The Global economy in the Industry has been in a downturn and has dragged on until now, with high prices of oil and coal causing profits in the industry to shift upstream, and the profitability level of bulk chemicals has reached a historical low.
According to Zhitong Finance APP, Founder Securities has released a Research Report stating that national policies have been consistently strong recently, and domestic demand is expected to regain its role as the main driving force for growth. In the window period of new and old kinetic energy transformation, the reversal of chemical prosperity may not be far off. For basic chemicals, there is optimism regarding core Assets and opportunities arising from regional supply-demand imbalances under the trend of de-globalization; in petrochemicals, it is advisable to pay attention to leading symbols that possess strong profitability resilience and are currently at the production realization window, as this type of company’s counter-cyclical expansion is beneficial for maintaining its leading position, and when the industry's prosperity reverses, the performance elasticity will be greater.
The main viewpoints of Founder Securities are as follows:
The reversal of chemical prosperity may not be far off.
Chemicals are the foundation of the manufacturing industry and serve as a barometer for assessing the economic prosperity of a nation. After entering 2022, the 'liquidity' effects in Europe and the USA have gradually weakened, with the resurgence of geopolitical conflicts in Europe, a reversal in supply-demand relationships, and a global downturn in the industry that has persisted to this day. The high prices of oil and coal have shifted industrial profits upwards, and the profitability of major chemicals has reached historical lows. Despite the short-term difficulties in alleviating pressures from both the cost side and the supply side, recent national policies have been consistently strong, and future domestic demand is expected to regain its role as the main driving force for growth. In the window period of new and old kinetic energy transformation, the turnaround in prosperity may not be far off.
There is optimism regarding core Assets and opportunities arising from regional supply-demand imbalances under the trend of de-globalization.
There is optimism for the opportunity of core chemical Assets to lead the reversal at the industry bottom; currently, de-globalization has become a major trend, with the de-industrialization process in Europe accelerating in recent years, and trade protectionism in the USA rising again. There have also been increasing anti-dumping investigations by Europe and the USA against products from China that have competitive advantages, which will exacerbate the regional supply-demand imbalance in the global chemical trade. For Chinese chemical companies, this presents both crises and opportunities: firstly, it is beneficial for domestic production capacities that are not affected by sanctions to expand overseas; secondly, it is favorable for the domestic import substitution of high-end products.
The petrochemical sector is advised to focus on leading symbols that have strong profit resilience and are currently in a production realization window.
On one hand, these assets are currently valued at relatively low levels, and leading large-capacity backgrounds are often accompanied by strong cost advantages, which benefit their ability to maintain higher than industry profit resilience over long cycles. This also offers a margin of safety in the current context of weak realistic expectations turning strong. On the other hand, such companies' counter-cyclical expansion helps maintain their leading position, allowing for greater performance elasticity when the industry experiences a turnaround.
Investment recommendation:
It is recommended to focus on core assets Wanhua Chemical Group (600309.SH) and Shandong Hualu-Hengsheng Chemical (600426.SH);
white horses in the petrochemical sector include Satellite Chemical (002648.SZ) and Ningxia Baofeng Energy Group (600989.SH);
Symbols that benefit from de-globalization include Longyan Zhuoyue New Energy (688196.SH), Yaxiang Co., Ltd. (301220.SZ), Xinxiang Richful Lube Additive (300910.SZ), and Valiant Co.,Ltd (002643.SZ). At the same time, it is advisable to pay attention to Tongkun Group (601233.SH) and Xinfengming Group (603225.SH) where the supply side is likely to optimize.
Risk Warning: Macroeconomic performance may not meet expectations, the chemical production capacity cycle may change unexpectedly, oil prices may fluctuate significantly, and there are safety and environmental risks in the chemical industry.