Incident: On August 23, 2024, Hengyi Petrochemical released its 2024 semi-annual report. The company's revenue for the first half of 2024 was 64.764 billion, up 0.70% year on year; net profit to mother was 0.43 billion yuan, up 465.59% year on year; after deducting non-net profit of 0.231 billion yuan, up 215.84% year on year. The company's 2Q24 revenue was 33.109 billion yuan, down 7.87% year on year, up 4.59% month on month; net profit to mother was 0.017 billion yuan, down 59.69% year on year, down 95.98% month on month.

Comment: 1H24's performance has further improved. The company's overall gross sales margin for the first half of 2024 was 4.13%, up 0.85pcts from the same period last year. In the first half of 2024, the company's financial expenses rose 5.75% year on year; sales expenses rose 17.36% year on year; R&D expenses increased 5.42% year on year. The company's net interest rate for the first half of 2024 was 0.86%, an increase of 0.73 pcts over the same period last year. We believe that the main reason for the increase in the company's performance in the first half of 2024 is the rising boom in the polyester industry and the shortage of refined oil products in the Southeast Asian market, which is beneficial to the company's refining and chemical sector's profit.

The company's net cash flow from operating activities declined year-on-year in the first half of 2024. The net cash flow from the company's operating activities in the first half of 2024 was 0.097 billion yuan, a year-on-year decrease of 87.90%, mainly due to the increase in raw materials and finished product inventories in the polyester sector compared to the beginning of the year. Net cash flow from investment activities was -0.686 billion yuan, up 74.19% year over year, mainly due to a decrease in entrustment loans and capital increases for participating companies in the same period last year. Net cash flow from financing activities was $2.326 billion, an increase of 198.06% year over year, mainly due to a net increase in financing loans. The balance of cash and cash equivalents at the end of the period was $10.322 billion, up 16.23% year over year. Accounts receivable amounted to $5.615 billion, a year-on-year decrease of 28.91%, and the accounts receivable turnover increased from 8.72 times in the same period in 2023 to 11.22 times. Inventory turnover declined from 4.44 times in the same period in 2023 to 4.32 times.

The company's chemical fiber and petrochemical sectors have strong revenue, and demand for polyester is booming. According to the company's 2024 semi-annual report, the company's revenue in the chemical fiber industry in the first half of 2024 was 25.214 billion, up 5.28% year on year, gross margin was 3.77%, up 0.20 pcts year on year; the petrochemical industry sector's revenue was 29.048 billion, up 16.42% year on year, gross margin was 5.43%, up 0.96 pcts year on year. In the chemical fiber sector, the popularity of downstream polyester fiber industries in clothing, home textiles, and industrial textiles increased markedly. Retail sales of clothing, shoes, hats, and knitwear in China increased 2.5% year-on-year in the first quarter of 2024, boosted month by month in the second quarter of 2024, and the growth rate reached 10% month-on-month in May. In the first half of 2024, textile and garment exports totaled 1017.1 billion yuan, an increase of 4.7% over the previous year. Among them, textile exports amounted to 492.67 billion yuan, an increase of 6.5% over the previous year.

In the petrochemical sector, the revenue from refined oil products was 17.887 billion yuan, up 35.45% year on year.

In the first half of 2024, Brent crude oil futures prices generally operated in the range of 75-90 US dollars/barrel. Refinery profits are expected to increase due to the large demand gap in the Southeast Asian refined oil market, the tight supply situation is difficult to improve in the short term, and the price spread of refined oil products remains high in the Singapore market. We believe that the demand market for polyester products will flourish in the first half of 2024. The company's polyester products will increase revenue compared to 2023, and will be supported by refined oil products in the future, and the company's petrochemical performance is expected to continue to improve.

The company's chemical products are developing steadily, and PTA performance is under pressure. According to the company's 2024 semi-annual report, the company's chemical revenue for the first half of 2024 was 6.553 billion yuan, up 19.52% year on year, and gross margin increased 3.20 pcts year on year; PTA and PIA revenue were 3.809 billion yuan and 0.8 billion yuan respectively, or -34.61% and 82.84% year on year respectively. In the first half of 2024, China added 4.5 million tons of PTA production capacity, an increase of 5.58% over the production base at the beginning of the year. The reason the company's PTA performance is under pressure is mainly due to the release of a large amount of new production capacity in the market, and the competitive pressure on the company's PTA products has increased. 95% of domestic PTA demand is used in the polyester industry. The growth of the polyester industry is driving up demand in the PTA industry and has a certain supporting effect on PTA products. Therefore, we believe that with gradual recovery and growth in the downstream sector, the company's chemical products are expected to develop in a positive trend.

Brunei's PMB petrochemical project is driving the integration of the industrial chain. On November 3, 2019, the first phase of the Hengyi Brunei project was fully put into operation, achieving a crude oil processing capacity of 8 million tons/year, including the annual production of 1.5 million tons of aromatic hydrocarbons, 0.5 million tons of benzene, and nearly 6 million tons of gasoline, diesel and kerosene products. On September 15, 2020, the company plans to invest in the construction of the second phase of the Brunei refining and chemical project, which mainly includes the four parts of “refining, aromatic hydrocarbons, ethylene, and polyester”. The four major related industrial chains are highly integrated, with production capacity including 14 million tons/year refining and 2 million tons/year of para-xylene, 2.5 million tons/year of PTA downstream, 1 million tons/year of PET, 1.65 million tons/year of ethylene and downstream deep processing. As of 2024, the profits of the first phase of the Brunei project are improving, and the second phase is progressing in an orderly manner. The Brunei project opened up the “last mile” of the company's oil refining to chemical fiber industry chain, formed a unique domestic “polyester+nylon” double “nylon” driving model, and continued to take advantage of the comprehensive competitive advantage of “upstream and downstream collaboration, domestic and external linkage”, and built a columnar balanced industrial structure integrating the upstream, midstream and downstream industrial chains. Since 2024, the overall price spread of refined oil products in Singapore has remained stable, and the profitability of the Brunei refinery is expected to continue to increase steadily. We believe that the company's Brunei project has benefited from the improvement in the price spread of refined oil products in Singapore, which is expected to drive a significant increase in the profitability of the company's refining and chemical sector and enhance the company's competitiveness within the industry.

Investment advice: The company is expected to achieve operating income of 142.625/155.325/168.288 billion yuan in 2024-2026, and realized net profit of 0.955/1.401/1.775 billion yuan respectively, corresponding EPS of 0.26/0.38/0.48 yuan, respectively. The PE multiples corresponding to the current stock price are 27.1X, 18.5X, and 14.6X, respectively. We are based on the following aspects: 1) The company's chemical fiber and petrochemical sectors are strong, and the industry boom in downstream polyester fiber clothing, home textiles and industrial textiles is expected to continue to rise. Demand for polyester is growing, and the company's chemical fiber sector is expected to contribute more performance; 2) the steady development of the company's chemical products, and the growth in demand in the polyester industry has a certain supporting effect on PTA products; 3) The profit of the first phase of the Brunei project is progressing in an orderly manner, and overall competitiveness is expected to further improve. We are optimistic about the rise in the chemical fiber industry and the increase in profits of the company's petrochemical projects, and maintain a “buy” rating.

Risk warning: risk of fluctuations in raw materials and energy prices; downstream demand falling short of expectations; progress of new construction projects falling short of expectations; risk of macroeconomic fluctuations, etc.