017E).

Downside (HK$4.5/sh): Following recent major supply outages and greater-than- expected production declines outside OPEC, in particular in China and the US, we believe the market is likely to become more comfortable with downside risks. In any case, our downside scenario would see a sharp deterioration in demand that alleviates much of the benefit to oil product balances from lower than expected supply. In this scenario, inventories would rise more than expected and oil prices could average US$40/bbl in 2017E. The worse-than-expected outcome for oil prices would prompt the market to price in a low long-term Brent crude oil price of US$45-50/bbl. Marketing EBIT would disappoint as weaker than expected gasoline demand would couple with surplus wholesales gasoline to reduce overall gasoline margins. Chemical margins would be lower than expectation on weaker than expected demand coupled with capacity starting up faster than expected. We assume a 25% discount to NAV in both scenarios.

Sinopec 7 July 2016  17

Valuation and price target Our valuation for Sinopec implies that the downstream businesses including refining, marketing and petrochemicals account for more than 70% of company’s enterprise value. We value downstream businesses using peer group target EV/EBITDA multiples including marketing (9x), refining (6x) and chemicals (6x). We value the E&P business assuming a long-term Brent crude price of US$75/bbl. We assume a 25% discount to NAV to arrive at a price target of HK$7.90.

Figure 18: Sinopec sum of the parts valuation

Rmb m HKD m HK$/sh E&P NPV (2P reserves) 371,407 432,842 3.6 LNG import subsidy (65,564) (76,409) (0.6) Marketing (9x EV/EBITDA) (17E) 456,588 532,114 4.4 Refining (6x EV/EBITDA) (17E) 332,751 387,793 3.2 Chemical (6x EV/EBITDA) (17E) 184,875 215,456 1.8 Other investments (Book value) 82,970 96,694 0.8 Enterprise value 1,363,028 1,588,492 13.1 Net debt (16-17E average) (75,805) (88,345) (0.7) Minority interest of marketing (136,520) (159,102) (1.3) Other minority interest (52,612) (61,315) (0.5) Equity value 1,098,091 1,279,730 Shares (fully diluted) 121,071 NAV (HK$/sh) 10.6 Price target (HK$/sh) 7.9 Price target discount to NAV -25% Source: UBS estimates Figure 19: Sinopec major operating assumptions

NEW 10 11 12 13 14 15 16E 17E 18E FX (Rmb/US$) 6.65 6.46 6.30 6.15 6.25 6.23 6.60 6.90 7.00 Brent (US$/bbl) 79.6 111.1 111.7 108.9 99.4 53.6 46.1 60.0 70.0 Realised oil price (US$/bbl) 72.1 98.7 100.2 95.4 90.4 45.6 39.6 52.8 61.6 Well-head gas price (US$/mcf) 4.9 5.6 5.6 6.2 7.5 7.2 6.0 6.9 7.3 ASP (oil & gas) (US$/boe) 63.1 83.7 84.4 80.6 70.3 44.1 35.9 45.6 51.7 Lifting cost (US$/boe) 13.7 15.4 17.5 18.2 18.4 17.6 15.5 14.5 15.0 Exploration expense (US$/boe) 4.1 5.1 5.7 4.6 3.6 3.6 3.0 3.0 3.0 Upstream DD&A (US$/boe) 11.8 13.4 14.5 16.2 16.3 17.9 19.5 19.5 19.5 Oil production ('000 bpd) 900 883 904 911 989 958 872 837 823 Gas production ('000 boed) 202 236 273 301 327 327 357.00 410 457 Oil and gas production ('000 boed) 1,102 1,119 1,177 1,213 1,316 1,285 1,229 1,248 1,281 Growth (%) 1.6% 5.2% 3.0% 8.5% -2.3% -4.4% 1.5% 2.6% Refinery EBIT (US$/bbl) 1.44 (3.64) (1.12) 0.82 (0.18) 1.94 3.00 3.00 3.00 Marketing EBIT (Rmb/t, domestic) 178 239 207 165 130 123 140 140 140 Chemical EBIT (US$/t) 54 88 4 3 (6) 56 45 43 40 Upstream capex (Rmb bn) 52.7 58.7 78.3 105.3 80.2 54.7 47.9 57.3 67.7 Operating profit (Rmb m): 10A 11A 12A 13A 14A 15A 16E 17E 18E E&P 47,149 71,631 70,054 54,793 47,057 (17,418) (32,695) (477) 14,443 Refining 15,855 (35,780) (11,444) 8,599 (1,954) 20,959 34,029 35,414 35,736 Marketing 30,760 44,696 42,652 35,143 29,449 28,855 34,784 37,643 41,230 of which: Non-fuel 1,539 2,483 3,960 6,049 8,846 Chemical 15,037 26,732 1,178 868 (2,181) 19,682 17,186 17,491 17,202 Other (2,342) (2,640) (2,443) (3,412) (1,063) 384 0 0 0 TOTAL 106,459 104,639 99,997 95,991 71,308 52,462 53,304 90,071 108,611 Source: Company data, Bloomberg, UBS estimates

