Asia Oil & Gas, Refining_ China Slashing Export VAT Rebate of Oil Products _ UCO

Summary of Key Points from the Conference Call Industry Overview - Industry: Asia Oil & Gas, Refining - Key Focus: Impact of China's reduction in export VAT rebate for oil products Core Insights 1. Reduction in Export VAT Rebate: The Chinese government announced a reduction in the export VAT rebate for gasoline, diesel, and jet fuel from 13% to 9%, effective December 1, 2024. This is a surprising shift given the previous reinstatement of full tax rebates since November 2016 to alleviate surplus refining capacity [1][3] 2. Impact on Refiners: The reduction is expected to negatively impact state-owned refiners such as Sinopec and PetroChina, with estimated full-year negative EPS impacts of approximately 3.9% for Sinopec and 1.3% for PetroChina in FY24E [1][3] 3. Refinery Run Cuts: Ongoing cuts in refinery runs in China (October: -6.9% YoY; YTD: -3.6%) are expected to limit further export upside, reinforcing the view of limited export support for regional Gross Refining Margins (GRM) [1][4] 4. Used Cooking Oil (UCO) VAT Rebate: The export VAT rebate for used cooking oil will be removed to align with biodiesel, which already has no rebate. This is part of China's strategy to promote local UCO processing and biofuel market development [1][5] Additional Considerations 1. Domestic Competition: The startup of the Yulong greenfield refinery, with a capacity of 200,000 b/d, may worsen domestic competition as the government reallocates crude import quotas to enhance industry competitiveness [3] 2. Regional Refiners' Advantage: Asian refiners such as S-Oil, SPRC, and TOP are expected to benefit from reduced Chinese competitiveness, although sentiment for TOP may remain muted due to ongoing issues with subcontractors [9] 3. Biodiesel Exports: China's biodiesel exports dropped by 45% YoY to 0.89 million tonnes, influenced by the EU's anti-dumping investigation, while UCO exports surged by 55% YoY to 2.12 million tonnes [5] Valuation and Risks 1. PetroChina Valuation: Target price for PetroChina A-share is set at Rmb10.3, based on a sum-of-the-parts valuation with an 8.0% WACC. Key risks include lower-than-expected oil prices and production volumes [18][19] 2. Sinopec Valuation: Target price for Sinopec A-share is Rmb5.1, with similar valuation methods applied. Risks include fluctuations in fuel demand and dividend payout ratios [24][26] Conclusion - The reduction in export VAT rebates and ongoing refinery run cuts in China are expected to have significant implications for both domestic and regional refining markets. While regional refiners may benefit, state-owned enterprises like Sinopec and PetroChina are likely to face headwinds in the upcoming fiscal year.