Key investment points:

Based on technical strength, we continue to break through high added value, high barriers, and high-capacity products to become a leader in fine chemicals. Shinwa established the fine chemical industry, with “chemical +” and “bio+” as the core technology platforms, pioneered the industrialization of key intermediates for products such as vitamin A and E in China, and has built leading technical strength in the fields of vitamins, methionine, fragrance, PPS, etc., with significant cost advantages and a rich product layout. Thanks to this, the company's profitability has long been at the leading level in the All A chemical sector.

Vitamins: Tight supply is driving the industry's boom. The company uses technical strength to obtain high profit returns, fully benefiting from the wave of price increases. Vitamins are mainly used in feed, pharmaceutical and chemical fields. Varieties such as vitamins A and E have high technical barriers and high industry concentration. On the supply side, DSM announced the divestment of the animal nutrition sector since 24, and the BASF Ludwig Port accident at the end of July drove a tight supply of vitamins A and E, and the export boom is high; on the demand side, domestic pig cycle profits have recovered, and there is room for improvement in domestic vitamin usage. Xinhecheng achieved cost reduction by improving upstream intermediate processes such as citral and linalol. In 2023, when prices are under pressure, the net interest rate for vitamin E was still as high as 28%, fully benefiting from price increases.

Regarding vitamin E, we have a different view from the market: even if BASF plants resume production in 2025, the negative impact on the price of vitamin E is relatively limited. We observed that Germany's vitamin E imports in 2023 nearly tripled from 2006, while the rest of the varieties did not change much. Considering the limited changes in animal husbandry demand in Germany, the reason for the sharp increase in imports may be due to the long-term aging of BASF's vitamin E production facilities. The actual output may be far lower than the 0.04 million tons of nominal production capacity claimed. It will still depend on imports in the future, so the impact of resuming production is limited.

Methionine: A feed additive with a market space of over 30 billion, and the company's layout of 0.18 million tons of liquid methionine is expected to contribute to the new volume. In 2023, global methionine demand exceeded 1.6 million tons. With technological breakthroughs by companies such as Xinhe became representative, methionine prices moved downward, and domestic methionine production and sales gradually increased. In the first half of 2024, Xinhecheng achieved full production and sales of 0.3 million tons of solid methionine, with a significant cost advantage. The company's investment in the construction of 0.18 million tons of liquid methionine is expected to contribute about 1.4 billion in revenue and 0.5 billion in net profit.

Flavors and fragrances: The global “olfactory economy” is recovering, and large-scale effects bring high profitability. The global market for flavors and fragrances exceeds 30 billion US dollars. In the long run, market growth is mainly driven by consumption upgrades in developing countries. In the short term, overseas fragrance consumption has recovered strongly since 2024, driving high growth in domestic fragrance exports. As the largest fragrance and fragrance enterprise in China, Xinhecheng has rich products and a high market share. The scale effect makes the company's gross margin significantly higher than that of competitors.

New materials: PPS localization promoters, laying out the PA66 industry chain to open up room for growth. The localization rate of key new material products such as PPS, high-temperature nylon, and adiponitrile is low. Benefiting from the development of lightweight new energy vehicles and consumer electronics, downstream demand is strong. Xinhecheng broke through PPS production technology and is currently leading in domestic production capacity; in terms of PA66, the company invested 0.25 million tons of hexanediamine and 0.48 million tons of new nylon materials at the Zhejiang Shangyu base, invested 10 billion to build adiponitrile and hexanediamine plants, and plans to expand nylon 66 production capacity. Relying on Tianjin Nangang butadiene supporting equipment, raw materials and transportation have cost advantages. According to the company's EIA data, the 0.48 million-ton nylon material in Shangyu, Zhejiang is expected to contribute 14.5 billion yuan in revenue and 2.1 billion yuan in net profit after delivery.

Profit forecast, valuation analysis and investment suggestions: We predict that from 2024 to 2026, the company will achieve revenue of 21.226/24.432/27.698 billion yuan, up 40.4%/15.1%/13.4% year on year; achieve net profit to mother of 5.376/6.092/6.861 billion yuan, up 98.8%/13.3%/12.6% year on year, corresponding EPS of 1.75/1.98/2.23 yuan, PE 12.6/11.1/ 9.9 times (based on the closing price on December 26), the first coverage gave a “Buy-B” rating.

Risk warning: macroeconomic risk, risk of worsening competition pattern, risk of new production capacity falling short of expectations, environmental and safety risks.