Incident: On April 25, 2024, Dongfang Shenghong released its 2023 annual report. In 2023, the company achieved operating income of 140,440 billion yuan, up 119.87% year on year; realized net profit of 717 million yuan, up 17.35% year on year; net profit after deduction of 217 million yuan, up 155.20% year on year; net cash flow from operating activities was 8.343 billion yuan, up 379.00% year on year; basic earnings per share were 0.11 yuan/share, up 22.22% year on year.

On April 29, 2024, in the first quarter of 2024, the company's revenue for a single quarter was 36.739 billion yuan, up 24.34 percent year on year, down 0.16 percent month on month; net profit for the single quarter was 247 million yuan, down 66.53 percent year on year, up 114.01% month on month; net profit after deduction for a single quarter was 86 million yuan, down 87.63% year on year.

Comment:

The company's revenue scale exceeded 100 billion dollars. Inventory impairment charges were high in the fourth quarter, and short-term profits were under pressure.

Looking at each section, Shenghong Refining & Chemical, Silbon Petrochemical, and Shenghong Chemical Fiber achieved net profits of 481, 751, and 107 million yuan respectively in 2023. On the cost side, crude oil prices remained medium to high in 2023. The average price of Brent crude oil was 82.49 US dollars/barrel, -16.72%. Especially in the fourth quarter of 2023, oil prices showed a unilateral decline. The company's crude oil inventory depreciation was obvious, which compressed the company's profits in the short term, but considering that oil prices are still expected to remain medium to high in the future, crude oil inventory impairment calculations are expected to recover. On the cost side, since 2023 is the first year of full operation of the company's 16 million ton large refining and chemical project, the overall cost increased significantly during the period. From the perspective of industry supply and demand, the overall increase in energy refining in the country was small in 2023, and there was no significant change in the industry supply pattern; on the demand side, after the impact of the epidemic abated in 2023, various commercial activities resumed, boosting market demand for refined oil products to a certain extent; on the chemical side, the industry sentiment is clearly differentiated and the profit performance of aromatic hydrocarbons is strong, but the olefin sector is still weak, and the prices of the company's EVA and acrylonitrile products have declined somewhat; on the chemical fiber side, after the impact of the epidemic abated, offline consumption scenarios increased, and chemical fiber consumer terminals increased markedly in 2023. Above the annual national limit Retail sales of clothing, footwear, and textile products per unit increased by 12.9% year-on-year, with a growth rate of 19 pcts higher than in 2022.

Earnings in the first quarter improved sharply from month to month, but the impact of inventory impairment still exists. On the raw materials side, Brent oil prices remained fluctuating at medium to high levels in the first quarter of 2024. The overall price center declined slightly. The average quarterly price was 81 US dollars/barrel, down about 1% year on year and month over month. On the product side, the prices of the company's downstream products, gasoline/diesel/kerosene/EVA/acrylonitrile/PX/pure benzene, changed by 0%, -4%, -2%, -5%, 1%, and 9%, respectively, in the first quarter. Overall, the prices of aromatic hydrocarbon products were relatively strong, and prices in the refined oil and olefin sectors declined. According to the company's announcement, the company calculated 515 million yuan of asset impairment provisions in the first quarter, of which the inventory price reduction preparation reached 504 million yuan, and the impact of the company's inventory impairment in the first quarter still exists.

The “1+N” industry is widely deployed, and the company's resilience to risks is expected to improve. The company has now achieved full coverage of the “oil head”, “coal head” and “gas head” olefin production process routes, and continues to expand into diversified industrial chains such as new energy materials, electronic chemistry, biotechnology, etc., to achieve a “1+N” industrial chain layout. In 2023, the company put into operation the fourth acrylonitrile project, and production capacity jumped to one million tons. The company is also a domestic enterprise with independent production technology for photovoltaic grade EVA and POE. In the future, the company plans that the total EVA production capacity will exceed 1 million tons and the total POE production capacity will exceed 500,000 tons, making every effort to build a world-class production base for photovoltaic film materials. We believe that the company has a far-reaching layout in terms of diversification of raw material sources and high added value of products. Achieving an increase in product added value during the phase of weak olefin profits is expected to enhance the resilience of the company's industrial chain to risks.

Profit forecast and investment rating: We predict that the company's net profit for 2024-2026 will be 20.95, 30.59 and 4.578 billion yuan, respectively, with year-on-year growth rates of 192.2%, 46.0% and 49.7%, and EPS (diluted) of 0.32, 0.46 and 0.69 yuan/share, respectively. The PE corresponding to the closing price on April 29, 2024 is 32.70, 22.39 and 14.96 times, respectively. Considering that the company will benefit from the recovery of industry sentiment in the future and rely on the refining and chemical platform to develop high-value-added products, our company's performance continued to grow in 2024-2026, maintaining a “buy” rating for the company.

Risk factors: the risk of large short-term fluctuations in crude oil prices; the risk of EVA production capacity falling short of expectations; risk of polyester fiber profits falling short of expectations; risk of overcapacity in refining and chemical production.