Description of the event

On the evening of August 21, Hengli Petrochemical released its 2024 semi-annual report, achieving revenue of 112.596 billion yuan, +2.87% year over year, achieving net profit to mother of 4.018 billion yuan, +31.77% year on year; realized deducted non-net profit of 3.542 billion yuan, or +55.69% year over year. Q2 achieved revenue of 54.184 billion yuan in a single quarter, +1.65%/-7.24% year over year; realized net profit of 1.878 billion yuan, -7.44%/-12.20% year over month; net profit without return to mother was 1.723 billion yuan, +1.89%/-5.27% year over month.

Overhauls affect production and sales, and olefin profits have rebounded

In terms of profitability indicators, the Q2 gross profit margin in 2024 was 12.61%, up 0.37pct/month-on-month; the net profit margin was 3.48%, up -0.33pct/month-on-month. ROE was 3.07%, and profit remained stable year-on-year.

In terms of expenses, the sales expense rate/management expense rate/financial expense ratio for the second quarter of 2024 were 0.13%/1.22%/2.96%, respectively, compared with 0 pct/+0.34pct/-0.13pct. Management expenses have increased slightly, and sales expenses and financial expenses are well controlled. The R&D cost rate was 0.85%, +0.24pct year-on-year, and the company's R&D investment increased.

2024Q2's profit margin in the single quarter narrowed year over year, mainly due to the company's maintenance of some installations, which had a certain impact on production and sales in the second quarter. Production of refined and chemical products/PTA/ new materials in the second quarter was -15.6%/-5.8%/+2.8% month-on-month, and sales volume -27%/+0.9%/+22% month-on-month. Q2 Industry maintenance supply contracted, olefin price spreads were boosted, aromatic hydrocarbon profits declined slightly, and profits from refined oil products and some coal chemical products were strong.

The four main raw materials of coal/ butylene glycol/ crude oil/ PX were -19.90%/-24.41%/+5.51%/+1.48% year-on-year in the first half of the year. The sharp drop in coal and butylene glycol led to a reduction in cost-side pressure.

Taking advantage of platform-based cost advantages, new materials projects have fully blossomed

Based on the good cash flow of refining and chemical integration, the company continues to increase capital expenses to ensure the company's future growth. The company chose to lay out new materials such as high-end polyester, functional films, degradable materials, and new energy chemicals, which are currently in short supply in China, and accelerate domestic replacement of restricted links such as “stuck necks” and “production capacity bottlenecks” based on its C2-C4 large chemical raw material platform advantages and many years of R&D accumulation.

The company's 1.6 million tons/year high-performance resin and new materials project is expected to be fully put into operation in the second half of 2024. The fine chemical project focuses on the downstream extension of the carbon 2 industry chain and improvement of production capacity related to coal chemistry. It mainly includes bisphenol A, polycarbonates, electronic grade DMC, isopropyl alcohol, ethanolamine, ethylene amine, polyformaldehyde, acetic acid, PTMEG, etc., to achieve efficient penetration and deep links from raw material supply to process technology to the consumer market, reducing the proportion of the company's bulk chemicals and new material products.

In addition, the company is currently constructing proposed projects. The 12-line functional film project at the Suzhou Fenhu base has been put into operation one after another, and the other 12 functional film projects and lithium battery diaphragm projects at the Nantong base are progressing steadily. It is expected that all of the projects will be completed and put into operation in the first half of 2025. The completion and commissioning of projects related to the Fenhu base and the Nantong base will lay a solid foundation for Kanghui New Materials to become the world's largest functional membrane materials company with the largest production capacity and the most advanced process technology.

Investment advice

We are optimistic that based on the advantages of a full range of raw material platforms, the company will expand its scale advantage through capital expenditure, achieve strength, and at the same time actively explore new downstream materials to increase product differentiation and added value. Due to factors such as recent increases in crude oil price fluctuations and maintenance, we expect the company's net profit to be 8.967 billion yuan, 12.94 billion yuan, and 13.188 billion yuan (original value 10.191 billion yuan, 13.544 billion yuan, 14.253 billion yuan) in 2024, 2025, and 2026, respectively, corresponding to the current stock price PE of 10.38X/7.19X/7.06X, maintaining a “buy” rating .

Risk warning

Crude oil and coal prices fluctuate greatly;

The construction of the project fell short of expectations;

force majeure;

Macroeconomic downturn.