The company released its 2024 semi-annual report, and the results exceeded expectations. 24H1 achieved operating income of 13.744 billion yuan (yoy +9%), net profit due to mother of 1.518 billion yuan (yoy +12%), net profit after deduction of 1.455 billion yuan (yoy +11%), 24H1 short-term loans decreased by 3.885 billion yuan to 1.875 billion yuan year-on-year, and financial expenses decreased by 0.048 billion yuan to -0.122 billion yuan year-on-year, exceeding expectations. Among them, 24Q2 achieved operating income of 7.087 billion yuan (yoy +10%, QoQ +6%), net profit of 0.835 billion yuan (yoy +15%, QoQ +22%), net profit after deduction of 0.799 billion yuan (yoy +15%, QoQ +22%), and financial expenses of -0.106 billion yuan. The main reasons for the year-on-year increase in the company's performance in the first half of 2024 are: 1. The gradual release of the company's new production capacity for spandex and adipic acid led to a year-on-year increase in production and sales; 2. The scale effect was further enhanced. As the price spread of the main business continued to narrow, gross margin fell by only 1% compared to the same period last year.

Demand for spandex is expected to continue in the second half of the year, waiting for the industry to recover and the company's flexibility to show. The subsidiary Huafeng Chongqing Spandex achieved net profit of 0.399 billion yuan in the first half of the year. In terms of production and marketing, according to data from the National Bureau of Statistics, the country's per capita clothing consumption expenditure increased 8.1% year on year in the first half of this year, an increase of 2.7 percentage points over the same period last year. According to Zhuochuang Information data, 24H1 China's apparent consumption of spandex was about 0.52 million tons, an increase of 26% year on year, and the demand side showed a high trend. According to Baichuan Yingfu price data and the company's semi-annual report data, we estimate that 24H1 spandex sales volume is about 0.19 million tons, an increase of 18% over 0.16 million tons in the same period last year. In terms of price, according to Baichuan Yingfu, the average price difference of 24H1 domestic spandex 40D fell 16% and 15% from the same period last year to 2,8002 and 11,605 yuan/ton, respectively. In terms of trends in the past six months, the prices of spandex and the raw material PTMEG and pure MDI have declined almost uniformly, and the price difference of spandex has reached the bottom of history. Since June, the rate of decline in spandex prices has slowed down. As of August 9, 2024, the average price difference of 24Q3 domestic spandex 40D was 26,120 and 11,763 yuan/ton, respectively. The price difference has been slightly repaired compared to Q2. The second half of the year will usher in the “gold nine silver ten” production season. I am optimistic that the company will continue the volume increase trend in the first half of the year. In the medium to long term, with extensive losses in the industry, spandex production is nearing its end, and the scope of application has been expanded and the amount of superimposed additives has increased, catalyzing the continuous growth of demand for spandex, and a situation where supply and demand are tight may gradually become apparent. With its scale and cost advantages, the company has the ability to cross the cycle. When the profitability of the industry is repaired, the company has greater performance flexibility.

The Q3 price difference of adipic acid was fixed month-on-month, and the company's production and sales were at a steady bottom. The subsidiary Chongqing Huafeng Chemical achieved net profit of 0.634 billion yuan in the first half of the year. According to Baichuan Yingfu, the average domestic price of adipic acid in 24Q2 was 9,604 yuan/ton, down 2% month-on-month. Affected by the increase in pure benzene prices, the 24Q2 price difference fell 42% month-on-month to 1,138 yuan/ton. As of August 9, 2024, the average price difference of adipic acid in 24Q3 was 9373 and 1,262 yuan/ton, respectively, and the price difference has been repaired by 11% month-on-month. Currently, adipic acid still has some planned production capacity, but as the industry continues to lose money, the implementation situation remains to be seen, and old foreign devices may be withdrawn, and the supply side will still need time to sort out; breakthroughs in the localization of adipic acid have brought about PA66 volume, and there is still logic on the demand side of adipic acid. The company's 0.4 million ton adipic acid project was put into operation in September 2023. It is ahead of its peers in terms of scale and cost advantages. With an average operating rate of only about 60% at the bottom of the industry, it can still maintain full production and sales.

Investment analysis: The company is a global mainstream enterprise for spandex, adipic acid and polyurethane stock solutions. It has remarkable advantages in scale, technology and cost. It will further cultivate the industry in the future, and the strong will continue to strengthen. We maintain the company's 2024-2026 net profit forecast of 3.049, 3.812, and 4.765 billion yuan, corresponding EPS of 0.61, 0.77, and 0.96 yuan. The PE corresponding to the current market value is 12X, 10X, and 8X, maintaining an increase rating.

Risk warning: 1) Prices of major products such as spandex, adipic acid, and polyurethane stock solution fell sharply; 2) construction of new projects such as spandex fell short of expectations; 3) downstream textile and garment demand declined sharply.