Incident: On October 28, the company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 147.6 billion yuan, +11.4% year on year; net profit to mother of 11.09 billion yuan, -12.7% year over year; net profit after deducting non-return to mother of 10.93 billion yuan, -12.1% year on year. 2024Q3 achieved revenue of 50.54 billion yuan in a single quarter, +12.5% year over month, -0.7% month on month; net profit to mother of 2.92 billion yuan, -29.4% year on month, -27.3% month on month; net profit without return to mother of 2.83 billion yuan, -31.3% year on year and -28.8% month on month.

The combined costs and expenses of equipment maintenance increased, putting pressure on the company's profit in the third quarter. The third quarter is the traditional centralized maintenance period for the company's main installations. According to the announcement, the 2024Q3 subsidiary Hungary's Baoside Chemical Company, Yantai Industrial Park MDI, TDI and other integrated devices and PDH devices were discontinued one after another. The maintenance period was about 49, 55, and 37 days (total maintenance of PDH devices was about 45 days), an increase of about 14 days (not considering MDI technology improvement and capacity expansion), 12, and 2 days over the same period in 2023. On the cost side, the average price of pure benzene, coal, propane, and butane of 2024Q3's main raw materials was +13.1%, -2.0%, +25.2%, and +24.4%. In terms of costs, the 2024Q3 company's cost rate during the period was about 5.8%, +0.1pct compared to the previous year. Among them, the financial expense ratio, management expense ratio, R&D expense ratio, and sales expense ratio were about 1.2%, 1.5%, 2.3%, and 0.9%, respectively, compared with +0.1 pct, +0.1 pct, -0.2 pct, and +0.05 pct.

Polyurethane products have mixed ups and downs, and the long-term economy is expected to improve. 2024Q3's polyurethane series products produced 1.38 million tons, +16.0% and -6.1% YoY; sales volume 1.41 million tons, +13.7% and +2.2% YoY; revenue 18.8 billion yuan, +8.5% and +4.7% YoY. By product, due to overseas force majeure and the increase in terminal white electricity emissions, the MDI boom remained high. The average price difference of 2024Q3 was 10,461 yuan/ton, +2.0% and +6.6% compared to the same period last month. In contrast, due to the weakness of industries such as textile clothing and upholstered furniture, the pure MDI and TDI boom was under pressure. The average price difference in 2024Q3 was 11524 and 7,477 yuan/ton, -22.3% and -33.8% year-on-year, and -1.1% and -6.9% month-on-month. In terms of production capacity, in April 2024, the Fujian base completed 0.4 million tons of technical transformation and capacity expansion to 0.8 million tons/year; the new production capacity of the Ningbo base of 0.6 million tons entered the commissioning stage. Recently, the EIA of the MDI plant technology improvement and capacity expansion project at the company's Fujian base was announced. The subsequent EIA will increase from 0.8 million tons/year to 1.5 million tons/year. After the planned production capacity is put into operation, the company's total production capacity is expected to reach 4.8 million tons/year, and the global market share will further increase. Along with the continued deepening of the consumer goods trade-in policy, as of October 30, the average price differences between pure MDI, aggregate MDI and TDI in 2024Q3 were +7.3%, +16.3%, and +2.5%, respectively. Benefiting from the continuous increase in the company's new production capacity, polyurethane product profits are expected to continue to improve against the backdrop of devices returning to normal load and terminal demand continuing to pick up, and the company may fully benefit.

The economy is falling and petrochemicals are under pressure, raw material transformation & new projects are about to be put into operation, and the sector's long-term profits are expected to grow. In 2024Q3, the company's production and revenue of the petrochemical series products were +15.0% and +42.4% YoY, and -5.8% and +6.4% YoY. Looking at international oil prices, the average price of 2024Q3Brent oil was 78.71 US dollars/barrel, -8.4% and -7.4% year-on-month. Affected by falling oil prices, the overall price focus of petrochemical products declined. Shandong propylene, Shandong butanol, Shandong acrylic acid, Shandong butyl acrylate, Shandong MTBE, East China LLDPE film grade, and East China ethylene PVC average prices were +1.7%, -12.5%, +1.7%, -6.1%, -17.8%, +0.8%, and -8.4%, respectively. The profit margin of the industrial chain was clearly narrow. In terms of construction capacity, the Penglai Phase I and Ethylene Phase II projects are progressing as scheduled, and are scheduled to be put into operation one after another from 2024Q4 to early 2025; the first phase of ethylene is planned to convert propane feed into ethane as a raw material, which is expected to significantly improve the economy of the company's production facilities while increasing the yield of diene. Furthermore, in July of this year, the company and overseas giants Abu Dhabi National Petroleum Company, Nordic Chemical, Bolu Chemical, and Wanrong New Materials will form a Sino-foreign joint venture with a 50% to 50% shareholding ratio to jointly launch a feasibility study to build a 1.6 million tons/year special polyolefin integrated project facility in Fuzhou, Fujian Province. The profitability of the petrochemical sector is expected to continue to increase with the transformation of raw materials and the volume of new projects put into production.

New materials 0-1 continues to break through, and the sales scale of the sector continues to grow. 2024Q3's production of fine chemicals and new materials series products was 0.45 million tons, +15.4% and -15.1% YoY; sales volume was 0.5 million tons, +16.3% and +4.2% YoY; operating revenue was 7 billion yuan, +10.9% and +2.1% YoY. It is worth noting that at the end of June 2024, the first phase of the company's 0.2 million tons/year PoE project completed the entire process and produced qualified products on the same day. The first batch of vehicles was achieved on July 10, marking the first large-scale self-developed POE industrialization device in China to complete the entire line from R&D, production to sales, officially opening a new era of POE localization. At the end of August, all processes of the company's 0.048 million tons/year citral plant were successfully put into test run and successfully produced qualified products, marking the successful operation of a single citral unit with the largest production capacity in the world. Furthermore, according to the plan, construction of the second phase of the company's Penglai base PoE project with an annual output of 0.4 million tons has already started and is expected to be completed and put into operation by the end of 2025. In the context of new materials 0-1 blossoming and continuous breakthroughs, the company is expected to become a new material platform enterprise with the gradual improvement of the petrochemical platform construction.

Profit forecast and investment suggestions: Based on data disclosed in the company's regular reports, combined with recent market conditions in the polyurethane, petrochemical and new materials industry and the company's future development plans, we adjusted the profit forecast. The net profit for 2024-2026 is 14.75, 18.01, and 22.39 billion yuan respectively (previous forecasts were 16.96, 20.71, and 24.45 billion yuan, respectively), mainly considering the relatively weak terminal demand and the petrochemical product boom is still low, reducing the average product price assumption; at the same time, slightly increasing the unit cost Assuming that the adjusted current stock price is 16.0, 13.1, and 10.6 times PE, respectively, and the corresponding PB is 2.3, 2.0, and 1.7 times, respectively, maintaining a “buy” rating.

Risk warning: economic downturn; large fluctuations in product and raw material prices; progress of new projects falls short of expectations; downstream demand falls short of expectations; untimely information updates, etc.