Matters:
CNPC is further promoting refining and chemical transformation and upgrading, moving towards the middle and upper end of the industrial chain and value chain, continuously optimizing the product structure, increasing the proportion of specialty refining products and high-end chemical products, and increasing research and development of new chemical materials. In 2023, the company produced 1.37 million tons of new chemical materials, an increase of 60% over the previous year, and the refining and new materials business achieved operating profit of 36.94 billion yuan. Recently, the preliminary research report for Lanzhou Petrochemical's 1.2 million tons/year ethylene transformation project was approved by CNPC; the normal pressure tower with an annual output of 3.8 million tons of normal pressure relief devices was successfully installed in the Jilin Petrochemical refining and chemical transformation and upgrading project; and all earthwork for the Guangxi Petrochemical Refining and Chemical Integrated Transformation and Upgrading Project was completed.
Guoxin Chemical's opinion:
1) China has excess crude oil processing capacity, and production capacity is expected to be concentrated in leading enterprises: by the end of 2023, China's crude oil processing capacity was 936 million tons/year, refinery operating rate in 2023 was 78.5%, and refining energy was in excess. Currently, the refining capacity under construction and approved for construction has reached 122 million tons/year, with a significant increase in production capacity. The Development and Reform Commission and the National Energy Administration have repeatedly pointed out that until 2025, domestic crude oil processing capacity will be limited to 1 billion tons at a time.
In the context of limited production capacity space, small refineries with high single-ton operating costs and no conditions for transformation are facing elimination, and refining production capacity is expected to be further concentrated in leading companies.
2) The increase in demand for refined oil products in China is limited, and “reducing and increasing fuel” is the only way to transform refineries: In terms of gasoline: due to the acceleration of electric vehicles replacing gasoline vehicles, the number of gasoline vehicles owned in China is expected to peak in 2025. At the same time, the trend of saving energy and reducing consumption of traditional fuel vehicles has also reduced the room for growth in gasoline consumption. The growth rate of gasoline consumption in China is not expected to exceed 2%. Diesel: China is currently in the middle and late stages of industrialization. The value added of the secondary sector accounts for about 40% of GDP. It is expected to decline steadily in the future, and productive diesel consumption is showing a downward trend. In the transportation sector, the “replace the power with iron” strategy and LNG heavy trucks have also replaced part of the diesel demand. Currently, China's diesel consumption is declining. In terms of kerosene: As increases in residents' disposable income and consumption upgrades will drive long-term growth in civil aviation transportation, the growth rate of kerosene consumption is expected to remain around 8% in the medium term. Overall, the increase in demand for refined oil products in China is limited.
Some chemical products in China are still facing insufficient production capacity. The dependency on polyethylene imports in 2023 was 33.1%, and the import dependency is expected to exceed 20% in 2025. China's polypropylene import dependency is 8.0% in 2023. Although polypropylene is expected to balance imports and exports in 2025, high-end brand products still need to break through. In the context of an industry with overcapacity for oil products and insufficient production capacity for chemical products, “reducing and increasing oil” is inevitable in refinery transformation.
3) The company actively implements the “oil reduction and increase” strategy by constructing large-scale integrated refining and chemical projects and upgrading refineries. The company's Guangdong Petrochemical Integrated Refining and Chemical Project, which was put into operation in 2023, is the largest one-off world-class refining and chemical project in China. The refining capacity has reached 20 million tons/year, and the production capacity of major chemical products includes 2.6 million tons/year of p-xylene and 1.2 million tons/year of ethylene. The “Yi-yu Ze-you, Yifang Zefang, and Yi-ethene Zene” design increases the flexibility of Guangdong Petrochemical and is a typical example of “reducing oil growth”. Currently, key projects such as the refining and chemical transformation and upgrading project of Jilin Petrochemical Company, the integrated refining and upgrading project of Guangxi Petrochemical Company, and the 1.2 million tons/year phase II ethylene project of Dushanzi Petrochemical Company are progressing steadily. These projects will all strongly promote the company's “oil reduction and increase” strategy.
4) Investment advice: We maintain the forecast for the company's 2024-2026 net profit of 1735/1863/2029 billion yuan. The diluted EPS for 2024-2026 is 0.95/1.02/1.11 yuan, the current PE for A-shares is 11.2/10.4/9.6x, and 7.1/6.6/6.1x for H shares, maintaining a “buy” rating.