Future judgment of chemical industry prosperity

1 Supply side: fixed asset investment slowed down, and construction in progress began to fall

From the perspective of capital expenditure and the speed of new production capacity, the last round of prosperity has led to a new round of capital expenditure in the chemical industry from 2018, and 2018-2020 is the main time point of concentration of this round of expenditure, and the refining and chemical industry is the main direction of expenditure. At present, this round of capital spending has begun to show a significant year-on-year decline. Among them, chemical fiber fixed asset investment has declined sharply, chemical raw materials and their products, rubber and plastic products fixed asset investment growth has begun to slow down, from the industry inventory situation, chemical raw materials and products inventory close to 2016 low, chemical fiber inventory close to nearly five years low.

2 Demand side: The downstream demand for chemical industry is stable

As a midstream industry, the downstream demand covers clothing, food, housing and transportation. From the perspective of various demand sub-industries, the decline in automobile production and sales has narrowed, the production and sales of refrigerators have rebounded, the toughness of real estate is strong, the new construction has increased, the completion has gradually narrowed, and the sales area has rebounded. Cloth and yarn production declined year-on-year, and overall downstream demand for chemical industry stabilized.

3 Environmental protection and safety supervision: strict supervision has become the new normal

From 2016 to 2019, the supply-side impact brought about by the tightening of safety supervision and environmental protection policies in the chemical industry has entered the process of weakening at the margin, and the threshold of the overall industry has been significantly raised, while the level of enterprise safety and environmental protection governance in the industry has also been significantly improved, which may gradually transition to a steady state.

4 Concentration: The concentration of the head enterprise has increased significantly

In the past few years, under the background of supply-side reform, the concentration of the chemical industry has shown a significant upward trend, and the new capacity of the industry is mainly concentrated in the head enterprises. Taking listed companies in the industry as an example, the top 10% of chemical companies account for 40% of the revenue of all listed chemical companies, and profits and projects under construction are more than 50%. Both figures represent an increase of 10 percentage points from five years ago. We expect this trend to continue and possibly accelerate in the future.

5 Conclusions

1) Capital expenditure on the supply side of the chemical industry is still in the expansion cycle, but the year-on-year growth rate has weakened significantly, and the growth rate on the supply side of other industries has narrowed except the large refining and chemical industry.

2) The demand side is at the bottom except for real estate, and the future demand is expected to bottom out or gradually recover.

3), environmental protection and safety supervision will continue to impact, mainly for the fine chemical industry, the impact margin will gradually weaken.

4) Increased concentration, 10% of the leading market share of more than 50% and is expected to further accelerate expansion.

5) From the point of view of product prices, bulk products are in the bottom stage, and are expected to recover upward, but the strength may be small.

Therefore, it is believed that the change of the core profitability of the chemical industry will gradually evolve from the original industry supply and demand boom to the cost ability and pricing ability of enterprises. In the past, the chemical cycle analysis often focused on the industry beta, picking out the industry with an upward boom and buying the company with the greatest flexibility, while the current and future chemical cycle analysis focused on the company's alpha, buying the industry leaders with declining costs and increasing pricing power.

Big chemicals: Buy the leading companies that have stood out at the bottom of the cycle

1 Basic chemical: Optimistic about the core competitiveness of outstanding growth of white horse leading companies

The chemical industry has entered the Matthew effect stage, with the core competitiveness and moat of the excellent white horse company even in the industry boom in the medium and low can also have the scale of cash inflows to support the sustainable growth of the medium and long term, while relying on the extension of the industrial chain integration, market and technology related diversification, continue to expand its competitive advantage and moat. Therefore, we suggest that investors continue to pay attention to the chemical industry in the core advantages of outstanding, excellent corporate governance, competitiveness continues to expand the growth of white horse leading companies, recommend Wanhua Chemical, Hualu Hengsheng, Sanyou chemical, Linglong tire.

Wanhua Chemical: continue to force research and development innovation, optimistic about the company's continued growth

Optimistic about Wanhua Chemical development into "China's BASF" : From the perspective of BASF's development history and industrial chain layout, it takes naphtha as the main raw material, steam cracking device as the core device, and extends downstream into chemical, characteristic products, functional materials, agricultural solutions and other subdivisions. The overall breadth and depth of the industrial chain are more than Wanhua, and the business layout is broader and the integration degree is higher. The proportion of BASF's traditional chemicals business has fallen to 25%, and the proportion of new materials and characteristic products has reached 57%, which is also the result of BASF's century-old enterprise constantly optimizing the industrial structure and layout.

Wanhua is currently inferior to BASF in the breadth and depth of the industrial chain, polyurethane business accounted for 54.5%, new materials accounted for only 9.07%, the gap is obvious, but Wanhua has the advantage of late, product structure layout will be more planning and development speed will be faster, easier to make their own characteristics. For example, in the field of polyurethane, Wanhua has the whole industrial chain of "IP-IPN-IPDA-IPDI" special isocyanates (HDI, HMDI and IPDI).

From the perspective of future strategic layout, BASF is shifting from the production of functional materials to providing solutions, while Wanhua is shifting from the production of traditional chemicals to expanding the market share of functional new materials. Wanhua's future development mainly focuses on the C2/C3/C4 industry chain and polyurethane industry chain to do the extension of high value-added products, nutrition, flavor and fragrance business, new material business, special coatings, water-based coatings business are all possible directions.

