Incident: On the evening of August 23, 2024, Hengyi Petrochemical released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 64.764 billion yuan, a year-on-year increase of 0.70%; achieved net profit to mother of 0.43 billion yuan, an increase of 465.59% over the previous year; and achieved basic earnings per share of 0.13 yuan, an increase of 550.00% over the previous year. Among them, in the second quarter, the company achieved operating income of 33.109 billion yuan, a year-on-year decrease of 7.87% and a month-on-month increase of 4.59%; realized net profit to mother of 0.017 billion yuan, a year-on-year decrease of 59.69% and a year-on-year decrease of 95.98%. Net cash flow from operating activities in the second quarter was 2.553 billion yuan, up 5.86% year on year and 203.96% month on month.

Comment:

Affected by the narrowing of profits from overseas refined oil products, the company's performance in the second quarter was under pressure. In terms of cost, the average Brent oil price in the first half of 2024 was $83.05 per barrel, up 4% year on year, and crude oil prices remained fluctuating at medium to high levels. In terms of the price spread of refined oil products, the price spreads for gasoline, diesel, and aviation coal in Southeast Asia in the first half of 2024 were 11, 19, and 17 US dollars/barrel, respectively, down 13%, 11%, and 12% year on year. Among them, price spreads in the second quarter fell 32%, 34%, and 35% month-on-month. The price spread for refined oil products in Southeast Asia narrowed in the first half of the year, with narrowing significantly in the second quarter. In terms of chemicals, the overall aromatic hydrocarbon sector maintained a high level of prosperity in the first half of this year. The price differences for pure benzene and PX were 49% and -5% respectively in the first half of the year, with price differences of 15% and -3% month-on-month respectively in the second quarter. The supply and demand pattern of aromatic hydrocarbons remained tight. In particular, pure benzene installations gradually entered a centralized maintenance period in the first half of the year, and the tight supply pattern intensified. In terms of polyester filament, the profit of the polyester filament industry was relatively weak in the first half of the year. Inventory pressure was high in the first half of the year, incremental terminal orders were relatively low, and downstream loom starting load declined. From a gross profit perspective, the gross margins of the company's refining products, chemical products, and polyester filament in the first half of the year were 2%, 17%, and 4%, respectively, compared to -1 pct, 3 pct, and 1 pct. The company's subsidiaries Hengyi Brunei, Hengyi Limited, and Hengyi Hi-Tech achieved net profit of 0.416, -0.299, and 0.193 billion yuan respectively.

The supply pattern has basically been established, and we are optimistic about demand-side recovery in the second half of the year. In terms of overseas refined oil products, from the supply side, according to Platts data, more than 30 million tons of refining energy were withdrawn from the market in Southeast Asia and Australia during the period 2020-2023. According to IEA forecasts, energy refining in Southeast Asia is expected to remain stable overall until 2028. On the demand side, according to the IMF's latest forecast in July 2024, ASEAN's GDP growth rate will reach 4.5% in 2024 and 4.6% in 2025. The Southeast Asian economy is expected to maintain rapid growth, and profit space for refined oil products is expected to open up. In terms of chemicals, according to data from China Chemical Information Weekly, there was no new production capacity for PX in 2024. The starting load in the first half of the year remained at a high level of 81%, an increase of 7 pcts over the same period last year; the additional production capacity for pure benzene in the third quarter is expected to be only 0.2 million tons/year. As overseas plant maintenance resumes, the short-term tight supply and demand pattern may ease, but as new devices such as downstream styrene and phenol are put into operation one after another, we believe that the aromatics sector will maintain a tight supply and demand pattern in the second half of the year. In terms of polyester, according to CCF data, the actual new production capacity of polyester filament in the first half of 2024 was only 0.3 million tons, or only 1.16 million tons for the whole year, which is significantly narrower than last year; the second half of the year coincided with the peak consumption season for polyester filament “gold nine silver ten”, and recently filament inventories have clearly declined due to price reduction promotions by filament companies. Overall, the supply pattern for the refined oil products, aromatic hydrocarbons, and polyester sectors was basically established, and in the second half of the year, with multiple policies such as expanding domestic demand, promoting consumption, and real estate, compounded the rise in tourism and travel demand in Southeast Asia. We are optimistic that the company's performance in the context of the improvement in the supply and demand pattern will unleash opportunities.

Profit forecast and investment rating: We expect the company's 2024-2026 net profit to be 1.084, 1.294, and 1.934 billion yuan, respectively, with net profit growth rates of 148.8%, 19.4% and 49.5% respectively, and EPS (diluted) of 0.30, 0.35 and 0.53 yuan/share, respectively, corresponding to the closing price on August 23, 2024, PE is 20.94, 17.53 and 11.73 times, respectively. We are optimistic about the recovery of the company's overseas refined oil products and aromatic hydrocarbons sector. The company's performance will still be highly flexible in the future, and we maintain the company's “buy” rating.

Risk factors: the risk of rising upstream raw material prices; the risk that the company's new production capacity will fall short of expectations; the risk that downstream demand recovery will fall short of expectations; and the risk of sharp fluctuations in crude oil and finished product prices.