Photo source: Visual China

Blue Whale financial reporter Wang Xiaonan

On the evening of April 22, Saudi Aramco, capital from the Middle East, made another move and spent 11 billion yuan to acquire 10% of “Refining Mao” Hengli Petrochemical (600346.SH) plus 1 share.

In the past two years, Saudi Aramco has become a domestic oil refining and chemical asset in China and Italy, and has taken shares in companies including Rongsheng Petrochemical and Oriental Shenghong. At the same time, Hengli Petrochemical also released its first quarter report for 2024. Although revenue for the first quarter reached a new high, its net profit was only half of the first quarter of 2022, making it difficult to return to its heyday.

Invested about 11 billion yuan in shares, favored by Saudi Aramco

According to Hengli Petrochemical's announcement, the controlling shareholder Hengli Group signed a “Memorandum of Understanding” with Saudi Arabian Oil Company (hereinafter referred to as “Saudi Aramco”), and the two sides are discussing Saudi Aramco's intention to acquire 10% of the company's issued share capital plus 1 share from Hengli Group. At the same time, the two sides also discussed strategic cooperation on crude oil supply, raw material supply, product procurement, and technology licensing.

As of the close of April 22, Hengli Petrochemical's total share capital was 7.039 billion shares, with a total market value of 109.6 billion yuan. According to Saudi Aramco's shares in Hengli Petrochemical after completing its shareholding, its equity investment will be close to 11 billion yuan. If successfully invested, Saudi Aramco (or a related party under its control) will hold 704 million shares, making it the sixth largest shareholder of Hengli Petrochemical.

This is not Hengli Petrochemical's first contact with Saudi Aramco. As early as June 2018, Hengli Petrochemical signed a long-term contract with Saudi Aramco to supply crude oil. This is also the first time that Saudi Aramco has signed a long-term supply agreement with a Chinese private refining company. In 2019, Chen Jianhua, the actual controller of Hengli Petrochemical, publicly stated, “Our first batch of crude oil came from Saudi Aramco.”

Saudi Aramco is an integrated energy and chemical company. As the world's largest oil company, its crude oil production accounts for about one-eighth of the world's production. At the same time, Saudi Aramco is also developing new energy technology. Saudi Aramco was listed on the Saudi Stock Exchange in 2019, with revenue of US$440.88 billion and net profit of US$121.3 billion in 2023. The average daily profit was about 2.4 billion yuan, the second highest in history, but the year-on-year decline was about 25%. In 2022, the company's net profit was $161.1 billion, the highest in history.

Claimed “With a piece of cloth on top of my head, I am the richest in the world!” Saudi Aramco has invested frequently in China in recent years, and is quite a domestic oil refining asset for China and Italy.

On September 27, 2023, Saudi Aramco announced that it plans to acquire 10% strategic shares in the wholly-owned subsidiary of Dongfang Shenghong, another domestic refining and chemical giant; on October 11, Saudi Aramco, Nanshan Group, and unlisted refining and chemical giant Yulong Petrochemical also signed a memorandum of understanding to promote discussions on Saudi Aramco's possible acquisition of 10% strategic shares in Yulong Petrochemical.

At the beginning of January this year, Rongsheng Petrochemical and Saudi Aramco signed a “Memorandum of Understanding”. They have now reached agreement on some matters and signed a “Cooperation Framework Agreement”. The main content is that the two parties intend to separately sell and purchase 50% of each of Rongsheng Petrochemical's wholly-owned subsidiary CICC and Saudi Aramco's wholly-owned subsidiary SASREF, and jointly develop expansion projects for CICC and SASREF according to the share ratio.

Earlier, at the end of March 2023, Rongsheng Petrochemical and Saudi Aramco signed a package agreement including crude oil procurement under a strategic cooperation agreement. Among them, Saudi Aramco acquired 1,013 billion shares of Rongsheng Petrochemical through its wholly-owned subsidiary Aramco Overseas, with a corresponding total of 24.6 billion yuan. The shares involved account for 10% of Rongsheng Petrochemical's total share capital, making it the company's second largest shareholder.

Obviously, Saudi Aramco's investments in China don't stop there. As the helm, Saudi Aramco President and CEO Amin Nasser said during the earnings call that China's oil demand is strong and growing, and the company is looking for further opportunities to invest in China.

