Incidents:
The company released its 2023 annual report. In 2023, the company achieved total operating revenue of 27.3 billion yuan, -9.87% year-on-year, and realized net profit of 3.6 billion yuan, or -43% year-on-year. In the 2023Q4 single quarter, the company achieved total operating revenue of 7.9 billion yuan, +9.36% year over month, and realized net profit of 649 million yuan to mother, -14% year on year and -47% month on month.
Comment:
Major product sentiment declined, and spreads narrowed, putting pressure on 23-year results
In 2023, affected by the triple pressure of shrinking demand, supply shocks, and weakening expectations, the chemical industry's prosperity declined. The contradictions of traditional overcapacity, insufficient high-end supply, increased homogenous competition, and declining profitability were prominent. Market competition intensified, product prices fluctuated low, and the operating pressure on chemical companies increased. Prices and price differences of the company's main products have dropped significantly. By improving the large-scale production management system, improving the efficiency of resource and energy utilization, the company thoroughly explores the benefits of existing assets, and at the same time speeding up the progress of project construction, achieving smooth incremental market entry, and further consolidating the competitiveness of the industry.
In terms of price spreads, price spreads for urea, DMF, and acetic acid declined significantly in 2023, and price spreads for products such as ethylene glycol, adipic acid, and n-butanol improved, but they are still low. On the cost side, coal prices declined in '23, and thermal coal prices were -24% year on year. However, due to the sluggish sentiment in the industry, the profitability of the company's main products was weak, and the results in '23 were under pressure. In the 23Q4 single quarter, benefiting from the first phase of the Jingzhou base and the commissioning of the high-end solvent project, the company's revenue achieved month-on-month growth. We are optimistic that industry demand will gradually recover, superposition the company's Jingzhou base products will gradually rise, and profitability is expected to pick up.
Demand is gradually recovering from falling coal prices, and the profit of the coal chemical industry chain is expected to improve. Since the beginning of 2024, coal prices have continued to fall due to weak demand for non-electric coal such as steel and cement downstream of coal. Since the beginning of 2024, safety supervision of major coal production areas has become stricter. The State Council, Ministry of Emergency Management and other departments have introduced strict safety supervision policies, and supply in major production areas is expected to be tight. The “Regulations on Production Safety in Coal Mines” will come into effect on May 1, 2024. Corresponding provisions have been made to address outstanding issues currently existing in the coal mine field, including establishing working principles for coal mine safety, strengthening corporate principal responsibilities, and strict supervisory responsibilities of government departments. Looking ahead to the future market, demand for non-electricity demand for demand-side coal is still slow. Under the influence of supply-side safety supervision, coal companies' production is gradually shrinking. We expect both coal supply and demand to be weak, prices are expected to remain low, overall profits in the coal chemical industry chain will continue to improve, and low-cost coal chemical leaders represented by Hualu Hengsheng are expected to benefit.
The first phase of the Jingzhou base was put into operation. The new materials project under construction is expected to increase the company's profitability. In November 2023, the company announced that the company's Jingzhou Park gas power platform project and synthetic gas comprehensive utilization project will be put into operation. The project can produce 1 million tons of urea, 1 million tons of acetic acid, 10,000 tons of DMF15, and 150,000 tons of methylamine mixed per year. The completion and commissioning of the two projects will further enhance the company's core competitiveness and lay a solid foundation for the later development of the Jingzhou base. The second phase of the new material series project at the company's Jingzhou base began in 2023Q3. It is expected that production capacity for new products such as BDO, acetic anhydride, and melamine will be added. In addition, in December 2023, the company announced that the high-end solvent project was officially put into operation. The project can produce 600,000 tons of dimethyl carbonate (with sales volume of 300,000 tons), 300,000 tons of methylethyl carbonate, and 50,000 tons of diethyl carbonate per year. The company uses a low-cost coal gasification platform to continuously expand product production capacity and extend the industrial chain. We are optimistic that under the joint drive of the Dezhou and Jingzhou bases, the company will increase its expansion efforts in the field of new materials, and future performance is expected to increase further.
Profit forecast, valuation and rating: The profitability of the company's main products declined. We lowered the company's profit forecast for 24 and 25, and added a 26-year profit forecast. The net profit for 24-26 years was 46.56 (26% reduction), 56.51 (26% reduction), and 6.374 billion yuan respectively, equivalent to EPS of 2.19, 2.66, and 3.00 yuan, respectively. Considering the commissioning of the first phase of the company's Jingzhou project, it is expected that the company's profit will increase significantly. We continue to be optimistic about the company's future development and maintain the company's “buy” rating.
Risk warning: Product prices fluctuate greatly, project construction progress falls short of expectations, and risk of cost fluctuations.