Sinopec 7 July 2016  18

Figure 20: Sinopec free cash flow

Rmb mn 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Net profit 21,984 63,281 71,432 70,853 63,797 61,344 51,256 36,559 32,216 60,065 74,357 Depreciation 46,321 54,046 59,253 63,816 70,456 81,265 90,097 96,368 104,565 110,181 114,819 Exploration expense 8,310 10,545 10,955 13,341 15,533 12,573 10,969 10,459 8,875 9,428 9,849 Capex (107,300) (112,735) (113,651) (130,184) (158,722) (185,126) (154,640) (112,249) (100,400) (112,245) (125,094) Free cash flow (30,685) 15,137 27,989 17,826 (8,936) (29,944) (2,318) 31,137 45,257 67,429 73,931 Cash dividend paid (12,572) (13,559) (16,391) (19,469) (25,486) (28,298) (28,031) (24,214) (16,806) (21,678) (29,888) FCF after dividend (43,257) 1,578 11,598 (1,643) (34,422) (58,242) (30,349) 6,923 28,451 45,752 44,043 Other (7,683) 24,809 (16,438) (16,227) 6,821 11,117 (4,702) 155,292 42,119 (24,111) (28,458) Change in net debt (50,940) 26,387 (4,840) (17,870) (27,601) (47,125) (35,051) 162,215 70,569 21,641 15,585 Net debt-to-equity ratio 60.9% 46.0% 42.4% 41.1% 43.1% 45.6% 49.4% 20.0% 10.9% 7.8% 5.6%

Rmb/sh 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Net profit 0.18 0.52 0.59 0.59 0.53 0.51 0.42 0.30 0.27 0.50 0.61 Depreciation 0.38 0.45 0.49 0.53 0.58 0.67 0.74 0.80 0.86 0.91 0.95 Exploration expense 0.07 0.09 0.09 0.11 0.13 0.10 0.09 0.09 0.07 0.08 0.08 Capex (0.89) (0.93) (0.94) (1.08) (1.31) (1.53) (1.28) (0.93) (0.83) (0.93) (1.03) Free cash flow (0.25) 0.13 0.23 0.15 (0.07) (0.25) (0.02) 0.26 0.37 0.56 0.61 Cash dividend paid (0.10) (0.11) (0.14) (0.16) (0.21) (0.23) (0.23) (0.20) (0.14) (0.18) (0.25) FCF after dividend (0.36) 0.01 0.10 (0.01) (0.28) (0.48) (0.25) 0.06 0.23 0.38 0.36 Other (0.06) 0.20 (0.14) (0.13) 0.06 0.09 (0.04) 1.28 0.35 (0.20) (0.24) Change in net debt (0.42) 0.22 (0.04) (0.15) (0.23) (0.39) (0.29) 1.34 0.58 0.18 0.13 Source: Company data, UBS estimates

Sinopec 7 July 2016  19

Sinopec UBS Research

COMPANY DESCRIPTION return 

Market Cap US$92.65bn Revenues by region (%)

Shares Outstanding 121.0bn Industry Oil companies, major Region Asia Pacific Website www.sinopec.com

Sinopec is Asia's largest oil refining, retail refined product marketing, and petrochemical company by capacity. In 2015, the company's refinery throughput was 4.8m bpd, total retail sales volume was 119m tonnes (via about 30,560 petrol stations), and olefin and aromatics production was about 20mt and 9mt, respectively. Source: Company Through its network of nearly 23,000 Easy Joy shops, EBIT by product segment

Sinopec operates one of the world's largest convenience store chains by number of shops. Sinopec is integrated into Rmb bn 2013 2014 2015 2016E 2017E upstream oil & gas with 1.3m boed oil and gas production E&P 55 47 (17) (33) (1) and 3.5bn boe proven oil & gas reserves. Refining 9 (2) 21 34 35 Industry outlook Marketing 35 29 29 35 37 Chemicals 1 (2) 20 17 18 Oil prices are depressed due to an industry inventory glut Others (3) (1) (0) 0 0 but with prices now well below what is considered Total economic by a large number of non-OPEC producers, 96 72 52 53 90 Source: Company data, UBS estimates investment commitments are likely to lag and could create supply shortage several years from now. Petrochemicals is facing a 3-5 year upcycle driven by risk of large capacity delays. Diesel demand is sluggish and could turn negative while gasoline demand looks robust. Petrol station convenience stores are viewed as a long-term non-fuel revenue opportunity. SOE reform is leading to more sensible upstream and downstream capital allocation in China, in our view.

Sinopec 7 July 2016  20

Sinopec (0386.HK)

Income statement (Rmbm) 12/13 12/14 12/15 12/16E % ch 12/17E % ch 12/18E 12/19E 12/20E Revenues 2,880,311 2,825,914 2,018,883 2,048,137 1.4 2,482,796 21.2 2,835,758 3,085,301 3,247,228 EBITDA (UBS) 193,136 180,799 172,380 175,195 1.6 218,131 24.5 241,730 256,427 260,304 DD&A and exploration (96,351) (107,312) (115,352) (121,891) -5.7 (128,060) -5.1 (133,118) (136,262) (138,655) EBIT (UBS) 96,785 73,487 57,028 53,304 -6.5 90,071 69.0 108,611 120,165 121,649 Assoc and other inc (UBS, pre-tax) 2,513 6,246 8,525 8,450 -0.88 8,450 0.00 8,450 8,450 8,450 Net interest (9,034) (9,439) (5,155) (3,086) 40.1 (1,799) 41.7 (350) 370 170 Other pre-tax items 0 0 0 0 - 0 61.6 0 0 0 Profit before tax (UBS) 90,264 70,294 60,398 58,668 -2.9 96,722 64.9 116,711 128,985 130,270 Tax (UBS) (24,763) (17,571) (12,613) (14,667) -16.3 (24,181) -64.9 (29,178) (32,246) (32,567) Profit after tax (UBS) 65,501 52,723 47,785 44,001 -7.9 72,542 64.9 87,533 96,739 97,702 Minorities (4,157) (1,467) (11,226) (11,785) -5.0 (12,477) -5.9 (13,177) (14,242) (15,458) Other post-tax items 0 0 0 0 - 0 - 0 0 0 Net earnings (UBS) 61,344 51,256 36,559 32,216 -11.9 60,065 86.4 74,357 82,497 82,244 Exceptionals/Extraordinaries 4,788 (4,790) (4,121) (6,923) -68.0 (4,412) 36.3 0 0 0 Net earnings (reported) 66,132 46,466 32,438 25,293 -22.0 55,653 120.0 74,357 82,497 82,244 Tax rate (%) -27.4 -25.0 -20.9 -25.0 -19.7 -25.0 0.0 -25.0 -25.0 -25.0

Per share (Rmb) 12/13 12/14 12/15 12/16E % ch 12/17E % ch 12/18E 12/19E 12/20E EPS (reported, diluted) 0.50 0.44 0.30 0.27 -12.0 0.50 86.4 0.61 0.68 0.68 EPS (UBS, basic) 0.57 0.44 0.31 0.27 -15.0 0.50 86.4 0.61 0.68 0.68 EPS (UBS, diluted) 0.50 0.44 0.30 0.27 -12.0 0.50 86.4 0.61 0.68 0.68 Net DPS (Rmb) 0.24 0.24 0.18 0.15 -19.0 0.22 52.5 0.25 0.27 0.27 Cash EPS (UBS, diluted) 1.17 1.21 1.10 1.13 2.7 1.41 24.5 1.56 1.65 1.67 Book value per share 4.68 5.07 5.59 6.05 8.3 6.54 8.1 6.29 6.71 7.12 Average shares (diluted) 121,859 117,242 120,853 121,071 0.2 121,071 0.0 121,071 121,071 121,071

