The decline in basic chemical commodities has bottomed out: weak overall demand combined with the release of new production capacity in some industries. The bulk chemicals boom has mostly shown a continuous downward trend since it peaked in the first half of '22, and is currently in a low boom range. As of late March '24, the price quantiles for the company's main products urea, DMF, acetic acid, adipic acid, cyclohexanone, ethylene glycol, octanol, caprolactam, DMC, and oxalic acid were 77%, 27%, 56%, 55%, 28%, 83%, 3%, and 8%, respectively, with spreads of 75%, 1%, 41%, 18%, 5%, 27%, 86%, 11%, 1%, 7%, respectively. The price difference between urea and octanol alone is at a high quantile level. Dynamically, fertilizer and octanol account for about 30% and 10% of the company's gross profit composition, and the market is also worried that the decline in the two will put further pressure on the company's performance. Downstream agricultural demand for urea is relatively rigid, better than most chemicals that are highly correlated with the post-real estate cycle. At the same time, the boom is relatively strong when supported by energy costs such as coal; octanol has limited new production capacity in recent years due to poor profits in the early years, so fluctuations in stock production capacity can easily lead to tight supply and demand, leading to price increases. However, since both are expected to increase production capacity in '24, product prices have been adjusted since the beginning of the year, but they have also further absorbed the economic risks that the market has always feared, and the company's position at the bottom of the boom has been further strengthened.
The Jingzhou project was put into operation to open up medium- to long-term growth space: On November 9, 23, the company announced that the holding subsidiary Hualu Hengsheng (Jingzhou) Co., Ltd. has completed all processes, produced qualified products, and entered the trial production stage, that is, the first phase of the Jingzhou project was put into operation. The project includes 1 million tons of urea, 1 million tons of acetic acid, 150,000 tons of DMF, and 150,000 tons of methylated amine. The commissioning of the project is expected to further consolidate the company's cost and scale advantages and lay the foundation for the expansion of future products in Jingzhou. The second phase of the Jingzhou project is expected to invest 5 billion yuan, mainly including 200,000 tons of BDO, 160,000 tons of NMP and 30,000 tons of PBAT biodegradable materials integration project, 100,000 tons/year acetic anhydride project, melamine resin monomer material project (160,000 tons of melamine resin monomer, 800,000 tons of ammonium bicarbonate), melamine resin monomer material raw materials and product optimization and upgrading project (520,000 tons of urea). The project started in September 23, and is expected to be partially put into operation this year. The Jingzhou base project has been implemented one after another, which will open up space for the company's medium- to long-term growth and push the company through the economic fluctuation cycle.
Due to the overall decline in product and raw material prices, the company's revenue and profit margin have declined. We predict that the company's EPS for 2023-2025 will be 1.85, 2.22, and 2.60 yuan (the original forecast was 2.69, 3.29, and 3.74 yuan), respectively. Based on a comparable company's price-earnings ratio of 15 times in 24 years, the company's target price is 33.3 yuan and the purchase rating is maintained.
Risk warning
Risk of price fluctuations of products and raw materials; risk of project construction falling short of expectations.