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Sinopec falls 33% since last year; nears 19-year oversold level (14 May 19)

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Dear all

This week, Sinopec (00386.HK) caught my attention with its 33% fall since 21 May 2018. With its sharp fall, it has become extremely oversold with RSI at 15.1.

Given the basis below, my personal view is that Sinopec may be presenting a favourable risk reward setup for a long trade. Do take a look at the basis and more importantly, the risks inherent in such trades.

 

My personal basis

a) Attractive valuations

At HKD5.63, Sinopec is trading at approximately 10.3x current PE and 0.8x P/BV. These valuations are attractive as compared to its 10-year average PE and P/BV 11.2x and 1.1x respectively.

b) Extremely oversold RSI

Sinopec has fallen 33% from an intraday high of HKD8.35 on 21 May 2018 to close HKD5.63 on 14 May 2019. RSI closed at an oversold level 15.1. At 15.1, there is only one occasion since late 2000 where RSI is lower than current level with the lowest RSI at 14.2.

c) Dividend boost

Sinopec is going to XD RMB0.26 on 31 May 2019. Given an indicative rate RMBHKD:1.14, this translates to HKD0.296 dividend, approximately 5.3% yield. For the full year, analysts estimate Sinopec’s FY19F dividend yield to be around 8.0%.

d) Analysts are positive with an average target price HKD7.31

Average analyst target stands at HKD7.31 with 30 buys; 3 holds and no sells. This represents a potential capital upside of around 56%. See Figure 1 below for more details.

Figure 1: Average analyst target HKD7.31; potential capital upside 33%

Sinopec analyst 14 May 19

Source: Bloomberg 14 May 2019

As usual, with any trading or investment idea, there are always risks. The list below is not exhaustive.

 

Risks

a) Strong downtrend

Based on Chart 1 below, it is on a strong downtrend as evidenced by its death cross formations and downwards sloping EMAs.

Near term supports:  HKD5.58 -5.60 / 5.50 / 5.37 – 5.40 / 5.30

Near term resistances: HKD5.80 / 5.86 / 5.91 / 6.00

Chart 1: Entrenched in a strong downtrend

Sinopec chart

Source: InvestingNote 14 May 2019

b) Not familiar with the company

As this basis is based primarily on its technical oversold level, I am not familiar with Sinopec’s business and the underlying fundamentals. There may arguably be some reasons known to the market but not to me resulting in the continuous fall in the share price. Readers are encouraged to do your own due diligence.

c) Chart reading is subjective; no rule that RSI will not go below 15

There is no rule that RSI cannot go below 15, or even 10. However, on the balance of probability, it is less likely that Sinopec can keep on dropping without some form of bounce, as oversold pressures escalate.

 

Conclusion

In view of the above, there is no doubt that Sinopec is on a strong downtrend. However, it seems likely that near term potential downside may be capped, as oversold pressures escalate. I have initiated a long position in this stock via CFDs, with the aim of getting a couple of bids of potential profit if any. This is a trade based on potential retracement, as oversold pressures escalate and not a trend reversal play. Nevertheless, there are significant risks (highlighted above, for example, I am not familiar with Sinopec’s business and its fundamentals) which we should be aware of. It is noteworthy that as I am a full time remisier, I can change my trading plan fast to capitalize on the markets’ movements (I am not the buy and hold kind). Readers should exercise their due diligence and evaluate carefully.

Readers who are not familiar with Sinopec can take a look at its company website HERE.

 

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