Balance sheet (Rmbm) 12/13 12/14 12/15 12/16E % ch 12/17E % ch 12/18E 12/19E 12/20E Cash and equivalents 15,101 10,100 68,557 89,438 30.5 65,642 -26.6 27,460 54,431 86,321 Other current assets 357,909 350,044 263,848 266,928 1.2 315,258 18.1 355,114 384,216 404,233 Total current assets 373,010 360,144 332,405 356,366 7.2 380,901 6.9 382,575 438,647 490,554 Net tangible fixed assets 830,225 881,152 884,853 834,736 -5.7 836,798 0.2 859,420 884,706 904,985 Net intangible fixed assets 6,255 6,281 6,271 6,271 0.0 6,271 0.0 6,271 6,271 6,271 Investments / other assets 173,426 203,791 219,600 219,600 0.0 219,600 0.0 219,600 219,600 219,600 Total assets 1,382,916 1,451,368 1,443,129 1,416,974 -1.8 1,443,570 1.9 1,467,866 1,549,224 1,621,410 Trade payables & other ST liabilities 417,952 425,679 376,636 388,584 3.2 420,969 8.3 448,350 467,457 479,939 Short term debt 153,870 178,578 86,006 76,318 -11.3 70,881 -7.1 57,114 61,371 64,152 Total current liabilities 571,822 604,257 462,642 464,902 0.5 491,850 5.8 505,464 528,828 544,091 Long term debt 145,590 150,932 139,746 99,746 -28.6 59,746 -40.1 19,746 19,746 19,746 Other long term liabilities 42,244 49,084 55,118 55,118 0.0 55,118 0.0 55,118 55,118 55,118 Total liabilities 759,656 804,273 657,506 619,766 -5.7 606,714 -2.1 580,328 603,692 618,955 Common s/h equity 570,346 594,483 675,370 683,245 1.2 717,220 5.0 761,689 812,816 862,112 Minority interests 52,914 52,612 110,253 113,963 3.4 119,635 5.0 125,849 132,717 140,344 Total liabilities & equity 1,382,916 1,451,368 1,443,129 1,416,974 -1.8 1,443,570 1.9 1,467,866 1,549,224 1,621,410 Total capital employed 907,619 966,505 942,818 883,833 -6.3 901,840 2.0 936,937 972,218 1,000,033 Net (debt) cash (284,359) (319,410) (157,195) (86,626) 44.9 (64,985) 25.0 (49,400) (26,686) 2,423

Cash flow (Rmbm) 12/13 12/14 12/15 12/16E % ch 12/17E % ch 12/18E 12/19E 12/20E Net earnings (reported) pre MI 70,289 47,933 43,664 37,078 -22.0 68,130 120.0 87,533 96,739 97,702 DD&A and exploration expensed 93,838 101,066 106,827 113,441 6.19 119,610 5.44 124,668 127,812 130,205 Net change in working capital (14,475) 21,819 11,513 8,868 -23.0 (13,381) - (9,783) (7,168) (4,568) Other (operating) (2,028) 4,611 259 0 -100.0 0 31.3 0 0 0 Operating cash flow 147,624 175,429 162,263 159,386 -1.8 174,358 9.4 202,418 217,382 223,340 Capital expenditure (185,126) (154,640) (112,249) (100,400) 10.6 (112,245) -11.8 (125,094) (132,812) (135,326) Equity free cash flow (37,502) 20,789 50,014 58,986 17.9 62,113 5.3 77,324 84,570 88,013 Net (acquisitions) & disposals 0 0 0 0 - 0 - 0 0 0 Dividends paid (28,298) (28,031) (24,214) (16,806) 30.6 (21,678) -29.0 (29,888) (31,371) (32,948) Share issues / (buybacks) 0 0 0 0 - 0 - 0 0 0 Net other cash flows 18,675 (27,809) 136,415 28,389 -79.2 (18,794) - (31,852) (30,485) (25,956) Cash flow (inc)/dec in net debt (47,125) (35,051) 162,215 70,569 -56.5 21,642 -69.3 15,585 22,714 29,109 FX / non cash items 0 0 3,862 6,923 79.3 4,412 -36.3 0 0 0 Dec / (inc) in net debt (47,125) (35,051) 166,077 77,492 -53.3 26,054 -66.4 15,585 22,714 29,109 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.

