Incident: On October 28, 2023, Dongfang Shenghong released its 2023 three-quarter report. The company's revenue for the first three quarters of 2023 was 103.642 billion yuan, up 121.89% year on year; net profit to mother was 2,479 billion yuan, up 57.15% year on year; net profit after deducting non-net profit was 2,053 billion yuan, up 81.14% year on year. The corresponding company's 3Q23 revenue was 37.743 billion yuan, up 3.79% month-on-month; net profit to mother was 798 million yuan, down 17.13% month-on-month.
The company's performance for the first three quarters of 2023 improved markedly year over year. The company's revenue growth in the first three quarters of 2023 was mainly due to an increase in sales revenue from the commissioning of the project. The company's overall gross sales margin for the first three quarters of 2023 was 12.91%, up 4.20pcts from the same period last year. The company's financial expenses rose 52.67% year on year in the first three quarters of 2023, mainly due to increased interest expenses; sales expenses rose 113.04% year on year, mainly due to increases in employee remuneration and sales and warehousing in the first three quarters; R&D expenses rose 12.97% year on year; and management expenses rose 6.45% year on year. The company's net interest rate for the first three quarters of 2023 was 2.39%, down 0.98 pcts from the same period last year. We believe that the company's performance improved markedly in the first three quarters of 2023, mainly because the EVA project was put into operation and profits began, and the polyester filament boom picked up. 3Q23's revenue increased month-on-month, which we believe was mainly due to a month-on-month recovery in the prices of the company's main products in the third quarter. According to iFind data, the average market prices for 3Q23 gasoline/diesel/PX/PTA/polyethylene/polypropylene were 8859.23/6029.50/8304.17/7596.65 yuan/ton, respectively, 3.71%/5.57%/2.08%/1.71%/2.73%. The company's net profit fell month-on-month in 3Q23, which we believe was mainly due to the increase in the cost ratio during the period. In Q3, financial expenses rose 48.82% month-on-month, management expenses rose 18.06% month-on-month, and R&D expenses rose 25.73% month-on-month.
The company's cash flow is good. The company's net cash flow from operating activities in the first three quarters of 2023 was 6.022 billion yuan, up 88.17% year on year. Net cash flow from investment activities was -17.597 billion yuan, up 24.90% year on year. Net cash flow from fund-raising activities was $9.740 billion, a year-on-year decrease of 53.13%. The balance of cash and cash equivalents at the end of the period was $8.133 billion, a year-on-year decrease of 21.12%. Accounts receivable increased 282.55% year over year, mainly due to an increase in accounts receivable from customers with high credit ratings. The accounts receivable turnover ratio declined from 86.38 times in the same period in 2022 to 74.03. Inventories rose 86.70% year over year, and inventory turnover fell from 5.20 times in the same period in 2022 to 4.91 times.
A leading domestic polyester chemical fiber company, promoting the “1+N” industrial layout. The company is one of the leading enterprises of “refining+polyester chemical fiber+new energy new materials” in China, and has extended to diversified industrial chains such as new energy, new materials, electronic chemistry, biotechnology, etc., and built a “1+N” industrial layout based on integrated refining and chemical, alcohol-based multi-production, and propane industry chain projects. The company's new petrochemical and chemical materials production base is located in the Xuwei New Area of Lianyungang, one of the “seven major petrochemical bases in the country”. The Shenghong Integrated Refining and Chemical Project has diversified basic chemical production capacity, 16 million tons/year of crude oil processing capacity, 2.8 million tons/year of combined aromatic hydrocarbon plants, and 1.1 million tons/year of ethylene cracking plants. It is a raw material guarantee platform for the company's new materials industry.
Honggang Petrochemical is mainly responsible for the PTA sector. As an important intermediate link in the new polyester materials industry chain, it undertakes the company's refining and aromatic hydrocarbon products upward and supplies polyester raw materials from the company's Suzhou and Suqian bases. Honggang Petrochemical has a PTA production capacity of 3.9 million tons/year and is an important supplier of polyester raw materials in East China. Regarding the polyester chemical fiber business, the company focuses on the development and production of microfibers and differentiated functional fibers. As of the first half of this year, the company has 3.3 million tons/year of differentiated chemical fiber production capacity, including more than 300,000 tons/year of regenerated fiber, and 250,000 tons/year of recycled polyester fiber will also be put into operation this year. The company's high-end differential fiber DTY and regenerated fiber production capacity rank among the highest in China.
