Fitch Ratings has affirmed China Petroleum & Chemical Corporation (Sinopec)'s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A+'.

The Outlooks on the IDRs of the China-based integrated oil and gas and petrochemical company are Stable. The agency has also affirmed Sinopec's Short-Term Foreign- and Local-Currency IDRs at 'F1+' and its senior unsecured rating at 'A+'.

Sinopec's rating is closely aligned with Fitch's assessment of the credit profile of parent China Petrochemical Corporation (Sinopec Group), which owns 67.84% of Sinopec, under our Parent and Subsidiary Rating Linkage Criteria, due to a 'High' assessment in legal, strategic and operational incentives. Fitch's assessment of Sinopec Group's credit profile is based on our Government-Related Entities (GRE) Rating Criteria.

Sinopec Group is wholly owned by the China State-owned Assets Supervision and Administration Commission, or SASAC. The company is the country's largest supplier of oil and petrochemical products as well as one of the largest oil and gas producers, and plays a key policy role in implementing China's retail fuel-price mechanism.

Key Rating Drivers

Parent's Very Strong State Linkage: Fitch assesses Sinopec Group's status, ownership and control by the Chinese state as 'Very Strong'. Sinopec Group is fully owned by the state, which appoints key management. Sinopec Group's strategy is closely aligned with the central government's goal in energy security and energy transition. Fitch views its Support Track Record and Expectations as 'Very Strong', with tangible state support in the form of capital injections and subsidies, which helps to support a very healthy financial position.

'Very Strong' Impact of Default: Fitch assesses the socio-political impact of a Sinopec Group default as 'Very Strong'. A default would notably cause interruption in China's energy security - given Sinopec Group's prominent share in China's refining, marketing and chemicals. It also takes a policy role in implementing the retail fuel-price mechanism to ensure end-user affordability. Fitch sees the financial implications from a default as 'Very Strong', since it is a key state-owned borrower. A default would cause a severe impact on the availability and cost of financing of other major central GREs.

'High' Legal Incentive to Provide Support: As a principal subsidiary, a default of Sinopec would trigger the cross-default provision in Sinopec Group's large outstanding offshore bonds, which totalled CNY163 billion as of end-2022. Fitch believes cross-default provision is of high permanence, as Sinopec Group has a long record and large amount of offshore capital-marketing financing.

'High' Strategic Incentive: We assess the financial contribution at 'High'. Sinopec holds around 80% of the groups' assets across industry chains, and accounts around 80% of the Group's EBITDA. We assess Sinopec as providing a 'High' competitive advantage for the Group, and is the primary platform to carry out national energy security and energy transition mandates for the parent. We assess Sinopec's growth potential as 'Medium'.

'High' Operational Incentive: Sinopec and Sinopec Group share a common management, as seniors are overlapped and rotate. Sinopec is also viewed as integral to the Group, which share the same brand. 'High' management and brand overlap outweigh 'Moderate' operational synergies, given the majority of operations are carried at Sinopec's level.

Scale and Integration: Sinopec's profile is supported by its dominant scale as well as a presence in both upstream and downstream operations. Domestically, it is the largest refined oil products supplier and the second-largest oil and gas producer. It is also one of the largest Fitch-rated energy companies globally, with top capacities in refining and key petrochemicals projects. The integrated business model enables Sinopec to weather fluctuation over a commodity-price cycle.

Recovering Refining and Marketing Segment: We expect Sinopec's volume to increase. Domestic gasoline demand has recovered to pre-pandemic levels, with the removal of travel restrictions. Volume growth has been supported further by strong export volumes, spurred by a decent crack spread. We expect 5% and 14% yoy increases in 2023 throughput and domestic refined oil products sales, respectively, as a result.

We also expect Sinopec's 2023 refining and marketing (R&M) margins to improve, with higher demand and smoother pass-through as crude oil prices retreated. We estimate mild margin expansion in 2024-2026 as the oil price declines further, although new capacities and slower demand growth would limit future profit growth.

Moderating Upstream Performance: Fitch expect Sinopec's upstream earnings to decline in tandem with oil prices in 2023. The company reported realised oil and gas prices decreasing by 20% and 6%, respectively, yoy in 9M23. This is partially offset by gas production growth, which increased by 8.7% yoy in 9M23. Sinopec aims to lift gas output as a transitional energy to net zero.

Very Low Leverage: Sinopec's strong financial metrics and its diversified business model and leadership position in China's refining and marketing segment are commensurate with an 'a-' Standalone Credit Profile (SCP). Fitch expects stable EBITDA net leverage even after factoring in high dividend payouts and high capex to fulfil low carbon transition. Sinopec has announced filing of a share placement to the parent - which is currently not in our base case - and could result in even lower leverage, if this should materialise.

Derivation Summary

Our assessment of Sinopec is aligned with our internal assessment of Sinopec Group, based on the PSL criteria. We assess legal, operational and strategic incentives all as 'High'.

Key Assumptions

Fitch oil price base-case assumptions for Brent: USD80/bbl in 2023 and USD75/bbl in 2024, USD70/bbl in 2024, and USD65/bbl thereafter

We assume flat oil production and around mid-single-digit growth in gas output over 2023-2026

Refining throughput in 2023 to increase to 254million tonnes, in line with management guidance. Volumes will grow slightly on demand recoveries and new facilities coming on stream. Refining and marketing EBIT to improve in 2023 from 2022 when industry profitability was affected by the pandemic and surging costs. Future margin to expand mildly on falling oil prices.

Capex to decline to CNY165.8 billion in 2023, in line with management guidance, and stay high in 2024-2026 on further investment in exploration and production, ongoing downstream project construction, and new initiatives for energy transition.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive action on the sovereign, provided Fitch's assessment of Sinopec Group under the GRE criteria and Sinopec Group's incentive to provide support to Sinopec remain intact

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on the sovereign

Weakening of likelihood of state support for Sinopec Group

Significant weakening incentive for Sinopec Group to support Sinopec

Rating sensitivities for the China Sovereign as of 31 August 2023 are:

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Public Finances: A sustained upward trajectory in general government debt/GDP from persistently high fiscal deficits or a rise of contingent liabilities, for instance from LGFVs, such that debt levels compare less favourably with rated peers.

Macro: Reduced confidence in economic policymaking and medium-term growth prospects.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Structural Features: A material reduction in macro-financial risks and associated contingent liabilities facing the sovereign, for example by maintaining credit growth below nominal GDP growth over a multi-year period, which would cause the removal of the -1 QO notch on structural features.

External Finances: Widespread adoption of the Chinese yuan as a reserve currency, as reflected in a substantial increase in the share of yuan-denominated claims in the IMF's currency composition of the official foreign-exchange reserves database (COFER).

Liquidity and Debt Structure

Adequate Liquidity: Sinopec has comfortable liquidity, with cash and cash equivalents of CNY181.8 billion as of 9M23, sufficient to cover its short-term loans of CNY94.0 billion. Fitch believes future high capex can be covered mostly by strong operating cash flow, with a small gap to be closed by other funding channels. Sinopec has strong access to domestic banks, onshore and offshore bond markets and equity markets in 'A' and 'H' stock exchanges.

Issuer Profile

Sinopec is China's top refining and petrochemical supplier, and is the main listing platform of Sinopec Group. Sinopec Group is one of China's three national oil companies.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

Sinopec's rating is directly linked to the credit profile of Sinopec Group.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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