China Chemical is an engineering leader in the petroleum and chemical industry chain. It controls many design institutes of the former Ministry of Chemical Engineering, and has core assets on the design side of the chemical engineering industry. In recent years, the company has promoted the deep integration of industry, education and research through “one hundred thousand” talent selection, “one general hospital+multiple hospitals+N platform” system reform, and the “four 15%” and “two five-year” incentive mechanisms to ensure the sustainable development of technological resources.
Technical resources are a core element endowment in building the company's alpha. Vertical analysis: The company has experienced six rounds of large increases in the market. Three of these rounds of individual stock prices have benefited from the accumulation of the company's technical resources. Horizontal comparison: The company relies on technical advantages to create a moat for the main engineering business. The cash flow performance and asset quality are superior to traditional construction companies.
(1) Engineering perspective: Technical resources are a key factor driving the demand for chemical engineering. Under the “double carbon” strategy, chemical engineering faces the need for green transformation and upgrading; policies guide the extension of the coal chemical industry chain to the back-end fine chemicals sector; technology or alternative financing capacity, market resources, etc. have become the most critical competitive factors in the chemical engineering market. Take Tianchen Company as an example. In 2021, “equipment and catalyst sales and technology transfer” in its engineering sector accounted for about 52.2% of the total output value, while “construction” accounted for only 37.6% of the total output value, and technology research and development contributed a high level to the output value of chemical engineering. China Chemical has a deep accumulation in the field of carbon reduction technology and is at the leading international level in the field of coal chemical technology. It can provide owners with the most advanced production capacity design plans and engineering services. The main engineering business has a moat.
(2) Industrial perspective: Under the manufacturing model, technical resources can be converted into performance more quickly. Using the caprolactam project as an example, compare the characteristics of the industrial (manufacturing) model and the engineering model. In terms of cash flow, the payback period for the caprolactam project is about 5.89 years, and the risk is low; the project IRR is about 8.5% (the company's average ROE in 2015-2022 is 8.4%), and the return is fair. Evaluation in terms of net profit:
The caprolactam project relied on the advanced nature of the process to have a first-mover advantage and cost advantage. The net interest rate before production was over 10% (the company's average net interest rate from 2015 to 2022 was 3.4%), and the net interest rate fluctuated downward in the later stages. The conclusion is that the profit curve of the industrial (manufacturing) model is concentrated in the early stages, and that technical resources can be implemented more quickly, which helps to form a positive “technology-performance” cycle. In addition, technical resources support the industrialization and implementation of the company's various industrial projects, which also gives the company growth attributes.
Attention should be paid to the investment value of the company's technological research and development resources. The company has a large number of technical assets that are not reflected in the list, but there is still a lot of room for improvement in the PB level compared to the chemical engineering sector; as the industrial transformation continues to advance, it is also expected to move closer to the chemical industry sector with a higher valuation level. It is estimated that China Chemical's EPS from 2023 to 2025 will be 0.97, 1.18, and 1.36 yuan, and PE will be 7.10, 5.86, and 5.10 times lower than the current stock price, maintaining the “buy” rating.
Risk warning: chemical price risk, company performance falling short of expectations, increased competition in industrial projects, etc.