Serban Petrochemical is mainly responsible for the company's new chemical energy and new materials business, and has now formed a diversified product structure for the collaborative development of propylene, ethylene and fine chemicals derived from them. As of the first half of this year, the MTO plant that has been put into operation by Sibong Petrochemical has a design capacity of 2.4 million tons/year, making it the world's largest single alcohol-based multi-cogeneration unit; propane dehydrogenation unit (PDH) design capacity is 700,000 tons/year; in addition, Sibong Petrochemical has production capacity of 780,000 tons/year of acrylonitrile, 300,000 tons/year of MMA, and 300,000 tons/year of EO. The EVA production capacity is among the highest in the world, and acrylonitrile production capacity is among the highest in China.
Q3 The price of polyester fiber rebounded, and the EVA project started production profitably. In the polyester fiber sector, the prices of 3Q23's products such as DTY, FDY, POY, and polyester chips rose, supported by crude oil prices, which is beneficial to the company's performance. According to iFind data, the average price of Brent crude oil in Q3 was 85.33 US dollars/barrel, up 9.48% from month to month; the average price of the company's main products, DTY/FDY/POY/ polyester chips, was 9341.22/8498.40/7901.03/6926.35 yuan/ton, respectively, of 2.61%/2.29%/3.30%/0.52%. We believe that due to the rise in crude oil prices, the pressure on the raw material side of the company's polyester products such as DTY has been relieved and profitability has been repaired. We believe that in the future, as downstream demand for products such as polyester filaments and chips recovers and the Shenghong Integrated Refining and Chemical Project is put into operation, the company will actively expand downstream high value-added products, which is expected to further expand the company's overall profit level.
In the new energy and new materials sector, Sierbon Petrochemical's photovoltaic grade EVA and POE lines are in parallel. According to the company's 2023 semi-annual report, Silbon's propane industry chain and other projects have been fully put into operation. Its EVA production capacity is 300,000 tons/year, which is mainly used in the photovoltaic field. The market share is the highest in the world. The product quality has been fully recognized by downstream customers, and has covered many leading domestic companies in the photovoltaic film field; the new 100,000 tons/year POE device is in the early stages of the project and has successfully produced qualified products in the pilot plant. The price of 3Q23 photovoltaic grade EVA also rebounded, contributing to the company's performance in the third quarter. According to iFind data, the spot price of Q3 Silbon EVA was 17,470.00 yuan/ton, 6.32% month-on-month. We believe that the commissioning of the company's EVA project has greatly boosted its performance in the first three quarters of this year. Furthermore, as of the first half of 2023, Sierbon Petrochemical has an acrylonitrile production capacity of 780,000 tons/year. The quality of acrylonitrile products is stable and excellent. It has become the main raw material supplier for many mainstream domestic carbon fiber companies, and currently ranks first in China in production capacity.
The polyester filament industry is becoming concentrated, and differentiated competition is gradually becoming mainstream. As consumer demand grows in downstream industries such as clothing, home textiles, and industrial textiles, differentiated and functional polyester fibers are also facing a new round of growth demand. Structural adjustments and variety improvements in the polyester filament industry are driving the continuous development of the industry. The concentration of the polyester filament industry is gradually increasing. In the first half of this year, CR6 in the polyester filament industry accounted for about 66% of the total production capacity of the industry. The company expects the concentration of the polyester filament industry to increase further in the future. Competition in the polyester filament industry is shifting from “price and quality” competition to comprehensive strength competition with “high technology as the lead, brand competition as the focus”. Judging from the overall development trend of the polyester filament industry, supply-side structural reforms and raising the level of green manufacturing have gradually become the main lines of transformation and upgrading of the polyester chemical fiber industry. Leading domestic filament enterprises continue to strengthen their competitive core and enhance their core competitiveness in their respective advantageous product fields, and there is significant differentiated competition among them. At the same time, the gradual increase in industry concentration is also conducive to further forming a market pattern of orderly expansion and differentiated diversified competition among leading enterprises. We believe that as one of the leading polyester chemical fibers in China, the company is expected to benefit from changes in the industry pattern by superimposing a product structure based mainly on high-end differentiated fibers.
