Description of the event

On the evening of October 24, Hengli Petrochemical released its 2024 three-quarter report, achieving revenue of 177.764 billion yuan, +2.69% year over year, achieving net profit of 5.105 billion yuan, or -10.45% year on year; deducting non-net profit of 4.627 billion yuan, or -7.04% year on year. Q3 achieved revenue of 65.225 billion yuan in a single quarter, +2.42%/+20.46% YoY; realized net profit of 1.087 billion yuan, or -59.01%/-42.14% YoY; net profit of 1.085 billion yuan after deducting non-return to mother was 1.085 billion yuan, or -59.86%/-37.05% YoY.

Fluctuations in crude oil and falling aromatics spreads affected single-quarter profits

In terms of profitability indicators, Q3 2024 gross profit margin was 7.78%, -5.78pct/month-over-month; net profit margin was 1.67%, and -2.50pct/month-on-month.

ROE was 1.79%, and profit narrowed month-on-month.

In terms of expenses, the sales expense rate/management fee rate/financial expense ratio for the third quarter of 2024 were 0.22%/0.67%/1.86%, respectively, compared with +0.07 pct/-0.39 pct/-0.46 pct. The three fees were well controlled. The R&D cost rate was 0.69%, +0.12pct year-on-year, and the company's R&D investment increased.

In terms of volume, sales of refined products, PTA/ new materials in the third quarter were +9.7%/-13.5%/+16.7%, and -9.2%/+62.6%/-11.9% month-on-month. Due to the low base due to Q2 maintenance, sales of refined and chemical products increased significantly month-on-month, while PTA and sales volume declined month-on-month.

In the third quarter, crude oil was weighed by weak economic data from China and the US. Although crude oil rebounded steadily due to the escalation of the geopolitical conflict in October, the overall trend was declining. In the third quarter of 2024, the average price of WTI crude oil was 75.20 US dollars/barrel, down 6.81% from the previous month, down 8.17% year on year; the average price of Brent crude oil was 78.39 US dollars/barrel, down 7.82% from the previous month and 8.54% year on year. Refining and chemical companies are generally affected by inventory losses. Looking at the price difference, the price difference between supply and demand for olefin prices is relatively stable. Demand falls short of expectations during the peak season, profits for aromatic hydrocarbons have declined markedly, and profits for refined oil products, coal chemical products, and new materials are stable. The four main raw materials of coal/butanediol/ crude oil/PX were -13.40%/-21.91%/+3.02%/-2.36% year-on-year in the first three quarters.

Taking advantage of platform-based cost advantages, new materials projects have fully blossomed

Based on the good cash flow of refining and chemical integration, the company continues to increase capital expenses to ensure the company's future growth. The company chose to lay out new materials such as high-end polyester, functional films, degradable materials, and new energy chemicals, which are currently in short supply in China, and accelerate domestic replacement of restricted links such as “stuck necks” and “production capacity bottlenecks” based on its C2-C4 large chemical raw material platform advantages and many years of R&D accumulation.

The company's 1.6 million tons/year high-performance resin and new materials project is expected to be fully put into operation in the second half of 2024. The fine chemical project focuses on the downstream extension of the carbon 2 industry chain and improvement of production capacity related to coal chemistry. It mainly includes bisphenol A, polycarbonates, electronic grade DMC, isopropyl alcohol, ethanolamine, ethylene amine, polyformaldehyde, acetic acid, PTMEG, etc., to achieve efficient penetration and deep links from raw material supply to process technology to the consumer market, reducing the proportion of the company's bulk chemicals and new material products.

In addition, the company is currently constructing proposed projects. The 12-line functional film project at the Suzhou Fenhu base has been put into operation one after another, and the other 12 functional film projects and lithium battery diaphragm projects at the Nantong base are progressing steadily. It is expected that all of the projects will be completed and put into operation in the first half of 2025. The completion and commissioning of projects related to the Fenhu base and the Nantong base will lay a solid foundation for Kanghui New Materials to become the world's largest functional membrane materials company with the largest production capacity and the most advanced process technology.

Investment advice

Due to factors such as recent increases in crude oil price fluctuations and demand falling short of expectations during the peak season, we expect the company's net profit to be 7.245 billion yuan, 11.191 billion yuan, and 11.466 billion yuan (original value 8.967 billion yuan, 12.94 billion yuan, 13.188 billion yuan) in 2024, 2025, and 2026, respectively. Corresponding to the current stock price PE is 14.00X/9.06X/8.85X, respectively, to maintain” “Buy” rating.

Risk warning

Crude oil and coal prices fluctuate greatly;

The construction of the project fell short of expectations;

force majeure;

Macroeconomic downturn.