Midland Financial has released a research report maintaining its earnings forecasts for SINOPEC SEG (02386) at RMB 22 billion and RMB 24 billion for 2026 and 2027, respectively. The current stock price corresponds to 9x and 8x P/E for those years. The firm keeps its Outperform industry rating and HK$6.60 target price, which implies 11.5x and 10x P/E for 2026/27, offering a 27% upside from the current share price.

The company's first-half 2026 results met expectations. Revenue came in at RMB 35.6 billion, up 13% year-on-year, while net profit attributable to shareholders was RMB 1.14 billion, down 18% year-on-year, in line with forecasts. Foreign exchange losses and impairments totaled RMB 120 million against RMB 12.5 billion in foreign currency assets. Financial income fell 20% year-on-year to RMB 364 million due to lower deposit rates. Gross margin dropped 0.5 percentage points year-on-year but rose 1 percentage point quarter-on-quarter to 7.7%. Operating cash flow was negative RMB 959 million. The company declared an interim dividend of RMB 0.127 per share, and on August 16, it approved a share buyback program of HK$100 million to HK$150 million over six months.

The impact of low-price historical overseas construction projects is gradually fading, with gross margins remaining broadly stable. In the first half of 2026, the construction segment's operating profit turned to a loss of RMB 57 million, compared to a loss of RMB 1.1 billion in the second half of 2025. Projects such as Saudi Arabia's Marjan and Berri, secured during the low-fee period of 2020/21, are nearing completion, and the firm believes their drag on profits is expected to diminish. The EPC segment saw operating profit rise 10% year-on-year to RMB 870 million, driven by the peak construction phase of large-scale projects like Kazakhstan's Silleno and Maoming Ethylene.

The order book remains robust, with demand in the Middle East converting into new overseas contracts. In the first half of 2026, SINOPEC SEG signed a 60-month EPC long-term agreement and a 60-month PMC long-term agreement with Saudi Aramco for upgrades, won a USD 45 million EPC contract for the Ras Tanura refinery emergency repair project, and secured a USD 750 million construction contract with ADNOC in the UAE. Overseas new orders totaled RMB 20.8 billion, accounting for 40% of the total, achieving 60% of the full-year target of USD 5 billion. Domestic new orders reached RMB 31.2 billion, fulfilling 57% of the annual target. The total order backlog grew 4% year-on-year and 8% quarter-on-quarter to RMB 220.1 billion. Since the Strait conflict, Middle East owner construction projects may face some delays and cost increases, which could pressure overall EPC margins in the region.

The company holds ample cash reserves of RMB 27.5 billion. The interim dividend decreased 20% year-on-year to RMB 0.127 per share, with the payout ratio broadly unchanged at 49%. The dividend yield for 2026 is estimated at 7.5%. Risks include geopolitical conflicts, slower-than-expected overseas project progress, and weaker-than-expected new order inflows.