Incidents:

The company released its 2024 quarterly report, achieving revenue of 8.227 billion yuan (yoy +22.19%, qoq -5.82%) and net profit of 1,421 billion yuan (yoy +19.89%, qoq -19.26%).

Comment:

The commissioning of the project helped increase sales, and the company's Q1 performance grew steadily. The company achieved revenue of 2,045, 17.46 and 2,681 billion yuan respectively in the first quarter, accounting for 25%, 21% and 33% of corresponding revenue. Specifically, polyethylene sales volume is 295,300 tons (yoy +59.79%, qoq +0.00%), average price 6,925 yuan/ton (yoy -2.49%, qoq -1.27%), polypropylene sales volume 267,600 tons (yoy +50.93%, qoq -0.41%), average price 6523 yuan/ton (yoy -5.9%, qoq -3.28%), average price of coke 1,749,500 tons (yoy +11.04%, qoq -2.23%), average price 1,533 yuan/ton (yoy -14.46%, qoq -8.94%). The company's gross margin and net margin for the first quarter were 28.72% (yoy+0.97pcts) and 17.27% (yoy-0.33pcts), respectively. Overall, the commissioning of the Ningdong Phase III olefin project helped to increase sales volume and effectively expand the product market share.

Product price cuts have led to a decline in profitability, and price spreads are expected to repair and drive future performance improvements. According to Wind, the average market price of the company's main products, polyethylene/polypropylene/coke, changed +1.96%/+2.02%/-19.72% respectively from Q1. Prices of olefin products rose month-on-month, and the price of coke rose sharply by 18.38% from the recent bottom, showing a rebound trend. Meanwhile, the average price of the main raw material thermal coal/coking coal changed -8.59%/-13.51% month-on-month in April, respectively, and coal prices fell month-on-month. It is expected that the price difference and gross margin in the olefin sector will be repaired month-on-month. Looking ahead to Q2, the downward trend in coal prices on the raw material side is expected to continue. As policies increase to help domestic demand recover, prices in the product-side olefin sector are expected to pick up, and I am optimistic that the company's performance will continue to improve due to the correction of price differences.

The company added production capacity in 24-25 and was flexible enough, and the competitive advantage was further strengthened as soon as the Inner Mongolia project was put into operation. According to the company's “Improving Quality and Efficiency” action plan announcement, the first phase of the company's Inner Mongolia coal-to-olefin project is scheduled to be completed and put into operation in the fourth quarter of this year. The project is the largest coal-to-olefin project with a single plant in the world so far. At that time, the company's olefin production capacity will reach 5.2 million tons/year, ranking first in China's coal-to-olefin industry. Based on current product sales prices, revenue will double, which is expected to contribute significantly to performance elasticity. In addition, the company's Inner Mongolia base project integrates the world's leading process technology, and the efficiency of intensive investment and large-scale production capacity has been further improved. The production cost per unit of olefin is expected to continue to decline, and the cost moat continues to be consolidated.

Profit forecasting and valuation

The company is a leader in the domestic coal-to-olefin industry, and the cost moat is remarkable. As the company's Ningxia and Inner Mongolia base projects reach production one after another, performance flexibility is remarkable. We expect the company's net profit to be 82.32/141.57/16.482 billion yuan in 2024-2026, with year-on-year growth rates of +45.68%/+71.98%/+16.42%, respectively. Corresponding to the current share price PE is 15/9/7 times, respectively, maintaining a “buy” rating.

Risk warning

The risk of large fluctuations in raw material prices, the risk of product demand falling short of expectations, and the risk of new project commissioning falling short of expectations