Why I Chose To Close My Position in Sinopec Kantons?
Although I still believe Sinopec Kantons is undervalued at current levels, I have chosen to increase my holdings in Hysan Development as I believe this company has more potential at the current depressed price level.
In addition, closing my full position in Sinopec Kantons has created the opportunity to diversify my portfolio further into a new sector (biotechnology) to which I was not exposed to previously. I will disclose my new portfolio position as soon as I have finished writing the company analysis.
The Total Return on my investment in Sinopec Kantons from the initial purchase date on July 29, 2022, to the final closing date on March 5, 2024, amounted to 49.7% in local currency (EURO) and 58.27% in HKD.
For reference, I’ve included my original investment thesis for Sinopec Kantons below.
Why I Chose to Invest in Sinopec Kantons Holdings Limited (0934.SEHK)
There were several key factors that prompted my decision to invest in Sinopec Kantons Holdings Limited (0934.SEHK). Notably, the company’s impressive financial strength, attractive dividend yield, and its close relationship with China Petroleum & Chemical Corporation (0386.SEHK) all contributed to my decision.
- Strong Financial Position: One of the primary reasons I chose to invest in Sinopec Kantons was its healthy balance sheet. It is rare to find a company with such a robust financial standing, which I believe reflects well on the company’s long-term potential.
- Attractive Dividend Yield: Another appealing aspect of Sinopec Kantons is its dividend yield. As China Petroleum & Chemical Corporation owns approximately 60% of the company, it is reasonable to assume that they would have an interest in receiving regular dividends. This provides me with confidence that the company is likely to maintain a consistent dividend payout.
- Stable Customer Base: With Sinopec owning a significant stake in Sinopec Kantons, it is safe to assume that the former will remain a loyal customer of the latter. This not only ensures a stable source of revenue for Sinopec Kantons but also strengthens the business relationship between the two entities.
While no investment is without risks, I believe these factors offer a solid foundation for potential growth and returns in the long run.
Disclaimer: This is not financial advice. Always conduct thorough due diligence before making any investment decisions.
Financial Data Analysis
The following financial data were relevant when I made my initial investment in Sinopec Kanton’s shares (further details about my trading activity is provided below). The calculated “Key Metrics” provide a window into my approach to valuation. For a deeper understanding of this approach, as well as comprehensive explanations on what these revealing ratios truly signify, I encourage you to read the following article.
For my due diligence, I primarily focus on the most recent annual Cash Flow and Income Statements to gauge the company’s performance relative to the previous years. However, when reviewing the Balance Sheet, I always refer to the most recent quarterly statements. This allows me to accurately understand the present state of the company’s assets and liabilities, essentially giving me a snapshot of what I’m investing in at that moment.
| Selected Quarterly Balance Sheet Data as of June 30, 2022 | Key Metrics | ||
|---|---|---|---|
| Total Inventory | 3,403 | Current Ratio | 6,577,669 / 466,739 = 14.09 |
| Total Current Assets | 6,577,669 | Quick Ratio | (6,577,669 – 3,403) / 466,739 = 14.09 |
| Total Goodwill | N/A | Book Value per Share | 15,831,847 / 2,486,160 = 6.37 |
| Total Intangibles | N/A | Tangible Book Value per Share | N/A (No Goodwill, No Intangibles) |
| Total Assets | 15,831,847 | Price to Book Value | 2.46 / 6.37 = 0.39 |
| Total Current Liabilities | 466,739 | Price to Tangible Book Value | N/A (No Goodwill, No Intangibles) |
| Total Equity | 15,105,977 | Total Equity / Total Assets | 15,105,977 / 15,831,847 = 0.95 |
| Total Common Shares Outstanding | 2,486,160 | Total Tangible Equity / Total Tangible Assets | N/A (No Goodwill, No Intangibles) |
| Selected Annual Income Statement Data as of December 31, 2022 | Key Metrics | ||
| Diluted Net Income | 434,882 | Diluted Normalized EPS | 434,882 / 2,486,160 = 0.1749 |
| Diluted Weighted Average Shares | 2,486,160 | Price to Earnings Ratio | 2.46 / 0.1749 = 14.07 |
| Selected Annual Cash Flow Data as of December 31, 2022 | Key Metrics | ||
| Total Cash Dividends Paid | 497,232 | Dividend per Share | 497,232 / 2,486,160 = 0.20 |
| Dividend Yield | 0.20 / 2.46 * 100% = 8.13% |
Catalysts for Future Revaluation
- Through 2022, Sinopec Kantons had to deal with stringent restrictions in China due to local COVID-19 pandemic measures. Now that these restrictions have been lifted, I anticipate a resurgence of economic growth in the region. This increased economic activity is likely to benefit Sinopec by stimulating its business, thus improving margins and boosting turnover. Therefore, it would be prudent to keep a close eye on regional economic developments. If you hold a bullish view on the long-term growth prospects of the China region, Sinopec Kantons is a stock to watch!