The company's core competitive advantage is obvious. The company has advanced industrial layout advantages, innovation-driven development advantages, differentiated competitive advantages, collaborative development advantages and location advantages. In terms of industrial layout, the company has been deeply involved in the field of petrochemicals, new chemical materials, and polyester chemical fibers for many years. It has formed a “double chain” industrial pattern of olefins and aromatics, and has become a unique large-scale energy and chemical enterprise with full coverage of “oil head, coal head, and gas head” in China. In terms of scientific and technological innovation, the company has achieved rich scientific research results in products, processes, equipment, etc. As of the first half of this year, it has 382 patents, including 77 invention patents, 299 utility model patents, and 6 design patents. In terms of differentiated competition, the company is rooted in a misplaced competitive strategy, focusing on the development and production of microfiber and differentiated functional fibers. The product differentiation rate exceeds 90%, mainly high-end DTY products, focusing on developing green and low-carbon recycled fiber products, effectively avoiding the fierce market competition of conventional chemical fiber products. In terms of collaborative development, the company has a high self-supporting rate for refining, polyester, and fine chemicals. After the Shenghong Refining and Chemical Integrated Plant is put into operation, the upstream PX and ethylene glycol raw materials for polyester chemical fibers will be self-supplied, and the upstream and downstream product structure is very reasonable. In terms of location layout, the company's petrochemical and new chemical materials business is located in the Lianyungang petrochemical industrial base. The Lianyungang region has a suitable climate, excellent facilities in the park and surrounding area, close to the target market, and low material costs. Furthermore, the park is close to the seaport terminal, and processing imported crude oil has unique advantages in shipping, low transportation costs, and significant location advantages.
It is planned to introduce a war investment in Saudi Arabia and Aramco to develop international cooperation in the petrochemical business. On September 27, 2023, the company signed a framework agreement with Saudi Aramco Asia Company Limited, a subsidiary of Saudi Arabian Oil Company. The main contents include: (1) Saudi Aramco or its related parties intend to become strategic investors in Shenghong Petrochemical, a wholly-owned subsidiary of the company and intend to hold minority shares in Shenghong Petrochemical; (2) the two parties intend to purchase and supply raw materials such as crude oil for the long term, sales of chemical products and fuel products, and licensing of high value-added technology Collaborate. We believe that Saudi Aramco is one of the world's largest oil producers and one of the company's important suppliers of crude oil and other raw materials. Cooperation with Saudi Aramco will help the company further promote the integrated layout of the industrial chain, ensure a stable supply of raw materials, and help accelerate the company's international development.
Build the world's largest photovoltaic film raw material production base and lay out the field of new energy in depth. The company continues to lay out the new energy materials industry in depth around three million ton projects, namely the three major projects of million-ton EVA photovoltaic new energy materials, and million-ton green degradable materials, and has planned many new energy materials and low-carbon green projects, such as POE, lithium iron phosphate, CO2 to green methanol, PETG/CHDM, EC/DMC, POSM, etc., which are currently in the construction of industrial plants one after another. The company expects that within the next 1-2 years, these new products will be quickly put on the market, leading to the company's new performance growth point.
The global energy transition is accelerating, renewable energy is developing rapidly, and space is huge. Solar energy will become mainstream in the development of renewable energy. As the main raw material for photovoltaic films, photovoltaic grade EVA materials are expected to fully benefit from the boom in the photovoltaic industry. Sierbon Petrochemical is the only company in the country that also has independent production technology for photovoltaic grade EVA and POE. The company is actively promoting the strategic goal of “one million ton EVA”. Hongjing New Materials is building 3 sets of 200,000 ton photovoltaic grade EVA devices. Later, the company will also plan 100,000 tons of high-end hot-melt adhesive-grade EVA plants. At the same time, the company plans to build 200,000 tons/year α-olefin equipment, 300,000 tons/year POE unit, 300,000 tons/year butyl alcohol unit, 300,000 tons/year acrylic acid and ester unit, and 240,000 tons/year bisphenol A unit. It will use Shenghong Refining and Chemical to integrate rich basic intermediate products such as ethylene, propylene, phenol, acetone, etc. through EVA and POE to build the entire photovoltaic material industry chain layout with horizontal coverage and chain extension, and accelerate progress towards the goal of “building the world's largest photovoltaic film material industry base”.
