The company's recent situation

As of August 6, the company's net market ratio (LF) is 2.6x, which is 1.9% since 2011; according to our pessimistic profit estimates at the bottom of the cycle, the company's 2024 price-earnings ratio is about 12-13x, which is also at a historically low level. As the prices of raw materials such as pure benzene and toluene fall and the prices of pure MDI and TDI products rise, the company's MDI and TDI price differences have improved recently. Currently, the company's MDI and TDI profits mainly come from cost advantages, and profits are highly stable. As MDI and TDI expand production capacity and reduce costs brought about by technological iteration, petrochemical projects use a large amount of low-cost ethane as a raw material to produce ethylene, and the gradual commissioning of new fine chemical projects, etc., we expect medium- to long-term corporate profits to continue to rise steadily.

reviews

Profit at the bottom of the MDI and TDI cycle is strongly supported, and spreads have gradually improved recently. Wanhua Chemical is based on industrial chain integration, large-scale advantages brought by leading technology (low raw material consumption, energy consumption and depreciation costs), and energy cost advantages compared to European production capacity. In the past 2 years, when global MDI demand was weak and competitors were unprofitable, the company's MDI and TDI businesses were still able to achieve good profits based on cost advantages, and profits were highly stable. Recently, with the fall in raw material prices and the rise in product prices, MDI and TDI profits have gradually improved. Currently, the spread of aggregate MDI and pure MDI is at 57%/26% since 2010, respectively, and TDI profits are gradually recovering. With the application of the company's eighth-generation MDI technology, we expect that there is still room for significant reduction in the company's MDI comprehensive cost. At the same time, the new MDI and TDI production capacity around the world is mainly concentrated in the company, and there is still plenty of room for improvement in the company's polyurethane profit center.

The profits of the petrochemical business are expected to see positive changes. Due to high bulk energy prices and fierce competition in petrochemical products from 2022 to 2023, the company's petrochemical business profits were under pressure. We expect the company's 1.2 million tons/year ethylene phase II project (half ethylene is produced as a raw material) to be gradually put into operation from the end of 2024 to the beginning of 2025; according to the announcement, the raw materials for the Yantai Phase I ethylene project will gradually be replaced with ethane, and a joint venture to build a special polyolefin project to ethylene from ethylene in Fujian. We expect the petrochemical business to continue to increase profits.

The gradual commissioning of new projects has led to an increase in profits for new materials and fine chemicals. ADI series, polycarbonates, etc. are important profitable varieties of the company's fine chemicals. Currently, HDI and polycarbonate prices are at a low level, and the company's fine chemicals profits are also highly stable. We believe that with the POE project, the citral and derivatives project, and many other new materials and fine chemicals projects put into operation, it will drive the company's new materials and fine chemicals profits to increase.

Profit forecasting and valuation

We keep our profit forecast for 2024/25 unchanged. Currently, the company's stock price corresponds to the 2024/25 price-earnings ratio of 11.0/8.7x. We maintain our target price of 105 yuan, corresponding to a 45% increase and a price-earnings ratio of 16/12.6x in 2024/25, and maintain our rating of outperforming the industry.

risks

New projects are progressing less than expected, bulk energy prices have risen sharply, and MDI and TDI prices have fallen short of expectations.