Key points of investment
Incident: Fushun released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 6.018 billion yuan, a year-on-year decrease of 0.31%; realized net profit of 197 million yuan, a year-on-year decrease of 18.78%; realized net profit without return to mother of 192 million yuan, a year-on-year decrease of 18.63%; and a gross profit margin of 6.70%, an increase of 0.45 pct year-on-year. 2024Q1 achieved revenue of 1,639 billion yuan, up 28.49% year on year, down 0.14% month on month; realized net profit of 70 million yuan, up 40.06% year on year and 50.85% month on month; realized net profit without return to mother of 64 million yuan, up 29.63% year on year, up 42.07% month on month; gross profit margin of 7.94%, up 0.35 pct year on year, up 1.74 pct month on month.
Volume and price rose sharply in 24Q1, and performance increased significantly. Polymerization's main products are nylon slices. In 2023, nylon slices achieved revenue of 6.014 billion yuan, a year-on-year decrease of 0.30%; gross profit margin was 6.70%, up 0.45 pct year on year; output was 471,900 tons, up 4.03% year on year; sales volume was 477,800 tons, up 6.04% year on year; sales price was 12,600 yuan/ton, down 5.98% year on year. The volume and price of 2024Q1 nylon chips rose sharply, with an output of 125,300 tons, up 14.07% year on year; sales volume was 121,000 tons, up 15.98% year on year; average sales price was 13,500 yuan/ton, up 11.02% year on year and 3.89% month on month; average price of raw caprolactam was 11,900 yuan/ton, up 10.38% year on year and 5.74% month on month; revenue was 1,639 million yuan, up 28.76% year on year.
The increase in the raw material self-sufficiency rate is compounded by the expansion of the downstream market, and demand for nylon is growing steadily. Nylon slices are widely used downstream. In terms of civilian nylon fibers, market consumption and export demand continues to increase due to market differentiation and continuous development and expansion of new varieties. Demand for middle and high-end products has risen sharply, personalized demand for outdoor sports is increasing, and there is huge room for market growth. In terms of engineering plastics, demand for PA6 engineering plastics will continue to grow due to the development of industries such as automobiles, electronics, machinery, and high-speed rail in China. In particular, demand for high-end, high-performance nylon 6 engineering plastics will grow. In the film sector, it is expected that China's nylon film production will continue to grow in the future, driven by increased demand in the food packaging sector. According to the Polymerization Annual Report and Convertible Debt Collection Instructions, as the world's largest demand for nylon 6 products, the demand for nylon 6 products in China continued to grow at a high rate. From 2012 to 2023, China's apparent consumption of nylon 6 slices increased from about 1.96 million tons to 4.718 million tons, with a compound growth rate of about 8.29%, and the growth rate far exceeded the overall global level. With the advancement of technology in the domestic nylon 6 industry, product import dependence continues to decline, and the trend of import substitution is obvious. The import volume in 2023 was only 226,200 tons, and the output and apparent consumption in 2023 were 4.975 million tons and 4.718 million tons respectively, up about 10.95% and 9.93% year-on-year. In terms of upstream raw materials, as Sinopec broke the monopoly situation of a few foreign companies and developed complete caprolactam production technology with independent intellectual property rights, domestic caprolactam production capacity and production have increased rapidly. China's caprolactam production increased from 720,000 tons in 2012 to 4.433 million tons in 2022, with a compound annual growth rate of 20.01%. At the end of 2023, the domestic production capacity of caprolactam reached 6.51 million tons, the annual output is 5.05 million tons, and the apparent consumption is 5.11 million tons.
The project progressed steadily, and production capacity increased. By the end of 2023, Polymerization had a production capacity of 510,000 tons of nylon 6, of which the first phase of Hangzhou was overloaded, 70,000 tons were changed from leasing to own production in September 2023, and the Tengzhou Phase I 180,000 ton line was put into operation in 3 lines in December 2022, April 2023, and June 2023, respectively. In 2023, the company achieved 470,000 tons of nylon slice production. Currently, the main projects under construction include 180,000 tons of nylon 6 in the second phase of Tengzhou, 124,000 tons of nylon 6 and copolymerized nylon in the second phase of Hangzhou, etc., which will further expand the company's nylon 6 production capacity. At the same time, the 80,000 tons of production capacity under construction in Zibo will expand the category to nylon 66 products. Project construction is progressing steadily, and the scale of production capacity continues to increase, boosting future growth.
Investment advice: Polymerization focused on the production and sale of nylon 6 slices, and later expanded to nylon 66 products. The industry boomed against the backdrop of structural increases in demand for nylon, and project construction and commissioning helped increase production and sales. The company's revenue for 2024-2026 is expected to be 69.90/88.45/10.405 billion yuan respectively, up 16.1%/26.5%/17.6% year on year, net profit to mother of 2.85/3.80/486 million yuan respectively, up 44.9%/33.2%/28.1% year on year, and corresponding PE is 12.3x/9.3x/7.2x respectively; the first coverage gave it a “increase in holdings - B” rating.
Risk warning: demand falls short of expectations; industry competition exceeds expectations; raw materials fluctuate greatly; project progress is uncertain.