Incidents: On October 28, 2023, Hengyi Petrochemical released its 2023 three-quarter report. The company's operating income for the first three quarters was 101,529 billion yuan, down 17.67% year on year; net profit was 206,000 yuan, down 84.34% year on year; net profit after deduction was 192 million yuan, down 86.20% year on year. The corresponding company's 3Q23 operating income was 37.213 billion yuan, up 3.56% from the previous month; net profit was 130 million yuan, up 215.76% from the previous month.

The company's 3Q23 performance recovered, and profit rebounded month-on-month. The company's overall gross sales margin was 3.88%, up 0.08pcts from the same period last year. Sales expenses fell 3.93% year on year; management expenses rose 48.25% year on year, mainly due to technological transformation work carried out by factories; financial expenses increased 41.61% year on year, mainly due to a year-on-year increase in interest expenses; and R&D expenses fell 12.64% year on year. The company's 3Q23 net profit rose 215.76% month-on-month, and the net profit margin was 0.53%, an increase of 0.77pcts over the previous month.

The company's cash flow situation in the first three quarters was relatively good. Net cash flow from operating activities was 427 million yuan, an increase of 111.32% over the previous year, mainly due to a recovery in downstream demand, an increase in load, and the removal of inventories in the chemical fiber sector. Net cash flow from investment activities was -4,035 billion yuan, a year-on-year decrease of 218.33%, mainly due to the increase in investment expenses for new construction projects and capital increases for participating companies in the first three quarters. Net cash flow from fund-raising activities was -3,267 million yuan, a year-on-year decrease of 173.87%, mainly due to the increase in repayment of maturing loans in the first three quarters and the receipt of 3 billion convertible bonds raised in the same period last year. The balance of cash and cash equivalents at the end of the period was $6.20 billion, a year-on-year decrease of 38.25%, mainly due to the combined impact of changes in operating activities, investment activities, and fund-raising activities in the first three quarters. Accounts receivable rose 78.24% year on year, mainly due to an increase in payments to be collected from overseas customers at the end of the third quarter and a decrease in the turnover rate of accounts receivable, from 20.61 in the same period last year to 12.15. Inventories fell 23.32% year on year, and inventory turnover declined from 8.37 times in the same period last year to 6.38 times.

One of the leading “refining, chemical, and chemical fiber” integration leaders in China, the polyester/nylon double chain runs side by side. The company is one of the leading refining and chemical fiber manufacturers in China. It is mainly engaged in R&D, production and sales of refined oil products, petrochemical products, and polyester products. Since its establishment, it has achieved a balanced development model of “from crude oil refining to polyester-nylon double chain”. According to the company's 23th mid-year report, as of the first half of '23, the company had a crude oil processing design capacity of 8 million tons/year; participation in PTA production capacity of 19 million tons/year; PIA production capacity of 300,000 tons/year; company participation in polymerization production capacity of 11.065 million tons/year, including polyester fiber production capacity of 8.365 million tons/year, polyester bottles (including RPET) production capacity of 2.7 million tons/year; caprolactam (CPL) production capacity of 400,000 tons/year, annual production of 1.2 million tons of caprolacta-polyamide (polyamide) industry Continuation of integration and ancillary projects Promotion; the scale of production capacity ranks among the highest in the industry. Among them, the production capacity involved in the first phase of the company's Brunei refining and chemical project is 8 million tons/year, which can now reach 110% of the load. In the future, after completion of the second phase of the Brunei refining and chemical project, a new “olefin-polyolefin” industry chain will be added to promote the integrated construction process and enhance the company's overall profitability.

The company's integrated and collaborative development has outstanding scale advantages. The company has achieved coordinated development through differentiated development models such as the construction of upstream refineries overseas, the expansion of the middle and lower reaches domestically, and the integration of endogenesis and epitaxial integration. In recent years, the company has been committed to expanding the scale effect of all aspects and promoting quantitative changes in the company's operating scale and qualitative changes in business structure. The company's current production capacity is at the forefront of the industry, and the scale advantage is obvious. The company's participating PTA production capacity and participating holding aggregate production capacity rank first in the world, reducing unit investment costs and unit energy consumption, and consolidating the company's leading position in the industry.

