Incident: On April 26, 2024, Tongkun Co., Ltd. released its 2023 annual report. In 2023, the company achieved operating income of 82,640 billion yuan, up 33.30% year on year, and realized net profit of 797 million yuan, up 539.10% year on year; net profit after deduction of 455 million yuan, up 5208.32% year on year; basic earnings per share were 0.34 yuan/share, up 518.18% year on year.
On April 29, 2024, Tongkun Co., Ltd. released its report for the first quarter of 2024. In the first quarter, the company achieved operating income of 21.111 billion yuan, up 32.66% year on year, up 1.02% month on month; net profit from mother for the first quarter was 580 million yuan, up 218.31% year on year, up 644.30% month on month; net profit after deduction for the single quarter was 537 million yuan, up 203.02% year on year, up 301.12% month on month.
Comment:
The prosperity of the polyester filament industry has improved, and the company's performance has risen sharply. On the cost side, the crude oil price center declined somewhat in 2023. The average price of Brent crude oil was 82.49 US dollars/barrel, -16.72% year-on-year, and the cost pressure on the raw material side eased significantly. In 2023, the average purchase prices of PTA and MEG, the main raw materials of the company's products decreased by 3.01% and 11.45%, respectively, compared with the decline on the product side. On the demand side, along with the weakening impact of the 2023 epidemic, residents' offline consumption has clearly recovered, and polyester silk and downstream looms have been operating at a high level. According to our statistics, the average operating load of polyester filament and downstream looms in 2023 was 83% and 58% respectively, with year-on-year increases of 6 pct and 7 pct, respectively. Strong production and sales helped the company continue to release its performance. On the supply side, China's polyester filament production capacity reached 42.86 million tons in 2023, up 9.98% year on year, but driven by the demand side, the high supply growth rate was effectively digested, and inventories continued to be eliminated. According to our estimates, the average inventory of polyester filament in 2023 was 21 days, down 11 days from year on year. Affected by the improvement in the prosperity of the polyester filament industry, the company's polyester sector performance rebounded markedly in 2023. The company held 20% of Zhejiang Petrochemical's equity interest. The company's investment income in joint ventures and joint ventures in 2023 was 272 million yuan, down 78% year on year. After excluding Zhejiang Petrochemical's revenue, the company's polyester sector's operating profit was 525 million yuan, up +149% year on year.
The first-quarter results turned a loss into a profit, and the contraction in supply in the filament industry is expected to support the release of full-year results. According to our estimates, the company's net profit to mother after excluding Zhejiang Petrochemical's investment income in Q4 of 2023 was -305 million, and net profit after excluding Zhejiang Petrochemical's investment income in the first quarter was 329 million. The polyester and other sectors turned a loss into a profit in the first quarter, with a year-on-month increase of 207.87%. Looking at the whole year, 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, and the production capacity growth rate was less than 1%, a sharp slowdown from 2023. We believe that, benefiting from the significant narrowing of the industry's supply growth and continuous optimization of the supply and demand pattern, the company has completed an incremental investment of 3.9 million tons of filament production capacity in 2023, and the annual performance contribution is expected to continue to be released.
Further clarify shareholder return goals and highlight long-term investment value. Recently, the company issued an announcement to formulate the company's shareholder return plan for the next three years (2024-2026). According to the plan, the company's cumulative profit distributed in cash in the last three years is not less than 30% of the average annual distribution profit achieved in the last three years. In the specific distribution process, the company implemented the following differentiated distribution policy:
1) If the company's development stage is mature and there are no major capital expenditure arrangements, the cash distribution shall account for at least 80% of the profit distribution; 2) If the company's development stage is mature and there is a major capital expenditure arrangement, the cash dividend shall account for at least 40% of the profit distribution; 3) If the company's development stage is a growth period and there is a major capital expenditure arrangement, the cash dividend shall account for at least 20% of the profit distribution. The plan coordinates the distribution ratio and the company's stage schedule, further clarifies and strengthens shareholders' return expectations, and highlights the company's long-term investment value.
Profit forecast and investment rating: We predict that the company's net profit for 2024-2026 will be 33.98, 45.16, and 5.282 billion yuan, respectively, with year-on-year growth rates of 326.4%, 32.9%, and 17.0%, and EPS (diluted) of 1.41, 1.87 and 2.19 yuan/share, respectively. The PE corresponding to the closing price on April 29, 2024 will be 9.49, 7.14 and 6.10 times, respectively. We are optimistic about the continued expansion of the company's production capacity and improvement in its leading position in the PTA and polyester filament sector, as well as opportunities for continued recovery in the filament sector. The company is also expected to continue to benefit from the high investment benefits brought by the joint venture Zhejiang Petrochemical project. The company's profitability is expected to continue to increase, and we maintain the company's “buy” rating.
Risk factors: PX, PTA, and MEG production capacity investment falls short of expectations and the risk of upstream raw material prices rising; risk of excessive filament production capacity and a decline in profits due to industry filament production capacity expansion exceeding expectations; risk that the company's revenue growth rate will slow down due to falling short of expectations; risk of sharp fluctuations in crude oil and product prices; risk of sharp fluctuations in crude oil and finished product prices; risk of profit falling short of expectations for Zhejiang petrochemical refining and chemical integration projects.