Incident: On the evening of October 28, 2024, Xinfengming released the 2024 third quarter report. In the first three quarters of 2024, the company achieved operating income of 49.197 billion yuan, a year-on-year increase of 11.31%; realized net profit of 0.746 billion yuan, a year-on-year decrease of 15.91%; realized net profit after deduction of 0.637 billion yuan, a year-on-year decrease of 13.60%; and achieved basic earnings per share of 0.50 yuan, a year-on-year decrease of 15.25%.

Among them, in the third quarter of 2024, the company achieved operating income of 17.924 billion yuan, up 11.91% year on year; realized net profit of 0.141 billion yuan, down 65.41% year on year, down 57.23% month on month; realized net profit without deduction of 0.098 billion yuan, down 73.41% year on year and 68.23% month on month; achieved basic earnings per share of 0.09 yuan, down 65.32% year on year.

Comment:

The gross profit of off-season products narrowed+inventory depreciated, and profits declined somewhat in the single quarter. 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 global macroeconomic situation, slowing geographical concerns, and a rapid decline in international oil prices. 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. In the first three quarters of 2024, the average purchase prices of PTA, MEG, and PX, the main raw materials of the company's products were -2.28%, +11.71%, and -1.75%, respectively, and the cost center increased. On the demand side, according to data from the National Bureau of Statistics, the country's per capita clothing consumption expenditure increased 5.1% year on year in the first three quarters; in the first three quarters, retail sales of clothing, shoes, hats, and knitwear products above the limit in China increased 0.2% year on year, and the demand side was running steadily. Judging from the operation of the industry, July and August are the traditional low season for polyester filament. Prices at the filament factory remained stable in mid-July under the price policy of leading companies. Starting in late July, due to considerations of inventory pressure release, the cost center was reduced and large manufacturers reduced prices; in August/September, due to declining raw material prices, polyester silk continued to promote shipments, compounded by delays in the fulfillment of seasonal demand in September. Product prices and gross profit narrowed, and the company's profit declined somewhat in the third quarter. The gross margin of the company's products in the first three quarters of 2024 was 5.6%, or -1 pct year on year, of which the gross margin for the third quarter was 4.9%, -3 pct year on year and -1 pct month on month.

The overall increase in production capacity is slowing down, and profits for polyester filament can be expected. According to our estimates, Xinfengming added 0.36 million tons of production capacity in the third quarter, and about 0.5 million tons of production capacity to be invested in the fourth quarter. Looking at the full year, the overall production capacity this year was about 1.1 million tons, while the full year of 2023 added about 3.46 million tons of production capacity. This year's incremental production capacity was significantly reduced compared to last year. After entering October, in terms of inventory, according to our estimates, after experiencing price reduction promotions in the third quarter, the average inventory of the polyester filament industry since October was about 18 days, down 10% from September; in terms of profit, the average profit per ton of POY, FDY, and DTY products since October changed +53, +23, and +30 yuan/ton from the third quarter, respectively, and product profitability improved; downstream, according to CCF data, the average operating rate and operating rate of Jiangsu and Zhejiang looms in October was 83% and 93%, respectively. Moon Both were +7pct and +1pct month-on-month, and the loom started and repaired significantly. Considering the postponement of the “Golden Nine” traditional peak season, the downstream construction load has increased markedly, and the increase in production capacity supply in the superposition industry has clearly slowed, so future filament profits can be expected.

Profit forecast and investment rating: We expect the company's 2024-2026 net profit to be 10.09 billion yuan, 14.64 billion yuan and 1,762 billion yuan, respectively, with net profit growth rates of -7.1%, 45.0% and 20.4% respectively, and EPS (diluted) of 0.66, 0.96 and 1.16 yuan/share, respectively, corresponding to the closing price on October 28, 2024, and PE 17.81, 12.28 and 10.20 times, respectively. We are optimistic about profit recovery in the company's filament sector. As industry supply expansion slows down, we believe that the company still has room for high performance growth 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.