Zhixin Finance learned from the Futu app that Huachuang Securities released a research report stating that the mismatch between domestic and foreign inventory cycles and the long-term decline of the real estate cycle are reflected in the valuation of the chemical industry, and the significant decline in profitability of global chemical companies, especially overseas leading chemical companies, means that ROE has bottomed out, resulting in a double bottom of PB-ROE. The dilemma breeds hope, and the breakthrough comes from the resistance of supply, while the trend opportunity comes from the newland of demand. Adjusting the binary structure of the past domestic real estate + US inventory cycle demand to the ternary structure of China + developed country inventory cycle + Asia, Africa and Latin America, and bullish that chemical products driven by developing countries are expected to follow a long-term upward demand trend.

Huachuang Securities' main views are as follows:

PB-ROE double bottom reflects the cost-effectiveness of chemical allocation.

In 2023, the overall PB of the chemical industry is 1.82x, and the industry ROE is 6.73%, forming a double bottom of PB and ROE. The annualized ROE of the chemical sector in 2024Q1 was 6.78%, a slight improvement from 2023, and the quarterly ROE improved significantly compared to 23Q4. However, PB continued to decline to 1.73x. The rarity of the PB-ROE double bottom means that the market is too pessimistic, from dynamic thinking to static thinking, and using static pricing for cyclical industries indicates that the market is pessimistic about the future profit repair. Once the market confirms the trend of ROE repair, PB will take the lead in running.

Resistance from supply.

Huachuang Securities pointed out that Chinese chemical companies are continuously gaining market share globally. Under the resonance of management, R&D and scale advantages, Chinese companies are no longer on the right side of the global cost curve, and their competitive advantages have significantly strengthened, and their profitability is constantly increasing. Traditional overseas chemical companies are struggling on the profit and loss balance line. When they withdraw, the supply pattern of the corresponding products will be improved and profitability will be significantly repaired.

In the past, the chemical industry came out of the bottom mainly because of the domestic supply clearing in 2016 and the energy consumption dual control in 2020. In 2024, there will still be administrative measures for clearing backward production capacity in China, including the third round of the second batch of environmental protection inspections and the quantitative target of a 2.5% reduction in domestic GDP energy consumption per unit. However, after a long period of strict inspections, the energy consumption and environmental protection level of domestic chemical companies have been significantly improved. In combination with the ecological environment protection inspection office's requirement to prohibit “one size fits all” and “excessive accountability”, the key to this round of chemical industry coming out of the bottom may not come from domestic clearance, but rather overseas enterprise capacity clearance or the oligopoly pattern in China. From the share orientation to the profit orientation.

Newland of demand.

The demand marginal in Asia, Africa, and Latin America is an important improvement to our chemical demand framework. In the past, the demand framework mainly focused on China's credit cycle and the US inventory cycle because other demands had a lower proportion. As the main consumer country in the world, the inventory cycle of the United States itself will have an important impact on the global economic cycle. In the two inventory cycles from 2016 to 2019 and from 2020 to 2023, the resonance enhancement of China's credit cycle and the US inventory cycle also concealed the influence of other demand areas. When the Chinese credit cycle and the US inventory cycle are mismatched, the demand marginal of Asia, Africa and Latin America becomes important.

Huachuang Securities believes that the super unexpected demand in the future mainly comes from: 1) downstream demand of some chemical products is desensitized from domestic real estate, such as the sales of refrigerators have changed from incremental logic to stock replacement logic; 2) Truly overseas-oriented chemical products are expected to benefit from overseas stock replenishment, and the impact of fluctuations in shipping costs on the intensity and pace of stock replenishment must be considered, including pesticides, vitamins, food additives, etc; 3) True demand for chemical products in Asia, Africa and Latin American countries is expected to benefit from the continuous growth of developing countries' demand. Bullish on Asia, Africa, and Latin American countries' higher GDP growth rate × higher driving coefficient for China's manufacturing (chemicals) demand = Asia, Africa, and Latin America becoming new elements of China's manufacturing and chemical demand in the future, and is expected to become the main direction of digesting excess capacity in the future. Moreover, this growth trend is more certain and lasting than the inventory cycle.

Recommended line:

1) Clearing of overseas production capacity, focusing on chemical products with a relatively high proportion of overseas production capacity, especially in Europe, such as vitamins, polyurethane, and tires.

2) Stable domestic supply pattern, high concentration, oligopoly evolved from a competitive relationship to a cooperative relationship, from income orientation to profit orientation: fluorine chemicals, phosphorus chemicals, chemical fiber, etc.

3) Demand for chemical products mainly overseas, mainly focusing on the advancement of overseas stock replenishment cycle, and the impact of fluctuations in shipping costs on the intensity and pace of stock replenishment must be considered: pesticides, vitamins, food additives, etc.

Chemicals driven by Asian, African, and Latin American countries are expected to see long-term demand growth: refrigerants, polyurethane, off-road tires, and titanium dioxide.

Relying on its own incremental growth stocks such as Satellite Chemical (002648.SZ) and Ningxia Baofeng Energy Group (600989.SH), without relying on beta.

Risk Warning: Unexpected global recession, intensified geopolitical conflicts, etc.