Introduction to this report:

The company's performance in 2023 and 2024Q1 is under pressure, and performance is expected to recover as downstream recovers in the future. The company plans to strategically introduce Saudi Aramco and is expected to achieve a strong alliance.

Key points of investment:

Maintain the increase rating and lower the profit forecast and target price: Due to pressure on chemical demand and the impact of asset impairment, we lowered the company's 2024-2025 EPS by 0.49/0.69 yuan (originally 0.87/1.02 yuan), and added the 2026 EPS to 0.81 yuan. Referring to the 2024 PE24X, the comparable company lowered the target price to 11.76 yuan (originally 13.05 yuan), maintaining the holdings increase rating.

The company's results for the first quarter of 2023 and 2024 are under pressure: the company achieved net profit of 717 million yuan in 2023, +17.35% year over year, net profit after deduction of 217 million yuan, +155.20% year over year.

Non-recurring gains and losses are mainly asset impairment and government subsidies. In 2024 Q1, the company achieved net profit of 247 million yuan, -66.53% year-on-year, +114.01% month-on-month, net profit after deduction of 86 million yuan, -87.63% year-on-year, and +104.68% month-on-month. Due to rising oil prices and high pressure on product prices, the company's performance was under pressure, and the performance fell short of market expectations.

I am optimistic about the gradual recovery of refining and chemical profits, and there is plenty of room for improvement: the average price of oil in 2023 was about 83 US dollars/barrel, down 17% year on year. Benefiting from the decline in crude oil costs on the cost side and the recovery of downstream refined oil and chemicals, the gross profit margin of the company's new petrochemical and chemical materials in 2023 was 12.40%, +4.45% compared to the same period last year. According to Steel Union data, the gross profit of domestic refineries in 2024Q1 was 680 yuan/ton, +256% month-on-month. The recovery in the refining and chemical sector has led to improvements in the company.

The “1+N” industrial layout enhances resilience to risks: in 2023, the 16 million tons/year integrated refining and chemical project was fully released, and Shenghong Refining and Chemical achieved net profit of 480 million yuan, +1.27 billion yuan over the same period last year. In 2023, the company achieved full coverage of the three olefin production processes of “oil head”, “coal head” and “gas head”, which is expected to take advantage of large-scale operations and reduce the risk caused by cyclical fluctuations.

Risk warning: Demand falls short of expectations, and project progress falls short of expectations.