Short-term changes in the chemical industry brought about by carbon neutrality

1.1. The expansion of annual production capacity will slow down and the growth rate of fixed assets will slow down in 2021

The capacity expansion of the chemical sub-industry slowed down in 2021. In 2021, the production capacity of 20 sub-industries in 33 sub-industries will expand, but the growth rate of production capacity will increase significantly compared with the average level of the past three years, only the petrochemical industry chain expansion varieties such as propylene oxide, caprolactam, PC, DMC and related varieties of MDI's own enterprises. At the same time, the production capacity of 10 sub-industries such as DMF, caustic soda, soda ash, yellow phosphorus, polyester filament, and carbon black contracted, and the production capacity growth of the remaining products was flat or significantly decreased compared with the past three years. This also shows that in the context of carbon neutrality, subject to energy control and strict approval, the rate of capacity expansion may remain low.

With the beginning of 2021 as the dividing line, the growth rate of fixed assets and the proportion of fixed assets of listed companies in the basic chemical industry (a total of 422 companies in the basic chemical industry after adjustment according to Shenwan Level classification) have decreased significantly. Since Q1 of 2021, the growth rate of fixed assets of listed companies in the chemical industry has rapidly decreased from 21% to 12% in Q3 of 2021, and the proportion of fixed assets in revenue has gradually decreased from 33.4% to 31.9%. In the context of carbon neutrality, the growth rate and proportion of fixed assets of chemical enterprises that rely on traditional development models may remain at a low level. (Report source: Future Think Tank)

1.2. The price of new energy-related chemicals has increased significantly, and the demand structure has changed

The price of new energy-related chemicals increased significantly. In November 2021, the price of EVA/ lithium iron phosphate/dimethyl carbonate/lithium power PVDF was 9.8/191.4/0.85/415,000 yuan/ton, with an annual increase of 15.8%/132.0%/21.4%/277.3%, and the price reached the highest point in history this year. In the context of carbon neutrality, the supply constraint is accompanied by the continuous increase of downstream demand, and the price of new energy-related chemicals may remain at a high level.

In recent years, the downstream demand structure of traditional chemicals has changed, and the proportion of new energy-related fields has gradually increased. From 2013 to 2020, the proportion of photovoltaic film in EVA downstream applications increased from 9% to 34%; From 2018 to 2020, the proportion of electrolyte solvent in downstream applications of dimethyl carbonate increased from 28% to 36%; From 2015 to 2020, the proportion of polysilicon in downstream applications of industrial silicon increased from 22% to 31%. In the context of carbon neutrality, with the continuous improvement of downstream new energy demand, traditional chemicals will also be more applied to new energy scenarios.

1.3. Some chemical enterprises enter the field of new energy

Since 2021, traditional chemical enterprises have rapidly entered new energy-related fields. For chemical enterprises, the following three advantages are what they have to enter the field of new energy: first, the advantage of raw material resources, the second is the advantage of manufacturing costs, and the third is the advantage of chemical synthesis and chemical process. For example, phosphorus chemical companies enter iron phosphate or lithium iron phosphate, and the resource advantage of phosphate ores is transformed into a cost advantage, while having a more mature chemical synthesis and chemical process basis.

Wanhua Chemical, as a leading chemical company in the field of new energy, has a wealth of new energy material patents and capacity layout. In 2020, it will enter the field of new energy through the acquisition of Zhuoneng lithium Battery. At present, it has capacity planning in the two fields of positive electrode materials and electrolyte. Wanhua's entry into the field of new energy also reflects the inevitability of leading chemical enterprises to grasp the industry trend.

1.4. New energy-related chemical enterprises are developing rapidly

New energy-related chemical enterprises have entered a period of rapid development. Seven new energy-related chemical enterprises, including Polyfluoro, Yahua Group, Tianci Materials, Njie Shares, New Zhou Bang, Dang Sheng Technology, and Star Source Materials, were taken as samples to compare with the listed companies in the basic chemical industry as a whole. Since 2021Q1, the revenue growth rate of the sample companies has remained above 100%, and the net profit growth rate has remained above 150%, which is much higher than the industry average, indicating that the sample companies are in a stage of rapid development. Under the background of carbon neutrality, new energy-related chemical enterprises will benefit from the high prosperity of the downstream industry, or will maintain a high development rate.

2. Future development direction of chemical enterprises

We discussed the development mode of chemical enterprises in the past, and the possible development mode of chemical enterprises in the future under the new situation of "dual carbon", and believed that the future chemical enterprises will change from the development mode of capacity expansion and upstream supporting raw materials to the downstream fine, multi-category, platform type of new development mode. In the future, excellent chemical enterprises need to grasp the development trend of the industry, and on this basis, give full play to their financial advantages, research and development advantages, and the courage to invest capital, so as to have the development opportunity in the new situation of double carbon.

2.1. In the past, the development mode of chemical enterprises was "capacity expansion + upstream support".

A development model that relies heavily on capacity expansion

Chemical enterprises benefit from the rapid development of the domestic economy and the gradual improvement of the dominant position of the chemical industry, the past development mainly depends on the capacity expansion of traditional business, from the cyclical expansion of the whole industry before the supply side reform to the leading expansion after the supply side reform. The expansion and development of the production capacity of a single enterprise has formed and strengthened the rotation of the industrial cycle, so that the enterprise with a single industry and business attribute has a strong profit cycle attribute.