Continuous R&D and innovation, rapid growth of fine chemical and new material business: We believe that the new production of PC, TDI, MMA-PMMA and other heavy products in 19 years, the global sales volume is close to or more than 100 billion yuan, and the global oligopoly pattern, while the future water-based coatings, synthetic flavors, SAP and other products will continue to provide protection for their growth. Cash flow from operating activities remained high and capital expenditure continued to increase to ensure future growth: In the past 19 years, the company's net profit declined more than the same period last year, still maintained a basically flat operating cash inflow, polyurethane industry chain extension and supporting projects and ethylene projects at the same time to start construction is the main reason for the company's investment activities of cash flow increased. Optimistic about the company in the continuous research and development innovation and capital investment, the future with sustainable growth ability.

Profit forecast and investment advice: It is estimated that the company's net profit from 2019 to 2021 will be 102.59/122.25/15.381 billion yuan, corresponding to 16.0, 13.4 and 10.7 times PE respectively

Hualu Hengsheng: domestic high-quality coal chemical industry leading enterprises

Cost advantages brought by technology and management: 1) The company uses advanced clean gas technology to use bituminous coal (lignite) with lower price as the main production raw material and continuous technological transformation; 2) "one head and many lines" industrial chain advantage, flexible production; 3) Outstanding cost control ability, the company's period expense rate and management expense rate are only about half of comparable companies in the same industry.

Cyclical risk is gradually released: at present, most of the company's product prices have been lower than the historical average price, and there is little room for downward decline. The two historical lows of the company's products appeared around the beginning of 2010 and the beginning of 2016. In 2010, the company's main product structure was 1.2 million tons of ammonia alcohol, 1.5 million tons of urea, 250,000 tons of DMFand 350,000 tons of acetic acid. In 2016, the product price reached a new low, but the company's net interest rate and quarterly annualized ROE were about 7.5%, not only no new low but much higher than the level in 2010. The company's products in 2016 compared with 2010 more acetic acid expansion, compound fertilizer, adipic acid, melamine and butyl octanol; Some of these products, such as expanded acetic acid, adipic acid and other products, will increase ROE; More importantly, during this period, the company transformed and replaced the boiler, air separation and synthetic ammonia equipment, upgraded the technology, and the product cost continued to reduce, and the overall ROE was increased.

Sanyou Chemical: soda viscose head, waiting for the boom

The company is a domestic soda ash and viscose leading enterprise, with chemical fiber, soda ash, chlor-alkali, silicone four main businesses and supporting thermoelectricity, raw salt, alkali stone and other circular economy system of the industry leading enterprises, and the first in the country to "two alkali and one chemical" based, heat supply, fine chemicals and other as a supplement of the relatively perfect circular economy system, industrial synergy. It has a production capacity of 3.4 million tons of soda ash, 780,000 tons of viscose staple fiber, 530,000 tons of caustic soda, PVC55,000 tons and 200,000 tons of silicone.

From the perspective of the company's various businesses, viscose prices have reached a historic low, and the viscose expansion cycle is nearing an end, and industry supply and demand are expected to improve. The new capacity of soda ash from 2020 to 2021 is less, and the new capacity of chlor-alkali in 2020 is about 3%, and the strong toughness of real estate supports downstream demand; Silicone production expansion is more, but the price is close to the low point in 2016, and there is little room for downward movement.

Linglong Tire: The national tire layout is global, and the performance is strong

The company is the first in the profitability of the A-share tire sector, and the only tire sector to be included in the three major international indexes (MSCI, FTSE Russell, S&P Emerging Markets). In Q3 2019, the company achieved operating income of 12.509 billion yuan, an increase of 13.3%. Net profit was 1.214 billion yuan, up 37.3% year on year. The domestic automotive tire market demand is mainly divided into replacement (AM) and supporting (OEM).

According to the proportion of car ownership, sales, replacement and supporting in China, the domestic demand for car tires from supporting in 2018 is about 139 million, the replacement domestic demand for passenger cars is 356 million, and the replacement domestic demand for commercial vehicles is 184 million in 2018. As a result, domestic tire demand totaled 679 million in 2018.

2 Petrochemical industry: The private refining industry has entered the performance realization period, and the olefin lightweight route has cost advantages

1) It is expected that international oil prices in 2020 will continue to be affected by the slowing growth of global crude oil demand and the continuous increase of supply. With the breaking of the pipeline transportation bottleneck in the Permian Basin, US shale oil production is expected to continue to grow. In addition, OPEC will continue to extend the production cut agreement, which will also form effective support for oil prices. We expect the core range of international oil prices to remain at $50-80 (brent), which is positive for the cost side of the petrochemical industry chain.

2), private large refining into the performance period, low and medium oil prices will bring cost side benefits. 2019 is the first year of operation of private large refining and chemical enterprises, Hengli Petrochemical Changxing Island 20 million tons of refining and chemical integration plant was first put into operation at the end of 2018, of which the refining and chemical sector performed well, and then Hengyi Brunei 8 million tons of refining and chemical plant was fully put into commercial operation in November 2019. Zhejiang Petrochemical in Zhoushan phase I 20 million tons of refining and chemical project is also about to put into production, the current oil price position is good for the overall refining and chemical project.

3), the olefin lightening route is irreversible, and PDH and ethane cracking to ethylene has cost advantages. In the future, the profitability of olefins will decline under the background of the synchronous expansion of the three types of process routes (oil head, gas head, coal head), but PDH and ethane cracking to ethylene have the most cost advantages in several process routes.

4), PX-PTA-Polyester industry chain: a new round of PTA expansion cycle is coming, good for PX and downstream polyester. We estimate that the new production capacity in 2020 will increase by nearly 20% year-on-year, close to 10 million tons of new production capacity, PTA prosperity will continue to decline, prices will also be under pressure, PTA as the main downstream demand of PX and the main raw material cost of polyester, we believe that the PTA price decline will benefit PX and downstream polyester, especially polyester filament.