According to information from Zhitong Finance APP, Tianfeng issued a research report stating that the growth rate of domestic chemicals under construction peaked in Q1 2023 and has already dropped to near zero in Q2 2024, indicating that the stage of construction has reached its peak. It is expected that the pressure from new capacity release is the main factor restraining the profitability expectations of the chemicals sector, and the future needs to observe the impact of the matching situation between demand recovery and supply capacity release rhythm on profitability.

The main focus for "hard assets" is the recommendation of Wanhua Chemical Group (600309.SH) and Jiangsu Yangnong Chemical (600486.SH); from the perspective of prosperity, the agricultural chemicals and tire sectors have strong demand resilience and are expected to gradually welcome a recovery in prosperity. In the agricultural chemicals sector, the recommendation is Jiangsu Yangnong Chemical, and attention should be paid to phosphorus fertilizer related symbols such as Guizhou Chanhen Chemical Corporation (002895.SZ).

Tianfeng Securities' main points are as follows:

In the first three quarters of 2024, revenue saw a slight year-on-year increase, while profits were under pressure and declined year-on-year.

In the first three quarters of 2024, listed companies in the basic chemicals industry (according to the 2021 primary classification of Shenwan, with a total of 397 listed companies) achieved a total revenue of 1,593.9 billion yuan, a year-on-year increase of 1.5%. The operating profit was 114.9 billion yuan, a year-on-year decrease of 5.4%, and the net income attributable to shareholders of listed companies was 90.4 billion yuan, a year-on-year decrease of 6.6%. The overall gross margin of the industry was 16.3%, a year-on-year decrease of 0.3 percentage points; the period expense ratio was 9.1%, a year-on-year increase of 0.4 percentage points. The overall net margin of the industry was 6.0%, a year-on-year decrease of 0.6 percentage points.

From the price index perspective, the CCPI's decline from the beginning of 2024 to now (as of November 5) is 5.4%. The average CCPI for the first three quarters of 2024 was 4625 points, a year-on-year decrease of 0.9%; among them, the average CCPI for the third quarter was 4539 points, a year-on-year decrease of 3.1%, and a quarter-on-quarter decrease of 4.1%.

In the third quarter of 2024, revenue remained flat year-on-year, while net income decreased both year-on-year and quarter-on-quarter.

In the third quarter of 2024, the entire listed companies in the basic chemical industry achieved operating revenue of 546 billion yuan, a year-on-year increase of 1.1% and a quarter-on-quarter decrease of 2.4%; they achieved operating profit of 33.3 billion yuan, a year-on-year decrease of 14.9% and a quarter-on-quarter decrease of 25.5%; the net profit attributable to shareholders of the parent company was 26.5 billion yuan, a year-on-year decrease of 12.6% and a quarter-on-quarter decrease of 23.7%; the net margin was 5.1%, down 0.9 percentage points year-on-year and down 1.4 percentage points quarter-on-quarter, with a period expense ratio of 9.5%, up 0.4 percentage points year-on-year and up 0.8 percentage points quarter-on-quarter.

In the third quarter of 2024, 18 sub-industries experienced year-on-year revenue growth, with the leading sub-industries being fluorinated chemicals, other rubber products, and other chemical raw materials, all with a year-on-year growth rate of over 15%; on the other hand, the sub-industries of potassium fertilizers, non-metallic materials, and chlor-alkali saw significant revenue declines year-on-year. In the third quarter of 2024, 14 sub-industries reported year-on-year growth in net profit attributable to the parent company, with leading sub-industries including textile chemicals, chlor-alkali, and compound fertilizers, all exceeding a year-on-year growth rate of 100%. Additionally, the chlor-alkali industry turned a profit in Q2 2024 compared to a loss in the same period last year; meanwhile, sub-industries such as viscose, pesticides (which turned to a loss year-on-year in Q3), non-metallic materials, other chemical fibers, polyester, other plastic products, and nylon saw year-on-year growth rates decline by over 60%.

In Q3 2024, the growth rate of construction projects under development slightly rebounded quarter-on-quarter, as significant capital expenditures gradually approached completion.

In Q4 2022, the year-on-year growth rate of construction projects reached its highest point since Q3 2012, as the chemical industry entered a new round of concentrated capital expenditure. The growth rate peaked in Q1 2023 and began to decline, and by Q2 2024, the growth had dropped to the level of Q3 2018, with a rebound in Q3 2024. Specifically, in this quarter, the year-on-year growth rate of construction projects under development for all/sample listed companies in the basic chemical industry was 9.3%/3.0%, decreasing year-on-year by 18.3/13.6 percentage points, and increasing quarter-on-quarter by 7.1/10.4 percentage points. The growth rate of fixed assets in the basic chemical industry experienced a turning point in Q4 2023, and the growth trend continued to decline in Q3 2024. By the end of the third quarter of 2024, the total fixed assets of all/sample listed companies in the basic chemical industry amounted to 1183.4/898.6 billion yuan, representing year-on-year growth of 17.0%/15.3%, with growth rates declining by 0.8/0.6 percentage points compared to Q2 2024. During the same period, the total construction projects under development amounted to 409.1/264.3 billion yuan, indicating year-on-year growth of 9.3%/3.0%, with growth rates improving compared to Q2 2024.

Investment advice:

The growth rate of domestic chemical construction projects reached its peak in Q1 2023 and has already fallen back to near zero by Q2 2024, with a peak in ongoing construction projects. The pressure from expected new capacity releases is the main factor suppressing the profit expectations of the chemical sector; moving forward, the impact of the matching of the demand-side recovery and the supply-side capacity release pace on profits needs to be observed. On the other hand, it is also observed that the capacity supply structure has gradually become orderly after years of optimization, with leading and prominent companies expanding their competitive advantages in capacity, thus we recommend focusing on two main lines:

Focusing on the 'hard assets' of high-quality development: strongly recommend: wanhua chemical group, jiangsu yangnong chemical, and suggest paying attention to: yunnan yuntianhua, lb group co., ltd.

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‍风险提示：原油等原料价格大幅波动风险；产能大幅扩张风险；安全生产与环保风险；化工品需求不及预期。