Incident: On the evening of October 24, 2024, Hengli Petrochemical released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved total operating income of 177.857 billion yuan, a year-on-year increase of 2.71%; realized net profit of 5.105 billion yuan, a year-on-year decrease of 10.45%; realized net profit after deduction of 4.627 billion yuan, a year-on-year decrease of 7.04%; and achieved basic earnings per share of 0.73 yuan, a year-on-year decrease of 9.88%.

Among them, in the third quarter of 2024, the company achieved total operating income of 65.261 billion yuan, up 2.44% year on year; realized net profit of 1.087 billion yuan, down 59.01% year on year and 42.14% month on month; realized net profit without deducted back to mother of 1.085 billion yuan, down 59.86% year on year and 37.05% month on month; achieved basic earnings per share of 0.15 yuan, down 59.01% year on year.

Comment:

The cost side surged and declined, and the decline in the company's profit was mainly affected by the narrowing of chemical product gross profit. On the oil price side, international oil prices fluctuated in the first three quarters of 2024. In the first half of the year, oil prices showed a steady trend of falling back after rising; entering the third quarter, the peak driving season in the northern hemisphere supported the rise in international oil prices, followed by a seasonal decline in oil demand, compounded by the weakening of the global macroeconomic situation, slowing geographical concerns, and international oil prices fluctuated downward. The average Brent oil price in the first three quarters of 2024 was 81.6 US dollars/barrel, which is basically the same as the same period last year. The average for the third quarter was 78.7 US dollars/barrel. From the perspective of the company's product price, in terms of procurement costs, the company's crude oil procurement costs increased by about 3% year on year in the first three quarters, and the cost of other raw materials declined; in terms of price and production and sales rate, the prices of the company's refined and chemical products, PTA and new material products were -1.69%, +1.49%, and -3.60% year on year, respectively. The production and sales rates were -6pct, -22pct, and -9pct, respectively. From a profit perspective, according to Baichuan Yingfu data, the gross profit changes of the main refined products gasoline, diesel, kerosene, polyethylene, polypropylene, PX, and pure benzene in the first three quarters of 2024 were +47, +14, -39, -595, -766, -641, and +417 yuan/ton, respectively. We believe that the decline in the company's profits is mainly due to the weak supply and demand pattern and the narrowing of the profits of chemical products.

Refining and chemical production capacity growth is expected to peak, and the company's low cost and high-end product layout are expected to benefit. According to the guidance of the National Development and Reform Commission, domestic crude oil processing capacity will be limited to 1 billion tons by 2025, and 10 million ton refining enterprises will account for about 55% of production capacity. According to Jinlianchuang data, the total domestic refining energy as of 2023 is 0.953 billion tons, which is about 47 million tons of incremental space from the specified upper limit. The refining and chemical integration projects and renovation and expansion projects under construction and to be built before 2025 are about 69 million tons. We believe that in the future, the process of eliminating small-scale refineries is expected to accelerate, and the industry may enter an era of stock competition. In the context of the supply-side peak of the industry and deepening structural adjustments, refining and chemical integration leaders with low costs and deep processing are expected to benefit first. In terms of cost control, the company has 12 million tons of heavy oil processing capacity, accounting for 60% of the annual crude oil processing volume, and its crude oil procurement cost is lower; at the same time, the company supplies 0.25 million tons of scarce pure hydrogen raw materials at low cost every year through its own coal hydrogen production unit; in addition, the company also has a 520 MW high-power self-owned power plant, which effectively optimizes production energy consumption costs. In terms of high-end product layout, the company lays out 1.6 million tons/year high-performance resin and new material projects, functional film projects, and lithium battery separators. The products cover fields such as lithium battery separators, battery electrolytes, composite fluid collector substrates, photovoltaic backplate substrates, etc. In the future, it is expected to reduce the proportion of the company's bulk chemicals, increase the output of fine chemicals and new material products, and enhance product profitability.

Profit forecast and investment rating: We predict that the company's net profit for 2024-2026 will be 70.65, 80.34 and 10.185 billion yuan, respectively, with year-on-year growth rates of 2.3%, 13.7%, and 26.8%, and EPS (diluted) of 1.00, 1.14, and 1.45 yuan/share, respectively. The PE corresponding to the closing price on October 24, 2024 is 14.36, 12.63 and 9.96 times, respectively. Considering that the company benefits from its competitive advantage and industry consolidation is expected to accelerate, the company's performance space is expected to open up in 2024-2026, maintaining the company's “buy” rating.

Risk factors: risk of significant short-term fluctuations in crude oil prices; risk of polyester fiber profits falling short of expectations; risk of overcapacity in refining and chemical production; risk of new production capacity falling short of expectations.