Core views

(1) According to the semi-annual results report, it is estimated that 20.6.1 billion yuan of non-net profit will be deducted in a single quarter in the second quarter, or +39% over the previous quarter. +78% YoY. The excellent performance was mainly due to the sharp rise in product volume and price, especially the expansion of olefin profits.

(2) The long-term logic remains the same: the company gradually released a total of 1 million ton olefin plants in the third phase of Ningxia, and the 3 million ton olefin project in Inner Mongolia will also begin to gradually contribute to performance by the end of '24. While greatly expanding olefin production capacity, the new project will further deepen the company's cost barriers.

occurrences

2024 semi-annual results report: Revenue of 16.895 billion yuan is expected to be achieved in the first half of the year, +29.07%; net profit to mother is expected to be 3.304 billion yuan, deducted non-net profit of 35.4.3 billion yuan; deducted non-net profit is expected to be +45.46% year-on-year.

Corresponding to the second quarter, the company achieved non-net profit deduction of 2.061 billion yuan, +39% month-on-month and +78% year-on-year.

Brief review

A sharp rise in volume and price boosted a sharp increase in Q2 performance

Although the current performance report did not directly disclose the production and sales volume of the company's products in the second quarter, the report also showed that “the company's Phase III olefin project was put into operation, and the production of olefin products increased significantly compared to the same period last year.” It is speculated that the company's Ningdong Phase III PE, PP, and EVA plants may have all been fully produced. In terms of price, as shown below, the profit level of the company's core product, polyolefins, improved markedly in the second quarter. We estimate that the overall profit level was above 2,000 yuan/ton; in terms of coking business, the market prices of the company's coking coal and coke in the second quarter (according to Ningxia/Inner Mongolia market prices) were about 1,709 and 1,818 yuan/ton respectively, respectively, -159 and -245 yuan/ton, respectively. However, the profit base of the coking business in the first quarter was already small, clearly giving way to olefin. As a result, the overall profit margin situation of the company's products may have improved markedly in the second quarter.

Therefore, on a comprehensive basis, the sharp rise in volume and price caused the company to simultaneously achieve significant year-on-year and month-on-month growth in single-quarter results.

Olefins maintain a strong cost advantage; dynamic profitability remains steady

Baofeng Energy is located at the Ningdong base, one of the four major modern coal chemical demonstration bases in the country. It is close to high-quality and low-cost coal resources, and has an obvious location advantage. Currently, the entire coal → methanol → polyolefin industry chain has an annual equity of about 9.16 million tons of coal (coking coal, raw coal caliber), 5.9 million tons of methanol, and 1.2 million tons of polyolefin production capacity. At the same time, by-products such as C4 and C5 are further processed into fine chemical products, and the coal chemical industry chain is highly integrated. Coupled with the company's efficient management, the company has significant cost competitiveness. The product gross margin and ROE level have led the industry in recent years, and the overall profit level of coal-to-olefin projects is the highest in the industry. We calculate based on the company's historical financial data and industry conditions, as shown in Figure 1 below. Most of the time, the profit level of the company's olefin products is about 1,200-1500 yuan/ton ahead of other coal head and oil head companies (about 15-20% net interest rate).

From the perspective of prosperity, looking at the current industry supply and demand pattern, we believe that the boom in the olefin industry mainly depends on energy prices. Specifically, it is directly related to oil and coal price differences. International oil prices have remained high for 24 years. Despite a recent decline, Brent crude oil futures prices have remained around $80 per barrel. At this level, the dynamic profit per ton of olefin remains high recently.

Production capacity has continued to be invested since 23Q4, extreme cost advantage+efficient capital expenditure, and smooth growth logic; focusing on the upcoming Inner Mongolia base project company, which is about to be put into operation, is currently in a period of rapid expansion in business volume, 2023-2025. For projects already announced by the company, the company expects new revenue and profit increases to come from:

1. The Ningxia Phase III 1 million tons/year olefin project is planned to have a production capacity of 0.5 million tons PP+0.25 million tons of EVA to further expand production capacity while promoting high-end products. 23Q4 begins to estimate that it has contributed significantly; 2. The Ningxia Phase IV project plans 0.5 million tons/year of olefins. The project was announced before approval in June 2021; on August 4, 2022, the company stated on the investor interactive platform that Ningdong Phase IV The olefin project has obtained project approval documents from the government; the construction period is expected to be 2 years from commencement to completion and commissioning.