According to Mr. Chen Yaohuan, Chairman of Sinopec Kantons, as outlined in the 2022 annual report:
- “In 2022, the Company made a provision for the valuation loss in interest in Vesta, a joint venture of the Company, due to the geopolitical conflict which led to an extreme deterioration in the operating environment of Vesta storage area in Estonia and the impact of changes in the regional storage market environment.” The Russia-Ukraine conflict caused the company to absorb a non-cash write-down of HK$261 million in non-current assets. However, should the geopolitical situation improve, it could facilitate a favorable change in the company’s circumstances.
- “In 2022, based on the updated feasibility study report for the Batam Project in Indonesia, due to the impact of energy transition on the traditional oil storage market, and increasing competition in respect of oil storage from the Singaporean region, the Batam Project was economically impractical. Accordingly, the Board has decided not to continue to proceed with the Batam Project. The Group will continue to adopt various effective measures actively to protect the legitimate rights and interests of the Company and its shareholders.” Consequently, the company recorded a complete non-cash write-down of the project’s book value (approximately HK$636 million) for the year ended 31 December 2022. Despite this, the project might still hold value for other companies, which could potentially lead to a future sale of the company’s stake in the Project.
Company Information
Sinopec Kantons Holdings Limited is a Hong Kong-based investment holding company principally engaged in oil and gas-related businesses. The Company operates through four segments. Trading of Crude Oil segment is mainly engaged in the trading of crude oil in Hong Kong and China. Crude Oil Jetty Services segment is mainly engaged in the provision of the transportation, unloading and storage of crude oil and other jetty services in China. Vessel Chartering Services segment is mainly engaged in the provision of vessel chartering services as crude oil transportation facilities and floating oil storage facilities for oil tankers in China and the Middle East. Natural Gas Pipeline Transportation Services segment is engaged in the provision of pipeline transportation services of natural gas in China.
Company Website: http://www.sinopec.com.hk//index_en.html
Trading Activity – When I Bought These Shares
- July 29, 2022 – HKD 2.46
Dividend Activity – When I Received Any Dividends
- Ex-dividend date: September 15, 2022 – HKD 0.08 (interim dividend for the six months ended 30 June 2022).
- Ex-dividend date: July 6, 2023 – HKD 0.12 (final dividend for the year ended 31 December 2022).
- Ex-dividend date: September 14, 2023 – HKD 0.10 (interim dividend for the six months ended 30 June 2023).
Trading Activity – When I Sold These Shares
- January 11, 2024 – HKD 3.49
- February 29, 2024 – HKD 3.58
- March 5, 2024 – HKD 3.65
Note: I divested my holdings in Sinopec Kanton, not due to a lack of confidence in its future prospects, but as part of a strategic effort to rebalance my portfolio. This involved allocating additional shares to Hysan Development to enhance the overall composition.