Sinopec 7 July 2016  21

Sinopec (0386.HK)

Operational data 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Production (000 boe/d) 1,213 1,316 1,285 1,229 1,248 1,281 1,296 1,297

Valuation (x) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E P/E (reported, diluted) 10.0 12.5 15.9 17.4 9.3 7.5 6.8 6.8 P/E (UBS, diluted) 10.0 12.5 15.9 17.4 9.3 7.5 6.8 6.8 P/CEPS (diluted) 4.3 4.5 4.4 4.1 3.3 3.0 2.8 2.8 Equity FCF (UBS) yield % (7.3) 3.4 6.8 10.3 10.8 13.4 14.7 15.3 Net dividend yield % 4.9 4.4 3.8 3.2 4.8 5.3 5.9 5.9 P/BV 1.1 1.1 0.9 0.8 0.7 0.7 0.7 0.7 EV/EBITDA 4.3 5.4 6.3 4.6 3.5 3.1 2.9 2.8 EV/DACF 4.9 6.0 7.0 5.3 4.1 3.6 3.3 3.2 EV/EBIT 8.5 13.2 18.9 15.2 8.6 7.0 6.2 6.0

Debt adjusted cash flow (UBS) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Net earnings (reported) pre MI 70,289 47,933 43,664 37,078 68,130 87,533 96,739 97,702 DD&A and exploration expensed 93,838 101,066 106,827 113,441 119,610 124,668 127,812 130,205 Other non-cash items: Group 0 0 0 0 0 0 0 0 Other non-cash items: Associates 0 0 0 0 0 0 0 0 Post tax interest 6,610 6,914 4,074 2,315 1,349 263 (278) (128) Other (2,028) 4,611 259 0 0 0 0 0 DACF (UBS) 168,709 160,524 154,824 152,833 189,089 212,464 224,273 227,779

Enterprise value (Rmbm) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Market cap. 513,587 614,013 730,747 574,924 574,924 574,924 574,924 574,924 Net debt (cash) 260,797 301,885 238,303 121,910 75,805 57,192 38,043 12,131 Buy out of minorities 52,914 52,612 110,253 113,963 119,635 125,849 132,717 140,344 Pension provisions/other 0 0 0 0 0 0 0 0 Total enterprise value 827,298 968,510 1,079,302 810,797 770,365 757,965 745,684 727,399 Non core assets 0 0 0 0 0 0 0 0 Core enterprise value 827,298 968,510 1,079,302 810,797 770,365 757,965 745,684 727,399

Growth (%) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Upstream volumes 3.0 8.5 (2.3) (4.4) 1.5 2.6 1.2 0.1 EBITDA (UBS) 3.6 (6.4) (4.7) 1.6 24.5 10.8 6.1 1.5 EBIT (UBS) (1.9) (24.1) (22.4) (6.5) 69.0 20.6 10.6 1.2 EPS (UBS, diluted) (6.6) (13.2) (30.8) (12.0) 86.4 23.8 10.9 (0.3) Net DPS 37.4 (1.6) (24.7) (19.0) 52.5 10.0 10.9 (0.3)

Profitability (%) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E ROACE (UBS) 6.9 4.9 4.6 4.6 8.0 9.6 10.1 9.9 ROE (UBS) 11.3 8.8 5.8 4.7 8.6 10.3 10.5 9.8

Capital structure & Coverage (x) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Net debt / EBITDA 1.5 1.8 0.9 0.5 0.3 0.2 0.1 (.0) Net debt / total equity % 49.9 53.7 23.3 12.7 9.1 6.5 3.3 (0.3) Net debt / (net debt + total equity) % 33.3 35.0 18.9 11.3 8.3 6.1 3.2 (0.3) Net debt/EV % 0.3 0.3 0.1 0.1 0.1 0.1 0.0 (.0) Capex / depreciation % 227.8 171.6 116.5 96.0 101.9 108.9 112.7 112.6 CAPEX / operating cashflow % 125.4 88.1 69.2 63.0 64.4 61.8 61.1 60.6 EBIT / net interest 10.7 7.8 11.1 17.3 50.1 NM NM NM Dividend cover (UBS) 2.3 1.8 1.7 1.8 2.2 2.5 2.5 2.5 Div. payout ratio (UBS) % 42.8 54.7 57.7 55.0 45.0 40.0 40.0 40.0

EBIT (UBS) by division (Rmbm) 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Upstream 54,793 47,057 (17,418) (32,695) (477) 14,443 21,324 17,437 Downstream 44,610 25,314 69,496 86,000 90,549 94,168 98,841 104,212 Other (2,618) 1,116 4,950 0 0 0 0 0 Total 96,785 73,487 57,028 53,304 90,071 108,611 120,165 121,649 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.

