1Q24 Results Exceed Market Expectations

The company announced 1Q24 results: operating income of 31.7 billion yuan, +11.5% year-on-year; net profit of 410 million yuan, +1087% year-on-year, mainly due to 1) the first phase of the technical transformation of the Brunei project in 1H23, where technical reform expenses slightly exceeded market expectations; 2) 1Q24 polyester filament boomed better than market expectations, and 1Q24 performance exceeded market expectations.

By sector, we estimate that in 1Q24, Brunei refining and chemical contributed more than 300 million yuan in profit; the polyester filament business contributed about -50 million yuan in profit, which drastically reduced losses over the previous year; and Zheshang Bank contributed about 200 million yuan in investment income.

Development trends

The profit of the Brunei project is expected to increase in 2024. We expect Brunei's profits to improve in 2024, mainly due to 1) Southeast Asian countries will have limited investment in additional refining and chemical production capacity in 2024, 2) the chemicals in the Brunei project are mainly aromatic hydrocarbons, which are still booming, and 3) the negative effects of technical reforms will disappear.

The nylon industry chain will gradually reap profits. The company currently has a caprolactame-nylon production capacity of 400,000 tons/year (50% equity), and the profit in 2023 has exceeded 50 million yuan; we believe that in the future, as the company starts production of 600,000 tons of nylon in Qinzhou, Guangxi by the end of 2024, the overall profit is expected to grow.

The pattern of filament supply and demand has improved, and there is high certainty that the 2024 boom will improve. According to the current production plan, we expect that the new production capacity in 2024 will mainly come from Xinfengming and Rongsheng Petrochemical's total total of about 890,000 tons (in addition, Hengyi Petrochemical relocation of 650,000 tons of production capacity and the constant suspension of Lianda Chemical Fiber's 180,000 tons). The net supply growth in the industry will be almost zero in 2024. We expect demand in the polyester filament industry to grow by 5-6% in 2024, with textile and garment exports likely to exceed expectations. Looking ahead, we believe that after the new peak season arrives in the second half of the year, demand growth in 2024 may be higher than supply, and there is still a high degree of certainty that the polyester filament boom will increase throughout the year.

Profit forecasting and valuation

Taking into account the improvement in profit expectations for the Brunei project, we increased net profit to the mother by 19/ 19% in 2024/25 to RMB 8/10 billion, respectively. The current stock price corresponds to the 2024/25 33/27 price-earnings ratio. Maintaining an outperforming industry rating, we raised our target price by 21% to 8.8 yuan, which corresponds to 39/32 times the 2024/25 price-earnings ratio, and has 19% upside compared to the current stock price.

risks

Oil prices fell rapidly, and approval of new projects fell short of expectations.