Incident: On the evening of April 19, 2024, Hengyi Petrochemical released its 2023 annual report. In 2023, the company achieved operating income of 136.148 billion yuan, a year-on-year decrease of 10.46%; achieved net profit of 435 million yuan, a year-on-year increase of 140.34%; and achieved basic earnings per share of 0.13 yuan, an increase of 143.33% over the previous year.

On the evening of April 28, 2024, the company released its report for the first quarter of 2024. The company achieved operating income of 31,656 billion yuan in the first quarter, up 11.54% year on year, down 8.56% month on month; realized net profit of 414 million yuan, up 1087.19% year on year, up 80.52% month on month; achieved net profit after deduction of 314 million yuan, up 3890.0% year on year and 327.54% month on month; achieved basic earnings per share of 0.12 yuan, up 1100.00% year on month, month on month 83.33%

Comment:

The price spread for overseas refined oil products declined slightly, compounded by refining and chemical technology reforms, and short-term pressure on 2023 performance. On the cost side, the average price of Brent crude oil in 2023 was $82.49 per barrel, -16.72% year-on-year, and crude oil prices remained fluctuating at medium to high levels. In terms of refined oil products, due to a decline in the international oil price center, the price spread of overseas refined oil products fell year on year. According to our statistics, the price differences for gasoline, diesel, and aviation coal in Singapore in 2023 were 12, 24, and 22 US dollars/barrel, respectively, down 2%, 33%, and 19% from the previous month. In terms of chemicals, the company's main chemicals PX and pure benzene generally maintained a high level of prosperity in 2023. According to our statistics, the average price differences between PX and pure benzene changed by 21% and -7% respectively in 2023. On the polyester side, due to improvements on the cost side and demand side, the overall profit level of filament products increased. According to Baichuan Yingfu data, the gross profit of polyester filament increased 9.72% year-on-year in 2023. Overall, the company implemented technical reform work in the first half of 2023. Technical reform expenses were high, compounded by rising interest rates on overseas dollar loans. The performance of the company's refining and chemical sector was under pressure. The polyester sector benefited from increased demand, and overall performance improved. The company's subsidiaries Hengyi Brunei, Hengyi Limited, and Hengyi Hi-Tech achieved net profits of 0.14, 2.54, and 432 million yuan respectively.

Profit growth was high in the first quarter, and optimization of the refining and chemical product structure may enhance performance to release potential. Entering the first quarter of 2024, the company's performance improved significantly year-on-year and month-on-month. According to our statistics, in the first quarter of 2024, the price differences for gasoline, diesel, and aviation kerosene in Singapore were 13, 23, and 21 US dollars/barrel respectively, +5, -3, and -4 US dollars/barrel compared to the previous month. Currently, diesel is still one of the most profitable oil products in Southeast Asia. We believe that since the technical reform of the company's Brunei refinery was completed in 2023, the product structure of the refined oil sector has been clearly optimized. Under market conditions where the cracking price difference of other oil products is weaker than that of diesel, the output ratio of diesel has been increased, and the profit allocation of overseas refined oil products has been optimized. We expect the profit potential of the company's overseas refineries to be further unleashed in the future.

Against the backdrop of shrinking supply, the prosperity of the company's various sectors is expected to continue to rise. In terms of overseas refined oil products, from the supply side, according to Platts data, during the period 2020-2023, due to public health events and energy structure transformation, more than 30 million tons of refining energy were withdrawn from the market. Since some refineries in Southeast Asia still have adverse effects such as early installation construction, old technology, poor management, and heavy government subsidy burdens, there is insufficient desire to expand the capacity of refineries. According to IEA forecasts, energy refining in Southeast Asia is generally stable until 2028. On the demand side, according to IMF forecasts, ASEAN's GDP growth rate may remain high in 2024, and the boom in overseas refined oil products is expected to continue. In terms of chemicals, after intensive PX production capacity is put into operation in 2022 to 2023, PX's supply-side incremental production capacity may shrink significantly. According to our statistics, domestic production capacity is expected to increase by only 5 million tons in 2024-2026, and the supply side is expected to support the rising prosperity of the aromatic hydrocarbon industry chain. In terms of polyester, according to Longzhong News data, the country is expected to add 1.1 million tons of polyester filament production capacity in 2024, a reduction of more than 3 million tons compared to 2023. Furthermore, considering the relocation of 750,000 tons of production capacity in Hangzhou, without considering the withdrawal of other backward production capacity in the industry, the net increase in polyester filament production capacity in 2024 was less than 1 million tons. The production capacity growth rate was less than 1%, which is a sharp slowdown from 2023. Overall, we believe that in 2024, the company's core overseas refining and polyester sectors will maintain a high boom cycle. After the company's technical reforms are completed, the overall production capacity structure will be further optimized, and the company's performance release space is expected to open up.

Profit forecast and investment rating: We expect the company's net profit to be 19.39, 28.26 and 3.384 billion yuan respectively in 2024-2026, with net profit growth rates of 345.3%, 45.7% and 19.8% respectively, and EPS (diluted) of 0.53, 0.77 and 0.92 yuan/share, respectively, corresponding to the closing price on April 26, 2024, PE 13.31, 9.13 and 7.63 times, respectively. We are optimistic about the recovery of the company's overseas refined oil products and aromatic hydrocarbons sector. The company's performance will still have high growth potential in the future, and we maintain the company's “buy” rating.

Risk factors: the risk of rising upstream raw material prices; the risk that the company's new production capacity will fall short of expectations; the risk that downstream demand recovery will fall short of expectations; and the risk of sharp fluctuations in crude oil and finished product prices.