2023 results are in line with our expectations

The company announced its 2023 results: operating income of 136.1 billion yuan, -10.5% year on year; net profit to mother of 404 million yuan, turning a year-on-year loss into a profit, slightly exceeding the forecast upper limit of 415 million yuan, which is in line with our expectations.

Financial expenses for 2023 were $3.24 billion (of which +18% month-on-month to 1.02 billion yuan in 4Q23), +16% year-on-year, mainly due to an increase in interest expenses due to the year-on-year increase in US dollar LIBOR interest rates.

By sector, we judge the 2023 company: 1) The Brunei refining and chemical project achieved a total net profit loss of about 50 million yuan; 2) PTA+ flakes+polyester net profit loss of about 100 million yuan (of which PTA/polyester gross margin was -1%/+4%, polyester relocation subsidies were about 400 million yuan, and gross profit per ton of polyester was about 230 yuan after the subsidy was removed); 3) Zheshang Bank contributed 500 million yuan in investment income.

Development trends

The profit of the Brunei project is expected to increase in 2024. Brunei's performance in 2023 is under pressure, mainly due to: 1) the 1H23 Brunei refinery implemented technical reforms, leading to an increase in operating costs and a decline in production; (2) the increase in US dollar loan interest rates, and a sharp increase in the company's financial expenses over the same period last year. Looking ahead, we expect Brunei's profits to improve in 2024, mainly due to 1) Southeast Asian countries will have limited investment in additional refining and chemical production capacity in 2024, 2) the chemicals in the Brunei project are mainly aromatic hydrocarbons, which are still booming, and 3) the negative effects of technological reform will disappear.

The nylon industry chain is gradually cashing in on profits. The company currently has a caprolactame-nylon production capacity of 400,000 tons/year (50% equity), and the profit in 2023 has exceeded 50 million yuan; we believe that in the future, as the company starts production of 600,000 tons of nylon in Qinzhou, Guangxi by the end of 2024, the overall profit is expected to grow.

The pattern of supply and demand for filament has improved, and there is high certainty that the 2024 boom will improve. According to the current production plan, we expect 1) Supply: The net supply growth in the industry will be almost zero in 2024 (Hengyi Petrochemical's production capacity relocation of 650,000 tons was briefly withdrawn, and the company's output may decline year-on-year in 2024); Demand: Demand for polyester filament in 2024 is +5-6% year-on-year, with textile and garment exports likely to exceed expectations.

Capital expenditure is expected to decline. We judge that the company's capital expenditure is expected to decline, mainly because 1) the project with the largest capital expenditure is only the Guangxi Lactamide-Nylon Project (Phase 1); 2) Brunei Phase II is progressing or being postponed.

Looking ahead, we believe that with the gradual commissioning of the project, in the context of overall production capacity easing in the chemical industry, we expect the company to consider reducing its liabilities.

Profit forecasting and valuation

We kept our 2024/25 profit forecast basically unchanged; we kept our target price of 7.3 yuan unchanged, corresponding to the 39/31x 2024/25 price-earnings ratio, implying 5% upward space. Current stock prices correspond to price-earnings ratios of 37/302024/25, respectively. Maintaining a “outperforming the industry” rating.

risks

Oil prices fell rapidly, and approval of new projects fell short of expectations.