Investment highlights

For the first time, Baofeng Energy (600989) was covered to outperform the industry. The target price was 20.30 yuan. Based on the P/E valuation method, it corresponds to a price-earnings ratio of 20.9x/10.0x in 2024-2025. The company is a benchmark domestic coal-to-olefin enterprise. The Inner Mongolia project is progressing steadily, and the company's revenue and profit are high and growth certainty is high. The reasons are as follows:

The cost advantage of coal-based olefins is outstanding. In an energy environment where oil prices are stronger than coal prices, the cost advantage of coal-to-olefin is quite prominent. The domestic olefin industry has been at a low point for more than two years, and the price of polyolefins has fallen below the cost of oil-based olefins, and there is little pressure for a further sharp decline. Due to its path advantage, the profitability of coal-to-olefin is currently prominent; and benefiting from the adjustment of domestic coal prices from a higher level, we expect that the profit of coal-to-olefin will continue to expand in 2024.

The profit certainty of the Inner Mongolia project is high. Thanks to lower coal prices in Ningdong and Inner Mongolia, as well as the company's excellent ability to control investment and construction costs, the company leads the profit level in the coal-to-olefin industry. The project currently being promoted to produce 3 million tons of olefins per year in Inner Mongolia uses DMTO-III technology, further reducing the investment cost per ton, and we think it is expected to achieve a higher level of profit than the East Ningning base. This technical route has been verified in the Ningdong Phase III project, and there is a high degree of certainty that production will be achieved in 4Q24.

After the project is put into operation, the company's olefin production capacity will increase to 5.2 million tons/year, making it the company with the largest coal-to-olefin production capacity.

The olefin industry is expected to gradually break out of its trough after 2026. The olefin industry has been sluggish since 2022. Apart from being affected by global macroeconomic fluctuations, it is more important that China's investment in olefins and polyolefins remained high in 2019-2025, and production capacity investment was much higher than the increase in demand. Based on the pace of investment in the domestic olefin industry and the judgment that global high-cost olefin production capacity has begun to withdraw, we believe that the olefin and polyolefin industry is expected to gradually break out of its trough after 2026. The company expects to produce more than 5.7 million tons of polyolefins after 2025, which is highly flexible during the boom cycle.

What is our biggest difference from the market? The company's growth has been high in the past few years, and the revenue and profit drivers have mainly relied on large capital expenditure to build coal-to-olefin production capacity. After 4Q24's Inner Mongolia project is put into operation, the company's large capital expenditure will come to an end. We believe that the company's free cash flow situation is expected to improve significantly at that time, and the company's dividend and dividend ratio will have great potential for improvement after 2025.

Potential catalysts: The Inner Mongolia project was successfully put into operation; the oil-coal price gap widened further.

Profit forecasting and valuation

We expect the company's 2024-2025 EPS to be 0.97 yuan/2.03 yuan, respectively, and the CAGR is 62.2%.

The company's current stock price corresponds to the 2024-2025 price-earnings ratio of 17.8x/8.5x. The first coverage gave a “outperforming industry” rating, with a target price of 20.3 yuan, corresponding to the 2024-2025 price-earnings ratio of 20.9x/10.0x and an upward margin of 17.1%.

risks

The risk of price fluctuations in polyolefin products; the risk of fluctuations in the price of raw coal; the risk of uncertain access to coal mines; the risk of fluctuations in coking coal and coke prices; the risk of project approval and construction falling short of expectations.