Key points of investment:

Company announcement: In the first half of 2024, the company achieved operating income of 14.041 billion yuan (YoY +21.63%), net profit attributable to mother of 1.171 billion yuan (YoY +503.72%), after deducting non-return net profit of 1.206 billion yuan (YoY +588.74%). Among them, Q2 achieved operating income of 7.288 billion yuan (YoY +46.86%, QoQ +7.93%), net profit of 0.603 billion yuan (YoY +570.4%, QoQ +6.21%), and net profit without return to mother of 0.626 billion yuan (YoY +589.16%, QoQ +7.99%), which is in line with expectations.

The 24H1 butyl alcohol industry chain boom increased significantly year-on-year, compounded by a decline in the cost side, and the company's performance increased significantly. The but-octanol product boom declined to a high level in 2024, but the Q2 boom for some downstream products picked up, and the company's overall price spread improved significantly year-on-year. According to Baichuan statistics, the average market prices of the company's main products butanol, octanol, isobutyral, NPG, formic acid, caprolactam, polycarbonate, and silicone 24H1 changed by +10.7%, +13.24%, +17.78, +2.98%, -22.73%, +7.56%, -0.13%, and -7.86%, respectively. Judging from the performance contributions of subsidiaries in various business segments, polyalcohol, formic acid, chloromethane, polyamide, methylamine, and PC subsidiaries achieved net profit of 9.03, 0.68, 0.63, 0.026, -0.029, and 0.065 billion yuan respectively during the reporting period. Among them, the new supply of butyl octanol has been limited in recent years, and market supply and demand are tight, and the boom has improved markedly. On the cost side, the average market prices of coal, pure benzene, propylene, and bisphenol A 24H1 changed by -15.12%, +23.51%, -1%, and -0.21% year-on-year respectively. Among them, coal costs declined significantly, and profits of coal products increased. Overall, the company's 24H1 profit improved significantly year on year, and gross margin increased 7.88pct year on year to 17.99%.

The butyl octanol boom declined to a high level in 24Q2, but downstream products in the butyl octanol industry chain, such as isobutyraldehyde and NPG, took over, and coal costs continued to improve.

In the second quarter, “gold three silver four” led to a recovery in demand for some terminals, compounded by disruptions in overseas installation maintenance, and boosted the boom in some products. According to Baichuan statistics, the average market prices of the company's main products butanol, octanol, isobutyral, NPG, formic acid, caprolactam, polycarbonate and silicone changed by -2.2%, -19%, +7.4%, +10.1%, -10.7%, -2.8%, +3.5%, and -11.2%, respectively, from 24Q1. Butyl octanol is affected by expectations of new production capacity, and downstream storage continues, and overall demand is weak; due to maintenance of overseas installations, the supply side of downstream products in the industrial chain such as NPG and isobutyraldehyde has strong support, and the boom has increased. On the cost side, the prices of the main raw materials coal, pure benzene, propylene, and bisphenol A changed by -6.2%, +9.5%, +0.8%, and +3% month-on-month, respectively. The company's Q2 gross margin fell slightly by 0.76pct to 17.62% month-on-month, and remained at a high level.

The project under construction progressed smoothly, the accident investigation was carried out, and the company still has significant room for long-term development. The company's new projects continue to advance to support long-term development. The high-end fluorine materials and 0.2 million tons/year BPA project has been completed and put into operation in 2022, the 0.2 million tons/year DMF project has been put into operation in 2023, the 0.3 million tons/year caprolactame-nylon 6 project has been handed over, and 0.4 million tons/year silicone is expected to be gradually completed and put into operation within 2024.

At the same time, the investigation report on the safety accident of the company's hydrogen peroxide subsidiary came to fruition, and no one responsible person was a company executive. There will be no significant impact on the normal operation of the company in the future, and the hydrogen peroxide installation is also expected to gradually resume work and resume production. In the future, it is expected that the industrial chain will continue to be improved and a first-class new chemical materials industrial park will be built if the energy use of chemical raw materials from coal is not included in total energy consumption control, and the assistance and support of neutralization are added.

Profit forecast and investment rating: Maintaining the profit forecast for 2024-2026, it is expected to achieve net profit of 2.189, 2.359, and 2.56 billion yuan. The corresponding PE valuations are 9X, 9X, and 8X, respectively, maintaining the “gain” rating.

Core hypothetical risks: New project commissioning falls short of expectations; downstream demand falls short of expectations.