Brief performance review
Tongkun Co., Ltd. released its report for the first quarter of 2024 on April 29, 2024. In 2024Q1, the company achieved operating income of 21.111 billion yuan, an increase of 32.66% over the previous year, and realized net profit of 580 million yuan, an increase of 218.13% over the previous year. The results were generally in line with expectations.
Management analysis
Continued performance recovery in the polyester sector may drive the company's performance recovery. Zhejiang Petrochemical's performance recovery is expected to increase the company's profits: benefiting from the recovery in demand for polyester filaments, the polyester sector's performance has improved. Excluding Zhejiang Petrochemical's contribution performance, the company's polyester and other sectors achieved net profit of 329 million yuan in 2024Q1, an increase of 308 million yuan over 2023Q1 (21 million yuan). The company's current polyester filament production capacity is 13.5 million tons/year, and the recovery in demand for polyester filament may drive the company's performance recovery. The company holds 20% of Zhejiang Petrochemical's shares. 2024Q1 Zhejiang Petrochemical's net profit was 1,255 million yuan (based on the investment income of Tongkun Co., Ltd.), an increase of 149.10% over the previous year, and the company received 251 million yuan in investment income. Along with the recovery in demand for chemical terminals in Zhejiang Petrochemical and the commissioning of 1.4 million tons of ethylene and downstream chemical projects, high-performance resin projects, and high-end new materials, etc., it may bring rich investment returns to the company.
Consumption of polyester filament has picked up, and the operating load has remained at a high level: downstream consumer demand for polyester filament has recovered well since 2024, and the average operating rate of 2024Q1 downstream looms reached 54.07%, +11.27pct compared to the previous year. In particular, the operating rate of downstream looms picked up rapidly after the Spring Festival, which was a significant improvement compared to the beginning of 2023. 2024Q1 polyester filament maintained a high operating load level, with an average operating load of 86.76%, +13.31pct compared to the previous year. While there is a large amount of polyester filament production capacity, the polyester filament market sentiment remains steady, and the apparent consumption of filament has steadily recovered. The apparent consumption of 2024Q1 polyester filament reached 9.9066 million tons, an increase of 41.11% over the previous year. As consumer demand for filament is expected to continue to grow in 2024, the concentrated production capacity investment period is coming to an end, subsequent planned production capacity is limited, and industry supply and demand are expected to improve. As a leader in the polyester filament industry, the company may gain profit elasticity.
The price spread of filament continues to recover, and the filament inventory remains at a reasonable level, and the company is expected to achieve significant performance elasticity: along with the cyclical recovery of the polyester industry and the recovery in demand in the terminal market, the price difference of polyester filament products remains steady and continues to recover. The average price difference of 2024Q1POY/FDY/DTY products was 1006.84 yuan/1580.70 yuan/2170.17 yuan/ton, respectively, with a year-on-year narrowing of 13.85%/8.78%/4.18%, and 1.55%/0.55%/2.19% month-on-month, respectively. At the same time, polyester filament products continued to be removed from storage. 2024Q1 POY/FDY/DTY inventory was 20 days/25 days/20.55 days, respectively, a year-on-year decrease of 0.67/4.33/2.62 days, and an increase of 4.67/1.33/0.72 days. Along with the recovery in terminal consumer demand, the margin between supply and demand in the industry has improved markedly, the price difference of polyester filament products is expected to be further repaired, and the company is expected to gain significant performance elasticity.
Profit Forecasts, Valuations, and Ratings
We are optimistic about the performance elasticity of the filament industry as demand recovers. The company's net profit for 2024-2026 is 3.5 billion yuan/4.5 billion yuan/6 billion yuan, corresponding EPS is 1.47 yuan/1.87 yuan/2.50 yuan, and the corresponding PE is 9.1X/7.1X/5.3X, maintaining a “buy” rating.
Risk warning
(1) Risk of large one-way fluctuations in oil prices; (2) risk of terminal demand falling short of expectations; (3) geopolitical risk; (4) polyester project construction progress falling short of expectations; (5) risk of large fluctuations in the US dollar exchange rate; (6) other force majeure effects.