Sinopec 7 July 2016  22

Forecast returns

Forecast price appreciation +46.6%

Forecast dividend yield 4.8%

Forecast stock return +51.4%

Market return assumption 9.2%

Forecast excess return +42.2%

Valuation Method and Risk Statement In China, we believe government intervention in the event of a material spike in global oil prices is a key risk. Government intervention can include policies related to, for example, downstream refined product price caps or upstream oil windfall profit taxes. Oil prices, refining margins and petrochemical spreads can be volatile, highly cyclical and seasonal in nature. Therefore, changes in our outlook for global GDP growth or seasonal demand and inventory levels can have a material impact on our earnings expectations in the long and near term. Given large projects planned in the sector, execution risk exists. Finally, plant mechanical failure is a risk for oil and chemical manufacturers. To value Sinopec, we use a sum-of-the parts approach. Exploration and production assets are valued using NAV of 2P reserves (10% WACC) on a project-by-project basis. Downstream assets, including refining, marketing and petrochemical assets, are valued based on EV/EBITDA peer multiples ranging from 6x to 10x on a forward basis.

Sinopec 7 July 2016  23

Required Disclosures This report has been prepared by UBS Securities Asia Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 06 July 2016 10:04 AM GMT. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions

12-Month Rating Definition Coverage1 IB Services2 Buy FSR is > 6% above the MRA. 49% 32% Neutral FSR is between -6% and 6% of the MRA. 38% 26% Sell FSR is > 6% below the MRA. 14% 19%

Short-Term Rating Definition Coverage3 IB Services4 Stock price expected to rise within three months from the time Buy <1% <1% the rating was assigned because of a specific catalyst or event. Stock price expected to fall within three months from the time Sell <1% <1% the rating was assigned because of a specific catalyst or event.

Source: UBS. Rating allocations are as of 31 March 2016. 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near- term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Sinopec 7 July 2016  24

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS AG Hong Kong Branch: Peter Gastreich; Benson Chen, CFA. Company Disclosures Company Name Reuters 12-month rating Short-term rating Price Price date

Sinopec2, 4, 5, 16a, 16b 0386.HK Buy N/A HK$5.52 05 Jul 2016

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity or one of its affiliates. 5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 16a. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company. 16b. UBS Securities LLC makes a market in the securities and/or ADRs of this company. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. Sinopec (HK$) Price Target (HK$) Stock Price (HK$) 10.0 8 .0 6 .0 4 .0 2 .0 0 .0 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------l t r l t r l t r l t r l t r l n n n n n c c c c c u p u p u p u p u p u a a a a a J J J J J J J J J J J - O - O - O - O - O - - A - A - A - A - A ------1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Buy Neutral No Rating

Source: UBS; as of 05 Jul 2016

Additional Prices: LG Chemical, Won261,500 (05 Jul 2016); PETRONAS Chemicals Group Berhad, RM6.56 (05 Jul 2016); Lotte Chemical, Won290,500 (05 Jul 2016); Sinopec Shanghai Petrochemical, HK$3.55 (05 Jul 2016); PTT Global Chemical, Bt58.25 (05 Jul 2016); Bharat Petroleum Corporation, Rs1,098.15 (05 Jul 2016); Hindustan Petroleum, Rs1,033.85 (05 Jul 2016); Reliance Industries, Rs992.95 (05 Jul 2016); S-Oil, Won78,600 (05 Jul 2016); SK Innovation, Won143,500 (05 Jul 2016); Caltex Australia Limited, A$31.66 (05 Jul 2016); Ultrapar ON, R$69.39 (05 Jul 2016); Chengdu Hongqi Chain, Rmb6.09 (05 Jul 2016); CP All Plc, Bt51.25 (05 Jul 2016); President Chain Store, NT$251.00 (05 Jul 2016); Z Energy, NZ$8.09 (05 Jul 2016); Source: UBS. All prices as of local market close.

Sinopec 7 July 2016  25

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Sinopec 7 July 2016  26

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