Adequate cash has the ability to increase investor returns. China Chemical has sufficient cash on hand, and repayments for chemical engineering projects are generally better than traditional infrastructure projects. The company uses chemical engineering projects as its main business. Under the advantage of the business structure, measured by the difference between “monetary capital” and “interest-bearing debt,” the company was the only enterprise with a positive difference among the eight major construction central enterprises in 21-23, and the positive balance increased slightly year by year. The company also closely controls cash flow indicators and carries out rolling cash flow forecasts on a monthly basis. Net operating cash flow also improved markedly in 2023. Adequate cash guarantee companies have strong solvency, and also provide a solid foundation for the company to further take measures to increase investor returns, such as increasing the dividend ratio, increasing the holdings of major shareholders, and repurchases of listed companies.

The number of new orders has increased, and overseas orders continue to be booming. From January to April '24, the company signed a total of 15.8 billion yuan of new contracts, an increase of 21% over the previous year, ranking among the top eight construction central enterprises. By the end of '23, it had nearly 114.8 billion yuan of outstanding orders from Russia. Since 2024, it has continued to receive major overseas orders from the Middle East, Central Asia, Southeast Asia and Africa. From January to April '24, a total of 31.26 billion yuan was signed, the highest amount for the same period in history, a sharp increase of 360.2% over the previous year, and the share of overseas contracts increased to 21%. Russia, the Middle East and Central Asia regions of the “Belt and Road” are rich in oil and gas resources. With the deepening of mutual political trust and energy economic cooperation between China and these countries, opportunities for cooperation are gradually increasing, and the company is expected to receive more overseas orders with its leading chemical engineering and technical strength.

As chemical prices rise or the chemical industry catalyzes an increase in capital expenditure, the new industrial materials business is expected to see a sharp increase in volume and price.

Due to the impact of safety incidents, the shutdown of production by overseas companies, etc., chemical prices have continued to rise over the past 24 years, and the rise in chemical prices has driven the industry's profit recovery, while the increase in capital expenditure in the chemical industry is often based on an increase in profit. If the price of chemicals continues to rise, it is expected to catalyze an increase in capital expenditure, compounded by an increase in demand for technical reform under strict carbon emission control, which is expected to bring more chemical engineering construction orders to the company. In 2023, the company's Tianchen Yaolong caprolactam project was produced at full capacity; the Tianchen adiponitrile project has now completed technical reform and low load trial operation, which will gradually increase the load; the Hualu Aerogel project is running smoothly; the Donghua PBAT project has successfully operated and produced high-quality products. Prices of products such as caprolactam and hexanediamine showed an upward trend in 24 years. Along with the increase in the load on the company's related production lines, the company's new industrial materials are expected to increase rapidly in volume and price. The company is also actively planning a new production line for the adiponitrile project, and production capacity expansion can be expected.

Profit forecast, valuation and rating: As chemical prices rise, the investment value of China Chemical in the chemical industry chain is gradually becoming prominent. Sufficient cash lays a solid foundation for the company to increase investor returns. High orders and a booming new industrial materials business will ensure the continued growth of the company's performance. We are optimistic about the company's future performance growth, maintain the company's 24-26 net profit forecast of 58.9/64.2/7.12 billion yuan, and maintain the “buy” rating.

Risk warning: the risk of a sharp drop in the price of adiponitrile products, the risk of industrial projects falling short of expectations, the risk of large fluctuations in the price of engineering raw materials, etc.