Performance review

1Q23 performance is in line with our expectations

The company announced 1Q23 results: revenue of 22 billion yuan, down 15% from the previous year; the net profit of the mother was 160 million yuan, which changed from profit to loss over the previous year, which was basically in line with our expectations.

We believe that the year-on-year change in the company's performance in 1Q23 from profit to loss was mainly due to: 1) inventory loss (international oil prices fell month-on-month in March 2023); 2) commodity sales fell about 10% year over year.

Development trends

The refining business may contribute to major profits throughout the year. We believe that the refining business is expected to become the company's main source of profit in 2023, and net profit has basically returned to the level of 2019, about 200 million yuan/month, mainly due to 1) China's export quota for the first batch of refined oil products increased 46% year-on-year to 18.99 million tons in 2023, and the company's export quota in 2023 is expected to increase sharply year-on-year (the quota given to the company by Sinopec); 2) domestic refined oil demand will return to the year-on-year expansion range in 2023: the annual year-on-year growth rate is about 6.2% to 13.74 million b/d (CICC Group forecasts).

The 2H23 chemical business is expected to improve. We judge that demand in the 1H23 chemical industry is still low, and the performance of the synthetic resin and plastics and synthetic fiber sectors will still be in a state of loss, but 2H23 performance is expected to improve month-on-month with the gradual improvement of China's macroeconomic economy.

The new materials project is progressing steadily, and may continue to contribute a large increase in performance over the next 2-3 years. 3Q22 The first domestic line of China's first 10,000-ton 48K large wire bundle carbon fiber project was put into operation at the Shanghai Petrochemical Carbon Fiber Industrial Base and produced qualified products, the quality of which reached the international advanced level. At the same time, the company expects the production capacity of 24,000 tons/year of raw wire and 12,000 tons/year of large wire bundle carbon fiber to be completed and put into operation in 2024. The company is one of the few enterprises in China that has a complete set of production technology for large wire bundles of carbon fibers, and benefiting from the rapid increase in demand for large wire bundles of carbon fibers brought about by the increasing size of wind power blades, the gross profit of large wire bundle carbon fiber is expected to remain high. Furthermore, the 250,000 tons/year thermoplastic elastomer project, a key project in Shanghai, progressed steadily. The second phase of the hydrogen fuel cell hydrogen supply center project was completed, and the construction of the first megawatt-scale photovoltaic power plant project was completed. We believe that as high-margin new material projects continue to be put into operation, the company is expected to obtain large incremental profits in the next 2-3 years.

Profit forecasting and valuation

We keep our 2023/2024 earnings forecast unchanged. The target price of A/H shares remains unchanged at $4.0 /HK$1.6, corresponding to price-earnings ratios of 44x/15x 2023 and 33x/11x 2024 and 17%/19% upward space, respectively, maintaining the “outperform the industry” ratings of the two markets. A/H shares are currently trading at 38/13x 2023 and 28/9x2024 price-earnings ratios.

risks

International oil prices have fluctuated greatly, and carbon fiber projects have fallen short of expectations.