Earnings grew steadily year on year in 2023, while 1Q24 profit declined year on year and reversed losses month-on-month. In 2023, the company achieved operating income of 140,440 billion yuan, an increase of 119.87% over the previous year, and realized net profit of 717 million yuan, an increase of 17.35% over the previous year. In a single quarter, 1Q23-4Q23's net profit to mother was 738 million yuan, 993 million yuan, 805 million yuan, and -1,819 billion yuan, respectively. In the first quarter of 2024, the company achieved operating income of 36.739 billion yuan, a year-on-year increase of 24.34%; realized net profit of 247 million yuan, a year-on-year decrease of 66.53%, reversing losses from month to month. The company's gross profit for the first quarter was relatively stable year on year. The decline in profit was mainly due to a year-on-year increase in financial expenses and asset impairment losses.
Asset impairment affects profits. In 2023, the company experienced asset impairment losses of 2.210 billion yuan, all due to inventory price depreciation losses; of these, inventory products accrued depreciation of 1.72 billion yuan, while raw materials, in-progress products, semi-finished products, and in-transit materials amounted to 277 million yuan, 175 million yuan, and 39 million yuan respectively. In the first quarter of 2024, the company experienced asset depreciation of 504 million yuan, all due to inventory depreciation losses.
Refining and chemical reversal losses in 2023. According to subsidiary companies, in 2023, Shenghong Refining & Chemical achieved net profit of 481 million yuan, reversing losses over the previous year, increasing profit of 1,267 million yuan; Silbon achieved net profit of 751 million yuan, a year-on-year decrease of 677 million yuan; and Honggang Petrochemical (PTA) lost 200 million yuan, turning a year-on-year loss.
Focusing on the “1+N” strategy, focusing on new energy and new materials, key projects are progressing steadily. The company has 16 million tons/year integrated refining and chemical equipment, 2.4 million tons/year methanol-to-olefin unit (MTO), and 700,000 tons/year PDH unit to achieve full coverage of the three olefin production processes of “oil, coal and gas”. The company is steadily advancing the layout of the new materials industry chain, including 750,000 tons/year of EVA, 300,000 tons/year of POE and 200,000 tons/year of α-olefins, POSM and polyols, degradable plastics Phase I, lithium iron phosphate, etc., to provide future growth.
Shenghong Petrochemical Industry Group, a wholly-owned subsidiary of the company, plans to introduce Saudi Aramco as a strategic investor. On September 27, 2023, the company signed a framework agreement with Saudi Aramco Asia. Saudi Aramco or its affiliates intend to become a strategic investor in Shenghong Petrochemical Industry Group, a wholly-owned subsidiary of the company, and plans to hold a minority interest in it. The two sides intend to cooperate in long-term procurement and supply of raw materials such as crude oil, sales of chemical products and fuel products, and licensing of high value-added technology. We believe that cooperation between the two sides will, on the one hand, help stabilize the company's procurement of raw materials, strengthen technical cooperation, etc., and on the other hand, help Saudi Aramco increase the chemical conversion rate.
Profit forecast and investment rating: We expect the company's EPS in 2024-2026 to be 0.44, 0.69, and 0.96 yuan, respectively, and 5.69 yuan for BPS in 2024. Referring to the valuation level of comparable companies, they were given 2.0-2.5 times PB in 2024, corresponding to a reasonable value range of 11.38-14.23 yuan (corresponding to 2024 PEG 0.17-0.21), maintaining a “superior to market” rating.
Risk warning: Crude oil prices fluctuate greatly; product prices fluctuate greatly; progress of projects under construction falls short of expectations.