Incident: The company released its 17-year performance forecast on January 5. Net profit after deduction is expected to be 97-1.02 billion yuan, turning a year-on-year loss into a profit, mainly due to a sharp rise in the price of caustic soda over the same period last year; strong downstream demand and the maintenance of the company's equipment at a high load; adjustment results in the Wujing region are gradually showing, and related expenses have been reduced year-on-year. The performance was in line with expectations.
Caustic soda declined in the short term, and there was no change in the long-term upward trend under chlor-alkali imbalance: in early January '18, caustic soda (32% ion film national median price) was reported at 1,284 yuan/ton, down about 12.7% from the high of 1,471 yuan/ton in November '17. We believe that the short-term decline in caustic soda is mainly affected by the weakening of downstream demand. In particular, the price of alumina has continued to decline since the beginning of November 17, which has reduced Alumina's enthusiasm for purchasing caustic soda. In the long run, the price of caustic soda is expected to return to an upward channel with the end of the winter production limit for alumina, as well as the pressure of off-peak production and chlor-alkali imbalance. Overall, we believe that, supported by chlor-alkali imbalance and downstream demand for alumina, the fluctuating upward trend in caustic soda prices was the main theme in '18, and the average price of caustic soda in '18 is expected to be higher than the average price in '17.
The park's integrated industrial chain model benefits from continuous downstream expansion: the company's Caojing plant mainly supports the Shanghai Chemical Industry Park, providing long-term chlorine and caustic soda for the park's MDI/TDI/PC devices. The company announced the signing of a ten-year chlorine supply contract with downstream enterprises, improving the company's ability to develop steadily over the long term. Benefiting from the continuous expansion of downstream park enterprises, the company has gradually developed into a world-class chlorine gas supplier. We believe that with Lianheng and Huntsman's production expansion in 2018, the company's production capacity is expected to continue to be released and enjoy the investment benefits brought by downstream production expansion.
The integrated hydrogen chloride/chlorine cycle is expected to be completed, breaking through overseas technology monopolies: the company uses ethylene as a raw material and uses hydrogen chloride as a by-product to prepare ethylene chloride, and this business is dragging down the company's performance. Currently, the hydrogen chloride catalytic oxidation project developed independently by the company to produce chlorine gas is progressing steadily. Once opened, the company will break through overseas technology monopolies and find a better profit plan for the by-product hydrogen chloride.
Investment advice: We expect the company's EPS to be 0.87, 1.13, and 1.31 yuan respectively in 17-19.
Maintaining the Buy-A investment rating, the target price for 6 months is 18 yuan.
Risk warning: Downstream demand for caustic soda fell short of expectations, and demand for liquid chlorine improved more than expected.