Description of the event
Incident 1: On the evening of April 22, Hengli Petrochemical released its 2024 quarterly report, achieving operating income of 58,390 billion yuan, a year-on-year increase of 4.02% and a year-on-month decrease of 5.34%; realized net profit due to mother of 21.39 billion yuan, an increase of 109.80% and a year-on-month increase of 77.68%; realized net profit without return to mother of 1,819 billion yuan, an increase of 211.50% year-on-year and 78.29% month-on-month; and achieved basic earnings per share of 0.30 yuan/share.
Incident 2: On the evening of April 22, Hengli Petrochemical announced that the controlling shareholder signed a memorandum of understanding with Saudi Arabian Oil Company.
Cost-side pressure relieved demand. Profit indicators for the first quarter all rebounded sharply year on month. In terms of profitability indicators, the gross profit margin for the first quarter of 2024 was 11.16%, up 1.9 pct/month-on-month; the net interest rate was 3.67%, up 1.86 pct/1.72 pct yoy.
ROE was 3.51%, up 1.6 pct year on year, and profit quality increased significantly year on year.
In terms of expenses, the sales expense ratio, management fee rate, and financial expense ratio for the first quarter of 2024 were 0.18%/0.88%/2.52%, respectively. The overall control of the three fees is good. The R&D cost rate was 0.61%, +0.09pct year on year, and the company's R&D investment remained stable.
Although the Spring Festival factors affected a certain amount of sales, 2024Q1's performance achieved a significant year-on-month increase, mainly due to several factors. On the one hand, the boost in downstream demand for Q1 chemicals combined with the obvious support effect of crude oil costs, the price of olefin was boosted, and the prices of aromatic hydrocarbons, refined oil products, and some coal chemical products were strong; second, crude oil rose slightly from the fourth quarter, bringing a certain amount of raw material inventory revenue. Third, the four main raw materials of coal/butylene glycol/crude oil/PX were -24.76%/-22.33%/+2.70%/+4.93% year-on-year in the first quarter. The sharp decline in coal led to a reduction in cost-side pressure. We believe that throughout the year, crude oil will remain volatile at medium to high levels; profits are expected to continue at a high level due to improved supply and demand in PX and polyester; profits from refined oil products are strong; profits from refined oil products are stable; the price spread of olefins has bottomed out and slowly rebounded; overall profits are improving.
Taking advantage of platform-based cost advantages, new materials projects have fully blossomed
Based on the good cash flow of refining and chemical integration, the company continues to increase capital expenses to ensure the company's future growth. The company chose to lay out new materials such as high-end polyester, functional films, degradable materials, and new energy chemicals, which are currently in short supply in China, and accelerate domestic replacement of restricted links such as “stuck necks” and “production capacity bottlenecks” based on its C2-C4 large chemical raw material platform advantages and many years of R&D accumulation.
The company is currently constructing proposed projects such as 1.6 million tons of high-performance resins and new materials (which have been gradually put into operation in the 3rd quarter of 2023, and is expected to be fully put into operation in the 2nd quarter of 2024), the 800,000-ton functional polyester film/plastic project in Fenhu (which has been gradually put into operation in 2023, and is expected to be fully put into operation in the second half of 2024), and the 3 billion square meter lithium battery diaphragm project (the first phase of trial production will begin in 2024). With the further release of production capacity for various products and continuous breakthroughs in green innovation technology, the company's advantages of industrial chain integration, low scale cost, and industry-leading production technology have been further highlighted, and its leading position in the industry has been stabilized.
Join hands with Saudi Arabia and Aramco to deepen cooperation and open up space for imagination
According to the memorandum of understanding signed between the controlling shareholder of the company and Saudi Saudi Arabian Oil Company, the two parties are discussing: (1) Saudi Aramco (or a related party under its control) plans to acquire 10 percent of the company's issued share capital plus 1 share from Hengli Group; (2) Hengli Group will support and facilitate cooperation between the company (and/or related parties controlled by it) and Saudi Aramco (and/or related parties controlled by it) in crude oil supply, raw material supply, product procurement, technology licensing, etc. The initiative is conducive to deepening cooperation between the two sides, ensuring the stability and continuity of the company's cooperation in the purchase and sale of petroleum and other raw materials, and at the same time, technology licensing cooperation opens up room for further in-depth cooperation in other fields in the future.
Focus on shareholder returns, and the dividend ratio reached 56%
In 2023, the company plans to distribute a cash dividend of 0.55 yuan (tax included) per share to all shareholders, for a total cash dividend of 3,872 billion yuan (tax included), with a cash dividend ratio of 56.07% this year. Based on the closing price as of April 26, 2024, the company's current dividend rate is 3.57%. In recent years, the company has maintained a high dividend ratio. This move is conducive to enhancing investor confidence. As refining and chemical cash flow stabilizes, its high dividend attribute gradually increases.
Investment advice
We are optimistic that based on the advantages of a full range of raw material platforms, the company will expand its scale advantage through capital expenditure, achieve strength, and at the same time actively explore new downstream materials to increase product differentiation and added value. We expect the company's net profit for 2024, 2025 and 2026 to be 10.191 billion yuan, 13.544 billion yuan, 14.253 billion yuan (original value of 10.099 billion yuan, 14.034 billion yuan, and 14.672 billion yuan), and EPS of 1.45 yuan, 1.92 yuan and 2.02 yuan respectively. Corresponding to the current stock price PE is 10.64X/8.00X/7.61X, respectively, maintaining a “buy” rating.
Risk warning
Crude oil and coal prices fluctuate greatly;
The construction of the project fell short of expectations;
force majeure;
Macroeconomic downturn.