Fitch Affirms Sinopec at 'A+'; Outlook Stable Hong Kong Fitch Ratings has affirmed the Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDRs) of China's integrated oil and gas (O&G) and petrochemical company, China Petroleum & Chemical Corporation (Sinopec), at 'A+'. The Outlooks on both IDRs are Stable. At the same time, the agency has affirmed Sinopec's Foreign - and Local-Currency Short-Term IDRs at 'F1+' and its senior unsecured rating at 'A+'.

The ratings of Sinopec are equalised with those of the People's Republic of China (China; A+/Stable), in line with Fitch's parent-subsidiary linkage methodology. This is due to the strong strategic and operational linkages of the company with the state via its parent, China Petrochemical Corporation (Sinopec Group).

KEY RATING DRIVERS

Strong Sovereign Linkages: Sinopec is 71.32%-owned by Sinopec Group, which is wholly owned by the State-owned Assets Supervision and Administration Commission of China (SASAC). Sinopec is the most valuable asset of the group, accounting for about two-thirds of assets and the majority of group consolidated revenue and cash generation. Sinopec Group has management control over Sinopec, and they are tightly linked both operationally and financially. The group has received significant government support, including substantial annual capital injections and subsidies from the state.

State Linkage Intact despite Re-organisation: Sinopec has undertaken a series of corporate restructuring exercises, including the sale of 29.6% of its marketing business to a group of private investors. The company in August proposed selling 50% of its shares in Sichuan to East China Gas Pipeline Co., Ltd. to outside investors. Fitch considers these transactions to be in adherence with the government's directives to increase private-sector participation in the economy, and a continuation of the group's strategy to enhance its corporate structure and diversify its funding sources. We feel that Sinopec's close linkage with the state remains intact despite these transactions.

Dominant Mid - and Downstream Operations: Sinopec is the country's largest producer and distributor of refined oil and petrochemical products, with around a 60% market share in sales of refined products and certain petrochemical products. Sinopec's retail network of over 30,000 service stations is also the largest in China, providing comprehensive nationwide coverage. Refined oil product prices remain controlled by the state at the refinery-gate level despite fuel-price reforms in 2013, and Sinopec plays a key role in any fuel-price controls as it is the largest refined products producer and retailer.

Gradual Market Liberalisation: The government is supportive of liberalising the O&G mid - and downstream segment in the medium to long term. Oil import rights have been relaxed while product pricing is now linked more closely to the market, thereby introducing more competition from the independent refining companies. But we expect the dominance of the national oil companies (NOCs) to continue - and this includes Sinopec - which are more integrated, financially much stronger, and with better access to funding. We also do not expect the government to fully relinquish control over the highly strategic O&G industry that it maintains through the NOCs.

Integrated Profile Benefits: Sinopec's integrated operating profile - upstream, refining and petrochemicals and retailing operations - has moderated the impact of variations in oil prices and product spreads. The profitability of its upstream operations has suffered under low oil prices, while its petrochemicals, refining and marketing operations have contributed more to the generation of operating cash in 2015 and in 1H16. Capex cuts and the company focusing on low-cost fields mean that we expect its oil production to be lower in 2016, but for gas production to increase as per the company's strategy of increasing its gas output. Sinopec's lifting costs are higher at around USD17/barrel of oil equivalent (boe), compared with the other two China NOCs; the company was able to reduce its lifting costs by 5% in 2015 from the prior year. Prospects of further cost deflation could be limited.

We expect some moderation in the margins of its refining and petrochemical operations in 2H16, and for the company to be exposed to the effects of inventory movements from volatile crude oil prices. Notwithstanding this, we expect the company to generate strong cash flow from operations, covering a large share of its capex requirements.

Standalone Credit Profile Remains Healthy: Sinopec's FFO net leverage dropped to 1.8x in 2015 from 2.5x in 2014, helped by the significant disposal proceeds from the partial sale of

Sinopec Marketing Co., Ltd (CNY105bn). Fitch expects Sinopec to maintain a strong financial profile despite our assumption of capex rising from around CNY100bn in 2016, as the company increases its upstream investments from the reduced levels under low oil prices. Fitch expects Sinopec's FFO-adjusted net leverage to remain between 2x-2.5x over the medium term, barring any major debt-funded acquisitions, or significant weakening of profitability from those expected by us. These levels, together with Sinopec's integrated business operations, places its standalone credit profile at 'A-'.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Sinopec include:

- Fitch's O&G price base-case assumptions of USD42/bbl for 2016; USD45/bbl for 2017; USD55/bbl for 2018 and USD65/bbl for 2019

- Upstream oil and gas production to decline marginally in 2016, then to grow by 1%-3% per year thereafter

- Refinery throughput to decline marginally in 2016, then to grow by 1%-3% per year

- Marketing sales volume, and ethylene production volume flat-to-moderate growth

- Refining and marketing margins - stable to moderate decline

- Capex per management guidance at CNY100bn in 2016, and rise to CNY120bn-140bn per year thereafter.

RATING SENSITIVITIES

Sinopec's ratings are equalised with those of China.

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- Any negative rating action on the sovereign

- Weakening of linkage between Sinopec and the state

Positive: Developments that may, individually or collectively, lead to positive rating action include:

- Any positive action on the sovereign, provided the rating linkages between the state and the issuer remain intact.

For the sovereign rating of China, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 26 November 2015:

The main factors that individually, or collectively, could trigger positive rating action on China include:

- Increased evidence that the economy can adjust smoothly while rebalancing without experiencing a disruptive "hard landing"

- Greater confidence that the debt problem in the broader economy can be resolved without a material negative impact on growth or financial stability

- Widespread adoption of the renminbi as a global reserve currency.

The main factors that individually, or collectively, could trigger negative rating action on China include:

- A sharper growth slowdown than currently anticipated, leading to a materialisation of risks to financial and/or social stability

- A rise in estimated general government indebtedness well above Fitch's current estimate

- Sustained capital outflows sufficient to erode China's external balance-sheet strengths, or undermine financial stability

- A change in policy direction that signals a reduced willingness to tackle the economy's imbalances and vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment