Incidents:

On October 28, 2023, Hengyi Petrochemical released its 2023 three-quarter report: in the first three quarters of 2023, the company achieved operating income of 101,529 billion yuan, -17.67%; realized net profit of 206 million yuan, -84.34%; and the weighted average return on net assets was 0.82%, a decrease of 4.18 percentage points over the previous year. Gross profit margin was 3.88%, up 0.08 percentage points year on year; net sales profit margin was 0.27%, down 1.51 percentage points year on year.

Among them, Q3 in 2023 achieved revenue of 37.213 billion yuan, -14.48% year-on-year and +3.56%; realized net profit of 130 million yuan, +126.25% year-on-year, +215.76%; and the weighted average return on net assets was 0.52%, an increase of 2.31 percentage points over the previous year. The gross profit margin of sales was 4.92%, up 4.63 percentage points year on year and 2.40 percentage points on month; net sales profit margin was 0.53%, up 1.55 percentage points year on year and 0.77 percentage points over the previous year.

Investment highlights:

The popularity of polyester filament and refined oil products in Southeast Asia improved. Gross profit in the third quarter increased sharply month-on-month, and achieved revenue of 37.213 billion yuan, -14.48% year-on-year and +3.56% month-on-month in Q3 of 2023; realized net profit of 130 million yuan, +126.25% year-on-year, +215.76% month-on-month, +626 million yuan, and +89 million yuan month-on-month. Among them, Q3 in 2023 achieved gross profit of 1,832 million yuan, or 926 million yuan; financial expenses of 865 million yuan, +314 million yuan; asset impairment losses of 59 million yuan, or 72 million yuan month-on-month; and income tax of 103 million yuan, +274 million yuan month-on-month.

Gross profit increased month-on-month in the third quarter, mainly due to a recovery in downstream demand, recovery in polyester filament profits, and an increase in company load. At the same time, against the backdrop of rising crude oil prices, the price spread for refined oil products in Southeast Asia widened. According to Wind, the price difference for diesel cracking in Singapore in the third quarter was 33.34 US dollars/barrel, +159.14%; the POY price difference in the third quarter was 1,064 yuan/ton, +9.79% over the previous quarter. The increase in financial costs may be an increase in exchange losses. Looking ahead to the fourth quarter, since October, the price spreads for diesel and aviation fuel in the Singapore refined oil market have continued to fluctuate at a high level. Gasoline price spreads have gradually rebounded. At the same time, polyester filament has benefited from the ten-peak season of gold, nine, and silver, and is optimistic that the fourth quarter performance will continue to recover.

In terms of period expenses, the sales/management/finance expense ratio of 2023Q3 companies was 0.19%/1.18%/2.32% respectively, with a year-on-year ratio of +0.04/-0.03/+0.79pct and +0.06/+0.55/+1.15pct over the previous year. 2023Q3, net cash flow from the company's operating activities — $377 million, compared to $2,012 million in the same period last year.

Overseas refined oil products are booming. Since the third quarter, technological improvements have increased the diesel output ratio and maximized profit, the cracking price spread for refined oil products in Singapore has risen and remained at a high level of more than 30 US dollars/barrel since August. Brunei refineries have adjusted the product production ratio in a timely manner. Under the cracking price spread of other oil products that are weaker than the diesel market, the output ratio of diesel has been further increased to maximize profits. The first phase of the company's Brunei project has a design capacity of 8 million tons, including a design production capacity of 5.65 million tons of refined oil products. Entering October, the price spread of diesel cracking in Singapore fluctuated to a certain extent, but overall it was still at a high level, and the gasoline cracking price spread gradually rebounded. According to Platts data, as of October 19, the price spread of gasoline cracking in the Singapore market was about 4.10 US dollars/barrel, the diesel cracking price difference was about 26.24 US dollars/barrel, and the aviation kerosene cracking price difference was about 22.06 US dollars/barrel. It is optimistic that the company's Brunei refinery profits will continue to improve.

The location advantages of the Belt and Road are prominent, and the “polyester+nylon” two-wheel drive growth company has developed into the world's leading enterprise integrating the “crude oil-PX-PTA-polyester” and “crude oil-benzene-CPL-nylon” industry chains. As of mid-2023, the company's new environmentally friendly differential chemical fiber project with an annual output of 1.1 million tons, caprolactam and polyamide industry integration and supporting projects with an annual output of 1.2 million tons, and Brunei refining and chemical project phase II are progressing in an orderly manner. Among them, the first phase of the new environmentally friendly differential chemical fiber project with an annual output of 1.1 million tons of 300,000 tons has already been put into production; in addition, the company's joint venture Hainan Yisheng has produced 2.5 million tons of refined terephthalic acid (PTA) projects with an annual output of 1.8 million tons, and a functional materials project with an annual output of 1.8 million tons are also being actively promoted. The company's performance is expected to go further after delivery Increase the company's market share in short fiber, bottle chips, etc., effectively reinforce the downstream industrial chain, give full play to the unique advantages of the company's “polyester”, “nylon” and double “fiber” drivers, and further enhance the advantages of a balanced integrated industrial chain with high upstream and downstream compatibility. At present, the company's self-developed anti-fouling nylon 6 technology has reached the international advanced level, and it is expected that the company's main business will achieve diversified development. The company was successfully selected as “100 Best Practice Cases of Chinese Listed Companies Jointly Building the Belt and Road”. It has two major bases in Brunei and Qinzhou, Guangxi, and has outstanding advantages for the Belt and Road District Committee.

Profit forecasts and investment ratings take into account the impact of the macro exchange rate and related product prices and price spreads. Based on current company operating data, we have adjusted the company's performance expectations moderately. The company's net profit for 2023-2025 is estimated to be 3.48, 11.58, and 1,956 billion yuan respectively, corresponding to PE 76, 23, and 13 times, respectively. Considering the company's future growth, it maintains a “buy” rating.

Risk indicates policy implementation, new capacity construction progress falling short of expectations, new capacity contribution performance falling short of expectations, fluctuations in raw material prices, changes in environmental protection policies, and a sharp decline in the economy.