2Q24 results are in line with our expectations

The company announced 1H24 results: revenue of 48.215 billion yuan, +30.7% year-on-year; net profit to mother of 1.065 billion yuan, +911.4% year-on-year. That is, 2Q24 revenue was 27.103 billion yuan, +29.2% YoY, +28.4% month-on-month; net profit to mother was 0.485 billion yuan, -18.7% YoY and -16.3%. The results were in line with our expectations.

1H24 produces 6.36 million tons of polyester filaments (+45.1% YoY) and sells 5.87 million tons (+32.0% YoY); the net profit per ton of polyester filament is about 112 yuan. The company's main business, polyester filament and PTA, achieved a profit of 0.659 billion yuan, and Zhejiang Petrochemical's investment income of 0.406 billion yuan.

2Q24 produced 3.23 million tons of polyester filament (+31.5% YoY, +2.9% QoQ) and sold 3.29 million tons (+30.0% YoY, +27.2% QoQ); the net profit per ton of polyester filament was about 71 yuan, a decrease of 56 yuan over the previous month. The main business, polyester filament and PTA, achieved a profit of 0.233 billion yuan, and Zhejiang Petrochemical's investment income of 0.252 billion yuan.

Development trends

Demand is gradually starting up during the peak season, and I am optimistic that the long silk boom will rise. Since late May, long silk leaders have jointly reduced the burden and raised prices to guarantee the industry's profit level; the price difference improved significantly in June. We expect the company's profit for the second quarter to come mainly from June. Downstream demand has been weak since entering the third quarter, compounded by declining raw material prices, leading companies are under some pressure to raise prices; according to immediate price spread estimates, the profit level of filament has remained stable, but we expect the company to lose some inventory. Demand for the recent peak season has begun, and the operating rate of looms and balusters in Jiangsu and Zhejiang has gradually rebounded; furthermore, POY/FDY/DTY inventory in Jiangsu and Zhejiang has dropped below 23.0/21.5/29.5 days, and inventory pressure is not significant. We expect the filament industry to maintain profit levels as terminal demand improves. Since September, the industry has abolished tiered sales rebates and limited regional freight subsidies, but we expect that leading companies will still agree to reduce the burden or raise prices, and are more determined to maintain the prosperity of the industry.

Zhejiang Petrochemical's profit is low, and there may be an improvement on the cost side in 3Q24. Oil prices rose in 2Q24, and the price of Brent crude oil increased by 3.3 US dollars/barrel from month to month, and overall refining profits were still at a low level. Among them, 2Q24 price differences such as pure benzene, ethylene oxide, and ethylene glycol rose significantly, but olefin profits were still low. Oil prices continued to decline in 3Q24, and profits from olefin products are picking up. We expect Zhejiang Petrochemical's cost side to improve.

Profit forecasting and valuation

As the decline in oil prices in the third quarter affected the profits of the filament industry chain, we lowered our net profit in 2024 and 2025 by 17.5% and 15.2% to 2.801 billion yuan and 4.419 billion yuan. The current stock price corresponds to 10.1 times the 2024 price-earnings ratio and 6.4 times the 2025 price-earnings ratio. The target price was lowered by 15.4% to 16.5 yuan, but considering that the company has the highest filament production capacity in the industry and has outstanding advantages in industrial chain integration, we maintained an industry rating. The target price corresponds to 14.2 times the 2024 price-earnings ratio and 9.0 times the 2025 price-earnings ratio. There is 41.1% upward space compared to the current stock price.

risks

The recovery of the long-silk economy fell short of expectations; industry leaders continued to expand production on a large scale; and oil prices fell sharply.