The company is committed to industrial transformation, and its industrial layout is getting richer. Since the company clearly proposed the goal of building a “supplier of high-end chemicals and advanced materials” in 2021, it has accelerated the layout of the industrial sector. Currently, caprolactam, aerogel, PA66 and PBAT projects have been built. The propylene oxide project is about to be put into production, and projects such as coal-to-ethylene glycol and phase change energy storage materials are also under construction.
Performance perspective: The industrial sector is strongly correlated with the prosperity of the chemical industry, recovering with demand or showing high performance elasticity. In 2023, China's overall economy showed a slow recovery trend. Downstream demand was weak. The new production capacity of chemical industries such as nylon materials and degradable plastics has not been fully digested in recent years. Product prices and profits are at historically low levels, and the company's industrial sector is under phased pressure. Looking ahead, in 2024, China will insist on seeking progress through stability and progress, and break through first and later. Demand is expected to recover at an accelerated pace, and production capacity for the company's projects will also be released accordingly, demonstrating the elasticity of performance.
Among them, the adidinitrile project: marginal improvement in the competitive landscape, Tianchen Qixiang has significant advantages.
(1) In the short term, the increase in production capacity of hexinonitrile in 2023 was limited, and the pace at which domestic followers started production fell short of expectations; in October 2023, INVISTA issued an announcement planning to shut down the 520,000 ton/year adinitrile plant in the US. The competitive landscape is improving marginally, and there is no need to worry about the risk of overcapacity in the short term. Tianchen Qixiang, a subsidiary of the company, is at the forefront of the wave of localization of adiponitrile. The production capacity of 200,000 tons/year was successfully driven and produced high-quality products in July 2022, with a first-mover advantage.
(2) In the long run, considering the complex catalyst system of the adidinitrile process and the long-term commissioning of production lines to reduce costs, the company is expected to gradually transform the first-mover advantage into a cost advantage. Assuming extreme circumstances, the industry's construction/proposed production capacity is successfully put into operation by 2030, then we predict that the minimum requirement for full production of the Tianchen Qixiang project is that China's PA66 demand will reach 1,131 million tons, corresponding to the requirements for PA66 demand CAGR +5.7% from 2023 to 2030 (if the company expands production to 300,000 to 500,000 tons, the corresponding requirements CAGR +7.3% and +10.7%).
Valuation perspective: The company is competitive in the chemical industry. The company relies on the extension of its main engineering business to the industrial sector. The investment model focuses more on investment efficiency than traditional chemical companies, but the risk is high; at the management level, the reaction is that the production process has significant advantages and a short payback period, but the downturn period of the industry is difficult to transmit and absorb upstream and downstream pressure through the entire industry chain layout. The company makes up for shortcomings through equity management and collaborative layout of key raw materials, etc., and has strong competitiveness judging from the implementation of caprolactam projects.
Maintain a “buy” rating. The company's main engineering business is running steadily, and the industrial project layout is getting richer, and the economic bottoming out stage is showing high performance flexibility. The EPS from 2023 to 2025 is expected to be 0.97, 1.18, and 1.36 yuan respectively, corresponding to the PE of 6.4, 5.3, and 4.6 times lower than the current stock price.
Risk warning: demand recovery falls short of expectations, progress of industrial projects falls short of expectations, project repayment risk