Incidents:

On October 30, 2023, Shenghang Co., Ltd. released its report for the third quarter of 2023:

In the first three quarters of 2023, the company achieved operating income of 878 million yuan, a year-on-year increase of 42.74%, and completed net profit of 117 million yuan, a year-on-year decrease of 13.47%. Net profit deducted from non-return was 115 million yuan, a year-on-year decrease of 13.64%.

Among them, the company achieved operating income of 299 million yuan in 2023Q3, an increase of 34.29% over the previous year, an increase of 4.19% over the previous year, and completed net profit of 29 million yuan, a decrease of 35.49% over the previous year and a decrease of 32.49% over the previous year. Net profit after deducting non-return to the mother was 28 million yuan, a year-on-year decrease of 35.61% and a decrease of 30.85% over the previous year.

Investment highlights:

Demand recovered moderately, and performance fell short of expectations in 2023Q3 due to loss of investment income. The company achieved revenue of 299 million yuan, an increase of 34.29% over the previous year, an increase of 4.19% over the same period, and a double increase in revenue over the same period last month. The changes on the revenue side are in line with the trend of the company's continuous expansion of production capacity and the recovery of the industry. The chemical operating rate began to pick up in the second half of the year. Taking PX as an example, the average daily operating rate of 2023Q3 was 79.68%, up 1.98 pcts from the previous year and up 6.71 pcts over the previous year. The recovery in operating rate led to a slight increase in demand for liquid chemical water transportation. However, in the third quarter, the company's investment income dragged down the company's performance. In Q3, the sector lost 9.3 million yuan, Q2 was +5.33 million yuan, down 14.63 million yuan from Q2. This factor caused the company to complete net profit of 29 million yuan, a decrease of 35.49% over the previous year and a decrease of 32.49% over the previous month. The performance fell short of our expectations.

Domestic and foreign trade go hand in hand, and production capacity expansion continues to advance

On October 20, 2023, the company announced that it intends to purchase 100% ownership of a domestic chemical vessel named “Fenghai 29” and two foreign trade chemical vessels with the ship name “Fenghai 17” and “Fenghai 21” from Fenghai Shipping. The company's capacity will be further increased.

As of October 20, the company has purchased 11 new ships this year, including 5 domestic chemical tankers totaling 30629.33 DWT, 5 foreign trade chemical tankers, a total of 59653.29 DWT, and 1 finished tanker with a capacity of 7244 DWT. Currently, 6 of the 11 newly purchased ships have been put into operation, and the remaining 5 ships are expected to be put into operation one after another. The company's production capacity continues to expand, and the market share is expected to continue to increase.

Marginal restoration of operating rates, wait for the economy to pick up

Since entering October, the chemical operating rate has generally stabilized and picked up slightly. Take PX as an example. As of October 27, the average daily operating rate in October was 80.06, up 0.28pcts from September. Looking ahead, with the company's new purchases and the commissioning of self-built ships, the company's domestic and foreign trade chemical transportation business is expected to expand rapidly. The recovery in domestic trade demand is expected to absorb the company's additional domestic trade capacity; at the same time, investment in foreign trade ships will further enhance the company's international operating capacity. Driven by the two wheels of domestic and foreign trade, the company's performance is expected to enter a recovery stage, waiting for the economy to pick up.

Profit forecasts and investment ratings take into account the impact of macroeconomic conditions. We have adjusted this profit forecast. The 2023-2025 operating income of Shenghang Co., Ltd. is estimated to be 1,197 billion yuan, 1,682 million yuan and 1,932 million yuan, respectively, and net profit of 169 million yuan, 255 million yuan and 334 million yuan respectively, corresponding to PE 17.26 times, 11.45 times and 8.72 times, respectively. Entering a marginal recovery in industry prosperity in the fourth quarter, we are waiting for the company's production capacity to climb and performance to recover, and maintain the “buy” rating.

Risks indicate policy changes, demand growth falling short of expectations, capacity expansion falling short of expectations, mergers and acquisitions risks, and chemical transportation safety risks.