The price spread for refined oil products has rebounded, and the company's profitability is expected to continue to recover. The company's refined oil products and chemical products are mainly produced by Hengyi Brunei Refinery. The Singapore market is a profit indicator for Southeast Asian refineries. In the first half of 2022, under the influence of multiple factors such as soaring crude oil prices, contraction in refined oil supply, and increased demand brought about by economic recovery in Southeast Asia, the price spread for refined oil products in Singapore rose all the way up. Since entering 2023, gasoline price spreads have improved markedly month-on-month, diesel price spreads have rebounded to a high level, and the profitability of Brunei refining and chemical projects is expected to continue to stabilize. Furthermore, since Southeast Asian countries have limited investment in new refining and chemical production capacity in the future, and there is a gap in refined oil products in Southeast Asia itself, we believe that the supply and demand of refined oil products in Southeast Asia may maintain a tight balance in the future, and the company's Brunei refining and chemical project is expected to benefit.

The Southeast Asian refined oil market is expected to enter a boom cycle, boosting the profitability of Brunei refining and chemical projects. As of the first half of this year, Southeast Asia's refining capacity was about 271 million tons, of which the first phase of the Brunei refining and chemical project accounted for about 3% of its total production capacity. The first phase of the Brunei refining and chemical project introduced the world's largest single series aromatic hydrocarbon plant and the world's sixth flexible coking process unit at the time. The unit's production cost per unit product was lower, and it was cleaner and more environmentally friendly, and had significant latecomer advantages. After the completion of the second phase of the later Brunei refining and chemical project, a new “olefin-polyolefin” industry chain will be added, which is conducive to raising the level of refining and chemical integration of the Brunei project and further enhancing the advantages of collaborative operation between upstream and downstream industries. Along with the overall transformation and upgrading trend of the petrochemical industry, the advantages of refining and chemical integration will further reduce costs and increase efficiency for the company. Furthermore, since 2023, the Southeast Asian economy has continued to recover, and demand for refined oil products has received strong support. At the same time, due to the continuous withdrawal of backward production capacity, geopolitics and other factors, the refined oil supply pattern continues to be tight. Coupled with the limited amount of new refining and chemical production capacity in the future, the profitability of Brunei refining and chemical projects is expected to increase further.

Profits in the PTA industry are improving, and upstream and downstream supply and demand tend to balance. Since 2023, due to economic recovery, fluctuations in crude oil prices, technological transformation of upstream PX equipment, and high polyester operating rates, etc., PTA prices have shown a volatile trend, and the overall profit of the industry is superior to last year. 3Q23 was affected by rising crude oil prices, and PTA prices increased month-on-month. According to iFind data, the average price of Brent crude oil in 3Q23 was 85.33 US dollars/barrel, up 9.48% from month to month; the average domestic PTA price was 6029.50 yuan/ton, up 2.08% month on month. On the supply side, as domestic PX production capacity continues to expand and Asia's PX load steadily rises, the tight PX supply problem has been alleviated. At the same time, domestic PTA added about 6.25 million tons of production capacity in the first half of this year, and the average domestic PTA load in the first half of the year was 76.9%, which is an increase over the same period last year, indicating an increase in PTA supply this year. On the demand side, it has benefited from India's extended BIS certification period for PTA suppliers in mainland China. At the same time, domestic and foreign PTA price spreads have been inverted. Many sets of foreign PTA backward production capacity devices have been discontinued, and PTA export demand has remained stable. The cumulative export volume of PTA in the first half of this year was 1994,000 tons. At the same time, the polyester operating rate improved markedly in the first half of the year, and the polyester load increased steadily. Domestic textile and garment consumption is expected to continue to recover, supporting PTA demand. As a leading enterprise in the PTA industry, the company has a strategic layout of 4 PTA bases in Dalian, Liaoning, Ningbo, Zhejiang, and Yangpu, Hainan. It holds and shares in PTA with a total production capacity of about 19 million tons/year, ranking first in the world in scale, and is the world's largest manufacturer of refined terephthalic acid (PTA).