3. According to the company announcement, the 3 million ton coal-to-olefin project in Inner Mongolia is expected to be put into operation in the fourth quarter of '24. The project is a key growth for the company in the future. After the project is put into operation, it will more than double the company's olefin production capacity. It is expected to greatly increase the company's revenue and net profit, and at the same time fully reduce the cost of coal-to-olefin, further enhance the company's competitiveness.

The employee stock ownership plan was implemented, and the production capacity expansion period was further tied to employees' interests in March. The company announced an employee stock ownership plan: the total amount of capital to be raised will not exceed 0.149 billion yuan for the employee stock ownership plan. The proposed share repurchase price is 7.6 yuan/share. It is proposed that no more than 30 employees participate in the employee stock ownership plan, including middle and senior management, including CEO Liu Yuanguan, and core executives. The corresponding shares will be unlocked in four batches. The four unlocking periods correspond to the assessment year 2025/2026/2027/2028, respectively. Furthermore, company-level performance assessment targets are based on 2024 revenue, with revenue growth of no less than 20%/30%/40%/50% in 25/26/27/28, respectively. The company is currently constructing a 3 million ton olefin project at the company's Inner Mongolia base, which is at a critical stage of capacity expansion and company growth. At this point, the company implemented an employee stock ownership plan, which helps bind the interests of core employees and ensure the smooth development of the company.

Judging from the assessment goals of the shareholding plan, the assessment goals focus on the company's revenue level. Compared to profit, the company's operating income fluctuates less, especially when the company's core product, polyolefin, is relatively rare, and prices fluctuate greatly; at the same time, considering the company's expected production capacity investment scale, if production capacity is successfully put into operation, the growth rate of product production and sales can also fully match the performance assessment goals. Therefore, overall, we estimate that if the company's production, operation and project construction are stable, it should be able to relatively steadily achieve the company-level performance assessment goals in the employee stock ownership plan.

We believe that the current employee stock ownership plan is more in line with the actual development of the company: although coal chemicals are part of the commodity manufacturing industry, the accumulation of process efficiency is also critical to the company's continuous cost reduction and efficiency improvement. Retaining the company's core technology and management personnel is critical for the company — for example, Mr. Liu Yuanguan, the president of the company, is an excellent professional manager in the coal-to-olefin field, and has played a key role in the smooth commissioning of the company's MTO installation and continuous cost reduction and efficiency over the past many years. Compared to more aggressive performance assessment goals, we believe that more secure goals can also play a better role in binding the interests of core employees. Moreover, the value of the employee's shareholding plan is also sufficient to offset the corresponding financial expenses.

Profit forecasting and valuation

We maintain the company's net profit forecast for 2024, 2025, and 2026 at 7.732, 15.142, and 15.891 billion yuan, corresponding to PE 14.47, 7.39, and 7.04 times PE. We continue to make key recommendations and maintain a “buy” rating.

Risk warning

1. Risks such as weak demand due to macroeconomic fluctuations; the company's core products are polyolefin and coke, and downstream demand is closely related to macroeconomic performance. When macroeconomic fluctuations occur drastically, it may cause large fluctuations in the company's product demand and prices.

2. Risk of large fluctuations in crude oil prices: Against the backdrop of global geopolitical tension and the general low capital expenditure of large traditional energy companies, we can indeed expect crude oil to maintain a relatively high level for a long time to come, providing support for the company's profits. However, there are many factors affecting crude oil price fluctuations, and it is very difficult to predict. If the price of crude oil falls more than expected, it may cause the profit situation of the company's products to fluctuate greatly.

3. Risks associated with the construction of the Inner Mongolia project and coal mine support: Currently, the construction of the company's Inner Mongolia project is nearing completion, but there is still some uncertainty about the completion and production progress. Furthermore, the company plans to participate in the bidding for local coal mine resources, and there is also some uncertainty as to whether the company can successfully obtain prospecting rights through the bidding process.