Main points of investment:

The company integrates "trade-logistics-warehousing-production-R & D-sales-finance". It is mainly engaged in energy investment and production, storage, transportation and trade of petrochemicals.

At present, it owns Ningbo Haiyue New Materials, Zhuji Yuedu Oil, Tianjin Northern Oil, Haiyue Asset Management and other companies. The company's business segment includes propane and C4 as raw materials for the production of propylene, isooctane, methyl ethyl ketone and other products; gasoline, diesel, LPG warehousing, wholesale and retail; equity investment and property leasing; terminal loading and unloading, warehousing and trading of all kinds of oil and liquid chemicals. Ningbo Haiyue (51% owned by the company) mainly produces and operates propylene, isooctane, methyl ethyl ketone and other products. The first phase of Ningbo Haiyue 1.38 million tons of propane and mixed C 4 utilization project was officially put into production in 2015, with an annual production capacity of 600000 tons of propane dehydrogenation to propylene (PDH) plant, 600000 tons of isooctane plant and 40,000 tons of methyl ethyl ketone plant, as well as supporting terminals, storage tanks, steam and environmental protection devices. Northern Petroleum is mainly engaged in terminal loading, unloading, warehousing and trading of all kinds of oil products and liquid chemicals.

A 50, 000-ton specialized petrochemical terminal with an annual turnover of more than 10 million tons and a reservoir area of 850000 cubic meters of crude oil, oil products and chemical products have been built in Tianjin Port. Northern Petroleum has established a long-term strategic cooperative relationship with upstream and downstream enterprises. Zhuji Yuedu Oil has 52000 tons of finished oil depots, 2200 cubic meters of liquefied gas depots, supporting special railway lines and other ancillary facilities and 11 gas stations, oil and gas business in cooperation with Petrochina Company Limited and China Petroleum & Chemical Corp.

The global supply of liquefied petroleum gas (LPG) and natural gas condensate (NGL) is growing steadily, and there is a large amount of excess propane in the Middle East and North America, which provides a large number of high quality and cheap propane resources for the development of PDH in the Asia-Pacific region. In 2010, global LPG supply and demand were 242 million tons and 232 million tons respectively, while in 2016, LPG supply and demand were 295 million tons and 272 million tons respectively, of which the trade volume exceeded 100 million tons. Global LPG supply grew at an average annual rate of 3.4 per cent between 2010 and 2016, faster than the average annual growth of 2.7 per cent of demand, mainly driven by the massive development of shale gas in the US and increased crude oil and natural gas production in countries such as Iran and Qatar in the Middle East. Among them, the US shale gas revolution led to the rapid growth of NGL production, the US NGL supply nearly doubled from 2m b / d to 3.75m b / d from 2010 to 2016, while LPG accounted for about 50 per cent of US NGL supply. Therefore, in the world trade pattern, the United States and the Middle East two major resource centers are still the main export areas. LPG consumption is mainly driven by emerging economies, and demand in Asia-Pacific countries such as China, India, South Asia and Latin America is growing faster than supply. According to the data in "New characteristics and General Trends of liquefied Petroleum Gas Industry", in terms of the gap between supply and demand, the LPG surplus in North America was 6.14 million tons in 2010, 32.95 million tons in 2016, and 43.37 million tons in 2020. In the Middle East, the LPG surplus was 29.23 million tons in 2010, 36.23 million tons in 2016, and is expected to reach 40.74 million tons in 2020. Oversupply in the Middle East and North America has increased further. In the Asia-Pacific region, the gap between supply and demand of LPG was 26.17 million tons in 2010, reached 48.96 million tons by 2016, and is expected to reach 65.34 million tons by 2020, an increase of 149.68 percent over 2010.

China's external dependence on LPG is more than 30%, and the proportion of industrial use, especially PDH, has increased. In 2017, China's LPG output, import volume and apparent consumption reached 36.77 million tons, 18.45 million tons and 53.9 million tons respectively, with an average annual compound growth rate of 9.10%, 32.56% and 14.40% from 2011 to 2017. The degree of external dependence increased from 9.31% in 2011 to 31.78% in 2017. Imports mainly depend on the United Arab Emirates, the United States and Qatar. In terms of LPG consumption structure, the main downstream consumption areas of LPG in China include civil consumption, industry (including chemical raw materials) and transportation. Under the influence of the rapid construction of domestic urban natural gas pipeline network and the transformation of the way residents use energy, the urban civil LPG market is gradually replaced by natural gas and electricity, and the civil LPG demand is shrinking. However, with the increase of per capita income of rural households and the conversion of coal to gas under the strictness of environmental protection, the demand for civil LPG in rural areas has remained stable and slightly increased. The rapid development of PDH has promoted the consumption of LPG in the chemical industry, which is also a factor for the rapid growth of LPG imports in the past two years. In 2000, civil, industrial and other sectors accounted for about 72%, 19% and 9% of China's LPG consumption structure, respectively, and by 2015, civil, industrial and other sectors accounted for about 62%, 32% and 6%, respectively. With the introduction of projects under construction and proposed construction of PDH, it is expected that by 2020, civil, industrial and other sectors will account for about 55%, 38% and 7%, respectively. The reason why PDH has become an important new industry in China's chemical industry, on the one hand, is that its product propylene is an important petrochemical intermediate, which is widely used in the production of polypropylene, butanol, octanol, acrylonitrile, acrylic acid, propylene oxide, isopropanol, isopropanol and isopropanolic acid. On the other hand, the source of raw materials is relatively uncontrolled by the state, and excess resources in North America and the Middle East can be utilized. In addition, PDH has the characteristics of simple process route, relatively low investment and mature process package. Therefore, the PDH capacity has increased rapidly in recent years. From 2013, the first 600,000 tons / year PDH plant of Tianjin Bohua Group was put into production to 2017, China's total PDH capacity has reached 5.14 million tons / year, with an average annual compound growth rate of 71.08%. It is estimated that China's PDH capacity will reach 9.63 million tons / year by 2020.

The double advantages of the cessation of the trade war between China and the United States and the Brent oil price reaching the $80 / barrel mark are just the right time for China to develop PDH. China and the United States issued a joint statement on bilateral economic and trade consultations in Washington on May 19, in which the two sides agreed to meaningfully increase US agricultural products and energy exports, and the US side will send a delegation to China to discuss specific issues. We can basically infer from this Sino-US joint statement that China will lift the previous imposition of tariffs on US propane imports, so China's propane dehydrogenation to propylene (PDH) will be supported by double benefits when the international crude oil price in Brent continues to rise to the current mark of US $80 per barrel. According to the "Olefin feedstock diversification development trend and investment opportunity analysis", according to the naphtha cracking unit scale of 800,000 tons / year, the scale of coal-to-olefin (CTO) / methanol-to-olefin (MTO) / PDH unit is 600,000 tons / year. Under the scenario of high oil prices, the costs of CTO and PDH have relative advantages, while the cost of naphtha to olefin is the highest. According to the price and price difference we tracked, the average price difference between propylene-1.2 * propane (FOB, Middle East) and propylene-1.2 * propane (FOB,MB) was 4356 yuan / ton and 4913 yuan / ton respectively from the beginning of May to mid-May 2018, an increase of 18.77% and 9.40% respectively over the same period last year.

Northern Petroleum consolidated table and Ningbo Haiyue PDH profits rebounded, 2018Q1 company performance improved significantly. The company's 2018Q1 realized operating income of 5.486 billion yuan, an increase of 112.38% over the same period last year, and a net profit of 101 million yuan belonging to listed companies, an increase of 271.48% over the same period last year. The net profit attributable to shareholders of listed companies after deducting non-recurring profits and losses was 82 million yuan, an increase of 162.59% over the same period last year, and earnings per share was 0.22 yuan. The substantial increase in operating income of the company is mainly due to the acquisition of Northern Oil and consolidation, and the profit growth mainly comes from Ningbo Haiyue. Due to the high load of the plant after the completion of maintenance last year, PDH has a good profit. In addition, the company's financial expenses were 15.52 million yuan, down 43.12 million yuan from the same period last year, mainly due to the increase in exchange earnings due to the appreciation of the RMB in Ningbo Haiyue. We expect that under the current medium and high crude oil prices, the company's PDH plant high profits will continue, the gross profit margin of isooctane and oil products sales will pick up slightly, and the full-year results are expected to maintain high growth.

Profit forecast and investment rating: based on the judgment of the persistence of PDH profits under medium and high oil prices and the rebound of gross profit margins of oil products, isooctane and other products, the company expects its operating income to be 204.47 yuan in 2018-2020, respectively, and the net profit belonging to the parent company will be 3.499 billion yuan, respectively, and the net profit belonging to the parent company will be 3.499 million yuan, respectively. The corresponding closing price PE is 15.55 + 14.07 + 13.00 times, giving a buy rating for the first time.

Risk hint: the risk of sharp decline in international crude oil prices and product prices, RMB exchange rate volatility risk, LPG trade risk.