The concentration of the polyester industry continues to increase, and upstream industry chain profits are expected to be skewed towards the polyester side. In recent years, China's polyester industry has gradually entered the stage of large-scale, integrated and technological development. While the concentration of production capacity in the industry continues to increase, the technological level of leading enterprises has continued to increase, and the strong have become stronger. Since 2021, the growth rate of new polyester filament production capacity has slowed down one after another. Polyester factories that are compounded with old and outdated devices and lack technological innovation capabilities have also gradually withdrawn from industry competition. The entry threshold for the industry has increased, and the industry environment has tended to develop healthily. Looking at the upstream industry, according to CCF statistics, the new production capacity of domestic PX and PTA is expected to be 5.6 million tons and 15.2 million tons respectively in 2023, with year-on-year increases of 14% and 20% respectively. The production capacity growth rate is higher than that of downstream polyester production capacity, which is conducive to the profit of the industry chain being skewed towards the downstream polyester side. In addition, MEG production capacity is also continuing to expand, and integrated coal production capacity continues to be invested. In 2023, additional domestic and foreign production capacity is expected to be 365 million tons, and the production capacity growth rate is about 11.3%. We believe that the supply of PTA and MEG, the main raw materials of polyester, continues to be relaxed, and that profits from the upstream industry chain may shift to the downstream polyester side, which is beneficial to future company profit release.

Continue to strengthen supply chain business and improve closed loop transportation. The company vigorously builds a supply chain system to meet the needs of business growth and production safety, build its own transport fleet and vehicle fleet, enhance the competitiveness of the company's main business, stabilize the supply of raw materials, and help stabilize production capacity at home and abroad. The company continues to strengthen supply chain cooperation and service management capabilities, develop a digital supply chain, and actively carry out comprehensive distribution services for raw materials and products. Online, Hengyi WeChat Mall and marketing supply chain systems are the core, and offline logistics business is supported, achieving effective integration between online and offline. Among them, the intelligent logistics management platform (HTTMS) is one of the functional applications of Hengyi WeChat Mall. It has the functions of internal standardized management, information and data exchange with upstream and downstream factories, and online control of vehicle road operation safety. It provides supporting services such as price inquiries, quick order placement, market information, financial services, etc., promoting continued explosive growth in system transaction volume, reducing manual operation, and improving accuracy while standardizing processes. At the same time, the company innovated a unique omni-channel logistics control system and built a tripartite logistics transportation platform. The “petrochemical+supply chain” industrial layout can reduce the logistics costs of the company's internal raw materials and products, better achieve upstream and downstream collaboration, provide strong support for the development of the main business, and enhance overall competitiveness.

Investment suggestions: The company is expected to achieve operating income of 1598.56/1749.14/189.826 billion yuan in 2023-2025, and realized net profit of 3.55/11.75/1,585 billion yuan respectively, corresponding EPS of 0.10/0.32/0.51, and PE multiples corresponding to current stock prices of 73.9X, 22.4X and 14.1X respectively. Based on the following aspects, 1) the domestic production capacity of PX production continues to expand, the tight PX supply has been alleviated, and the operating rate of polyester filament has steadily increased, supporting PTA demand. As PTA market supply gradually eases and downstream demand picks up, it is expected to help the company's PTA product profit increase; 2) Singapore's refined oil cracking price gap has risen all the way, compounded by the tight supply and demand for refined oil products in Southeast Asia. The company's Brunei refining project is expected to benefit the company's performance; 3) the polyester industry lags behind in production capacity Gradual clearance, continuous increase in industry concentration, upstream industry chain Profits are expected to be skewed towards the polyester end, which favors the leader. We are optimistic about the recovery in the prosperity of the polyester filament industry chain and the increase in the profitability of the company's Brunei project. It is covered for the first time and given a “buy” rating.

Risk warning: risk of price fluctuations in raw materials and energy; downstream demand falling short of expectations; construction projects not progressing as expected; risk of macroeconomic fluctuations, etc.