Sinopec Results Displaying 'Black Box Tendencies': Jefferies

Jefferies Group downgraded China Petroleum & Chemical Corp., or Sinopec, to hold from buy, saying the state-owned petroleum refiner's results are "beginning to display black box tendencies with not insignificant amounts of earnings fungibility between quarters and segments."

Analysts Laban Yu and Jack Lu referred particularly to Sinopec's third quarter results. While the profit for the quarter (which beat consensus estimates) was in line with Jefferies' estimates, the management's explanation for "large discrepancies in segmented results versus our estimates were not entirely satisfying," they said.

Sinopec [SNP] [HK:386] [CN:600028] is the listed arm of China's Sinopec Group, which ranks 5th on the Fortune 500 list of companies with more than one million employees, $375 billion in total revenue and $9.45 billion in profit last year.

The analysts cited Sinopec's management as saying that the company booked a provision of 6 billion yuan in the first half of the year for losses on crude inventories at the prevailing refined product prices. But because of product price increases in the third quarter, those provisioned losses were written back during the July to September period, they said, adding that profits were moved, "in essence," from the second quarter to the third.

"Though we don't believe earnings are being overstated, they are becoming less transparent," Yu and Lu added.

Sinopec's shares fell 1.6% in Hong Kong and 0.6% in Shanghai Tuesday. On Monday, they had risen 2.9% and 1.1% respectively in the two markets, following the better-than-expected third-quarter results.

Employing an interesting choice of words, the Jefferies analysts also said 2013 will probably be a year of restructuring and share price volatility as shareholders go on a "ride" with the company Chairman Fu Chengyu.

"We aren't averse to saddling up, but we first need some more clues about horse and jockey," they added.