Incident: On the evening of April 22, 2024, Hengli Petrochemical released its report for the first quarter of 2024. In the first quarter of 2024, the company achieved total operating income of 58.412 billion yuan, up 4.02% year on year and 5.34% month on month; realized net profit of 2,139 billion yuan, up 109.8% year on year, up 77.66% month on month; realized net profit without deducted return to mother of 1,819 billion yuan, up 211.5% year on year, up 78.33% month on month; achieved basic earnings per share of 0.3 yuan, up 114.29% year on year and 76.47% month on month. The company's balance ratio was 77.21%, -0.25pct year over year.
Comment:
Costs and supply and demand fundamentals have improved, and the company's operating performance continues to grow. The company's operating performance improved in the first quarter of 2024, and profits improved further. We believe that the continued improvement in the company's performance is mainly due to stable operation on the cost side and improvements in supply and demand fundamentals. On the cost side, Brent oil prices remained fluctuating at medium to high levels in the first quarter of 2024. The overall price center fell slightly. The average quarterly price was 81 US dollars/barrel, down about 1% year on year, and the company's crude oil procurement costs were stable. At the same time, benefiting from the decline in coal prices, the company's coal procurement costs were clearly optimized compared to the same period last year, and the average purchase price fell 25% year on year. Combined with the company's unique competitive advantage of oil and coal in the refining industry, the pressure on the cost side was mitigated. Looking at the fundamentals of supply and demand, on the supply side, due to the low incremental production capacity of the refining and chemical industry in 2023, the energy refining supply pattern was relatively stable; on the demand side, the first quarter benefited from the Spring Festival holiday, and travel demand was strong, which clearly boosted the consumption of refined oil products; in chemicals, benefiting from the fuel conditioning demand brought about by refined oil consumption, the supply increase in the industry was limited. The aromatic hydrocarbon sector still maintained a high level of prosperity, and the fundamentals of the overall refining and chemical industry improved.
Relying on the large chemical platform layout, the performance growth potential of new materials is worth looking forward to. Looking at this year, the company's 600,000 tons of functional polyester film, functional film, and 3 billion square meter lithium battery diaphragm projects are expected to be put into operation in the second half of the year; the first phase of the 800,000 ton functional polyester film and functional plastics project is also expected to reach production within the year; and the high-performance resin project with an annual output of 1.6 million tons will soon be fully put into operation in the second quarter. Relying on the big chemical platform, the company will continue to advance into sectors such as lithium batteries, photovoltaics, engineering plastics, and high-end polyester. According to data from the Sinopec Institute of Economics and Research, at present, China still has a large import substitution space in the fields of high-performance resins, high-performance engineering plastics, high-performance membrane materials, etc. In the future, the company will focus on developing new chemical materials sectors such as high-end polyolefins, special resins, special engineering plastics, and high-end membrane materials, which is expected to open up a second growth curve for the company.
A memorandum of understanding was signed with Saudi Aramco to introduce combat investment to create a new chapter of cooperation. According to the announcement, the controlling shareholder Hengli Group has signed a “Memorandum of Understanding” with Saudi Aramco. The main contents include: (1) Saudi Aramco plans to acquire 10% of Hengli Petrochemical's issued share capital from Hengli Group; (2) Hengli Group will support and facilitate strategic cooperation between Hengli Petrochemical and Saudi Aramco in crude oil supply, raw material supply, product procurement, and technology licensing. We believe that since 2023, strategic cooperation between Middle Eastern and domestic refining and chemical companies has continued to deepen. After Saudi Aramco's strategic investment is completed, the company is expected to usher in new opportunities in terms of raw material supply guarantee, product sales channel development, and technical cooperation, and the room for performance growth is worth looking forward to.
Profit forecast and investment rating: We predict that the company's net profit for 2024-2026 will be 93.17, 121.27 and 13.477 billion yuan, respectively, with year-on-year growth rates of 34.9%, 30.2%, and 11.1%, and EPS (diluted) of 1.32, 1.72 and 1.91 yuan/share, respectively. The PE corresponding to the closing price on April 22, 2024 is 11.76, 9.04 and 8.13 times, respectively. Considering that the company benefits from its competitive advantage and the recovery in industry sentiment, the company's performance is expected to accelerate in 2024-2026 and maintain the company's “buy” rating.
Risk factors: risk of significant short-term fluctuations in crude oil prices; risk of polyester fiber profits falling short of expectations; risk of overcapacity in refining and chemical production; risk of falling short of expectations for additional production capacity; risk that the restructuring and listing of Kanghui New Materials to be spun off falls short of the expected risk.