The 100 billion “Refining and Chemical Mao” performance has skyrocketed, but it is difficult to return to its heyday

While Hengli Petrochemical revealed that it had signed a “Memorandum of Understanding” with Saudi Aramco, the listed company also disclosed its 2024 quarterly report. The company achieved operating income of 58.412 billion yuan, an increase of 4.02% over the previous year; net profit to mother was 2,139 billion yuan, an increase of 109.8% over the previous year.

Although Hengli Petrochemical's revenue reached a new high in the first quarter, its net profit was only half of the first quarter of 2022. In the first quarter of 2022, Hengli Petrochemical's revenue was 53.406 billion yuan, and net profit to mother was 4.223 billion yuan. After that, in the first quarter of 2023, Hengli Petrochemical's performance changed abruptly, and with revenue of 56.154 billion yuan, its net profit plummeted 70% to 1.02 billion yuan. At the time, the explanation given by Hengli Petrochemical was that the double operating squeeze of high operating costs and low industry demand led to a year-on-year decline in net profit, which in turn affected earnings per share.

In the first quarter of 2024, Hengli Petrochemical's leading products such as aromatic hydrocarbon chain PX and pure benzene maintained a high boom cycle. The profit situation of coal chemical products such as acetic acid, adipic acid, and liquid ammonia was good. Demand for downstream polyester chemical fibers, functional films, etc. followed a recovery in consumer consumption and industrial demand, and the price difference recovered further. Coupled with a further decline in coal costs and prices, crude oil costs remained relatively stable.

However, judging from the specific operating data of Hengli Petrochemical, there is still a certain gap between the first quarter of this year and 2023. Refining and chemical products account for more than 50% of revenue, which is Hengli Petrochemical's main revenue source. Revenue from this product fell 21.99% from 33.741 billion yuan in the first quarter of 2023 to 26.319 billion yuan in the first quarter of this year; production decreased from 6.4025 million tons to 5.998 million tons, down 6.31% year on year; sales volume decreased from 5.9045 million tons to 4.952 million tons, down 16.12%.

Obviously, the revenue increase of Hengli Petrochemical in the first quarter of this year was mainly due to PTA and new material products. Revenue from the two products increased from 13.852 billion yuan and 7.023 billion yuan in the first quarter of 2023 to 19.243 billion yuan and 9.758 billion yuan in the first quarter of 2024, up 38.91% and 38.94% from the previous year.

Furthermore, Hengli Petrochemical's own debt pressure should not be underestimated. In the first quarter of 2024, Hengli Petrochemical's balance ratio was 77.21%, short-term loans reached 70.78 billion yuan, notes payable and accounts payable reached 33.09 billion yuan, non-current liabilities due within one year were 13.23 billion yuan, while monetary capital was only 25.03 billion yuan, which could not cover short-term debt.

Currently, Hengli Petrochemical is a core listed company under the Hengli Group. The company landed on the main board of the Shanghai Stock Exchange in 2016 through Big Rubber and Plastic, with a market value of over 100 billion yuan. Its business covers industries such as petroleum refining, petrochemicals, aromatic hydrocarbons, PTA, civilian polyester filaments, industrial polyester filaments, engineering plastics, polyester films, and thermoelectricity, and is known as “refining mao”.

According to the 2023 annual report, Chen Jianhua and Fan Hongwei directly hold 11.24% of the company's shares and hold 64.21% of the company's shares through 6 companies including Hengli Group Co., Ltd., for a total of 75.45% of Hengli Petrochemical's shares. Chen Jianhua and Fan Hongwei of Hengli Group have a fortune of 115 billion yuan in the 2024 Hurun Global Richest List.

The petrochemical industry was warm and cold in 2023, and Hengli Petrochemical's revenue reached a new high. However, under the severe situation where downstream demand was relatively insufficient and upstream raw material costs were still high, the company's net profit, which nearly tripled, was less than half of 2021. At the same time, in 2023, listed companies will also pay out high dividends, paying 3,872 billion yuan in cash dividends, while Chen Jianhua and Fan Hongwei will reach nearly 3 billion yuan in cash dividends.

Judging from the secondary market, the news of Middle Eastern capital entering the market does not seem to have brought much damage to Hengli Petrochemical. On April 23, Hengli Petrochemical opened higher at 16.17 yuan/share and fluctuated during the intraday period. The stock price closed at 15.21 yuan/share, down 2.31%.