Company announcement: In 2023, the company achieved operating income of 1404.4 billion yuan, an increase of 119.9% year on year; net profit to mother was 720 million, up 17.4% year on year; net profit after deducting non-return to mother was 220 million, up 155.2% year on year. Among them, Q4 achieved operating income of 36.8 billion yuan, a decrease of 2.5% month-on-month; net profit to mother of 1.76 billion yuan, a decrease of 320.7% month-on-month; net profit without return to mother of 1,836 billion yuan, a decrease of 472.2% month-on-month. The reason for the sharp decline in the company's performance in 23Q4 was mainly due to asset impairment accruing inventory. The company accrued asset impairment of 2.21 billion yuan in 2023, of which 1.24 billion yuan was recorded in Q4. Due to the commissioning of large refining and chemical plants, the company's expense ratio reached 3.82% during the 2023 period, down 1.39 pct from the previous year, and all rates declined to varying degrees.

The commencement of production of DaRefining and Chemical led to an increase in gross profit, and profits are expected to continue to recover. The company's refining and chemical project was fully put into operation at the end of 2022. Driven by new production capacity, the company achieved a gross profit level of 15.83 billion yuan in 2023, an increase of 223.4% over the previous year, and the profit reached a new level. Due to the high correction in oil prices, it is expected that there will be some inventory loss. According to Wande data, the average price of Brent crude oil in 2023 was about 86.63 US dollars/barrel, down 4.2% year on year, but overall in 2023, with the restoration of chemical demand, the company's product profit improved. The overall gross margin level in 2023 reached 11.3%, up 3.6 pcts year on year. It is expected that in the future, as the bottom of chemical profits picks up, refinery profits are expected to improve marginally.

Profits in the chemical fiber sector have improved, and the boom is expected to increase. In 2023, the polyester filament industry continued the pattern of oversupply and demand due to the increase in production capacity, but due to the gradual recovery of the epidemic, industry demand gradually picked up, and the profit center increased slightly. We calculate that the 2023 POY/FDY/DTY price difference was -1%/+9%/0%, and the company's chemical fiber sector achieved gross profit of 1.298 billion yuan in 2023, an increase of 3.84% over the previous year. Looking ahead to 2024, the price gap between filament and PTA is expected to recover as the industry landscape improves.

According to data from the Chemical Fiber Information Network, considering the withdrawal of backward production capacity, domestic polyester filament production capacity is expected to increase by a net of 530,000 tons in 2024. The new production capacity is relatively small in the future, and the filament boom is expected to rise. Furthermore, due to PTA's poor profits, there are expectations that old devices will be repaired and discontinued. Supply and demand are expected to narrow, and the economy is expected to continue to recover.

There is excess supply and demand for EVA, and the boom is basically close to the bottom of history. The company's subsidiary Sirbon achieved net profit of 751 million in 2023, a year-on-year decline of 47.4%. The main reason is expected to be the downturn in the EVA boom. According to Zhuochuang information, the apparent consumption of EVA reached 3.34 million tons in 2023, an increase of 21% over the previous year. However, due to domestic production capacity of Gulei Petrochemical's 300,000 tons and a sharp increase in overseas imports, the EVA industry was in a state of excess supply and demand in 2023, and the profit center declined significantly. According to Zhuochuang Information, the average gross profit of the EVA industry in 2023 was 5044 yuan/ton, down 52% year on year. Looking ahead to 2024, it is expected that with Baofeng Energy's EVA device being put into operation, the industry's supply and demand pattern will remain relaxed, and EVA profit levels are expected to fluctuate at the bottom.

Investment analysis: Considering that the recovery in chemical demand was lower than expected, we lowered our profit forecasts for 2024-2025 to $51.79 billion and 7.266 billion yuan respectively (the original forecasts were 61.87 billion yuan and 9.045 billion yuan, respectively), and added the 2026 profit forecast to 8.81 billion yuan, corresponding PE 13X, 9X, and 8X respectively. Referring to the average PE value of comparable companies Lianhong Xinke, Rongsheng Petrochemical, and Hengli Petrochemical in 2024 (20), we gave the company 18 times PE in 2024, maintaining a “buy” rating.

Risk warning: Oil prices fluctuate greatly, the operating rate of refining and chemical projects falls short of expectations, and the commissioning of projects under construction falls short of expectations, etc.