Furthermore, in order to respond to the rapid development needs of the downstream NEV and energy storage industry, and based on the continuous empowerment of its large chemical platform and the accumulation of new materials over the years, the company has developed a layout in the field of upstream raw materials for lithium-ion batteries. Related products cover a wide range of key aspects such as cathode materials, battery separators, and electrolyte solvents. As of the first half of this year, the company's 20,000 tons/year ultra-high molecular weight polyethylene (UHMWPE) project has been put into operation. UHMWPE is the main raw material for lithium battery diaphragms. In addition, the company is constructing 100,000 tons/year vinyl carbonate and dimethyl carbonate (EC/DMC) plants. The downstream products will be mainly used in the field of lithium battery electrolytes. The company will also lay out the entire lithium iron phosphate cathode material industry chain in Yichang, Hubei, and comprehensively create a new energy green factory. The project will use phosphate ore as raw material to build 500,000 tons/year iron phosphate and 300,000 tons/year lithium iron phosphate, and eventually form an integrated layout of the entire industry chain from phosphate ore to lithium iron phosphate.
New materials projects are progressing steadily to expand high-end applications of downstream materials. The company takes advantage of the integrated industrial chain to actively expand high-end applications of downstream materials and continuously deploy into the field of new materials. The company's main construction projects for new materials include: ethylene glycol+phenol/acetone project: including 10/900,000 tons/year ethylene glycol plant and 400/250,000 tons/year phenol/acetone unit, which was put into operation in March this year. POSM and polyol projects: including 508,000 tons/year ethylbenzene plant, 20/450,000 tons/year POSM unit, 112,500 tons/year PPG unit, and 25,000 tons/year POP plant. Construction began in the first half of this year. High-end new material projects such as POE: 200,000 tons/year α-olefin plant, 300,000 tons/year POE unit, 300,000 tons/year butyl alcohol unit, 300,000 tons/year acrylic acid and ester plant, and 240,000 tons/year bisphenol A plant. Degradable plastics projects: including 340,000 tons/year maleic anhydride plant, 300,000 tons/year BDO unit, and 180,000 ton/year PBAT unit. As of the first half of this year, 200,000 tons/year maleic anhydride unit, 150,000 tons/year BDO unit, and 120,000 tons/year PBAT plant have completed the EIA announcement of the project and commenced construction. Lithium iron phosphate project: Higgs new energy supporting raw materials and iron phosphate and lithium iron phosphate new energy materials projects, including 1.8 million tons/year mineral processing plant, 500,000 tons/year iron phosphate plant, 300,000 tons/year lithium iron phosphate plant, etc.
Investment advice: The company is expected to achieve operating income of 1384.82/1530.43/176.734 billion yuan in 2023-2025, respectively, and realized net profit of 30.86/51.58/ 7.018 billion yuan, respectively. The corresponding EPS is 0.47/0.78/1.06, respectively. The PE multiples corresponding to the current stock price are 18.8X, 11.2X, and 8.3X, respectively. We are based on the following three aspects, 1) with macroeconomic stabilization and gradual downstream recovery, the company's refining and chemical business price differences are expected to continue to recover, boosting the company's profitability; 2) the concentration of the polyester filament industry continues to increase, favoring leading companies, and the industry is gradually moving towards a differentiated and diversified competitive market pattern. As one of the leading domestic polyester chemical fiber companies, the company cooperates with Saudi Aramco and the US to strengthen the integrated layout. The product structure, which is mainly based on high-end differentiated fibers, is expected to benefit from changes in the industry pattern; 3) The company's in-depth layout of new energy materials is expected to benefit from changes in the industry pattern; 3) The company's in-depth layout of new energy materials is expected to benefit from changes in the industry pattern; boost According to the company's performance, it is expected that the company's photovoltaic, lithium battery materials, and new materials projects will gradually be implemented in the future. We are optimistic about the company's competitive advantage in the changing pattern of the polyester filament industry, and the company's layout of new energy and new materials, covered for the first time, and gave it a “buy” rating.
Risk warning: risk of raw material price fluctuations; downstream demand falling short of expectations; market competition heightens risks; new construction projects are progressing less than expected; and risks such as exchange rate fluctuations.