Taking spandex and titanium dioxide as two industries, we obviously found that the rapid growth of industry capacity in the past was accompanied by the improvement of industry concentration CR5, and leading enterprises relied on rapid expansion of production capacity to seize market share, and this expansion model is the most common enterprise development model in the development process of China's chemical industry.

Extend the cost reduction model upstream

After the development of the chemical bulk segmentation field has entered a stage of steady growth or decline, chemical enterprises have begun to pay more attention to the accumulation of cost advantages, and the upstream replenishment of raw materials by midstream enterprises has become one of the main methods for major chemical enterprises to reduce costs and realize the autonomy and control of raw materials.

The most typical is the chemical fiber industry represented by polyester filament. Oriental Shenghong, Tongkun Shares, New Fengming and Hengli Petrochemical and other polyester filament production enterprises, in the past three years, through the continuous extension along the oil refining - PX-Ptas - polyester filament industry chain upstream, on the one hand to grasp the overall industry chain profits, on the other hand to the upstream bulk product expansion process significantly increased the level of corporate profitability.

Wanhua Chemical, the domestic chemical leader, and BASF, the international chemical leader, have the process of extending upstream to reduce production costs and increase the revenue volume of enterprises. Among them, Wanhua Chemical started from the production of polyurethane midstream raw materials, and has continuously laid out the upstream petrochemical industry chain in recent years, greatly reducing the production cost, and also laid the raw material foundation for the development of the company's multi-category. The development of BASF has also been accompanied by the expansion of the upstream petrochemical industry, and its global petrochemical industry layout has laid the foundation for the globalization of BASF products.

However, under the dual-carbon background, the most obvious change is that the process of capacity expansion is blocked, and the development rhythm of enterprises in the past may be broken. Under the new era background, enterprises are also seeking a new development model. We believe that the development model of enterprises in the future will be refined, multi-category, and platform-type.

2.2. Three development modes of chemical enterprises in the future

From the other side: BASF's solution application development precedent

When we enter the Chinese official website of BASF, we will find that when BASF displays its product results, most of them are divided into industries, and a number of chemical products are mainly introduced in the form of industry segmentation solutions. Looking at the development history of BASF, it is not difficult to find that it started with dyes in the early stage of its business a hundred years ago, extended raw materials upwards to the coal chemical industry, and launched a global development process through the replication expansion of the refining and chemical industry further upstream. After the completion of globalization, BASF gradually divested the upstream traditional business, opened up the downstream industrial chain by entering the new material business, and transformed into a comprehensive platform company that provides a variety of solutions from upstream product manufacturing to the same downstream.

The development process of BASF, the international chemical leader, and the experience of other global leading chemical enterprises have provided references for the development of China's chemical industry. In the context of the development of dual carbon imperative, domestic chemical enterprises should change their development ideas, from the replicative expansion model to the diversified product development model, from the upward integration of cost reduction model to the downward fine development model.

Under such a development model, we believe that chemical enterprises should seize the opportunity of industrial development, give full play to the advantages of raw materials and capital, and put technology research and development in a more important position, so that enterprises with these potential can fully adapt to the current development trend under the two-carbon policy.

Raw material enterprises to the downstream fine development

We have analyzed the raw materials for the upward integration layout of Wanhua Chemical, and Wanhua Chemical has gradually developed fine chemical products downstream along the path of raw materials and technology in recent years, and Wanhua Chemical's new materials plate has covered a number of industrial chains, which is also the development choice made by Wanhua Chemical as a leading chemical enterprise under the background of dual carbon. In addition to Wanhua Chemical, private refining and chemical enterprises with rapid development in recent years have also begun to lay out the field of new materials. (Report source: Future Think Tank)

Multi-category development under the same raw material and technology path

There are two forms of downstream development, one is the extension of the industrial chain under the same raw material, among which a number of capacities under construction by Hualu Hengsheng are mainly in this form of development mode: Relying on the coal gasification platform and the extracted petrochemical raw material benzene, Hualu Hengsheng is extending downstream along a number of industrial chains such as cyclohexanone - caprolactam -PA6, adipate - adiponitron-hexanediamine -PA66, ethylene glycol -DMCEMC/DEC. This development model is refined development along the same raw material to the downstream. Most of these enterprises have large production scale of bulk raw materials, such as refining and chemical enterprises such as Dongfang Shenghong, Rongsheng Petrochemical, Satellite Petrochemical, Hualu Hengsheng, Luxi Chemical, Baofeng Energy and other coal chemical enterprises, as well as phosphorus chemical, fluorine chemical industry chain related enterprises with resource advantages.

The other form of development mainly relies on its own technological advantages, and multiple industrial chains extend downstream to form a platform enterprise with the same technology and multiple industrial chains for coordinated development, among which a more typical enterprise is Wanrun: Relying on its rich accumulation of chemical synthesis technology, Wanrun Shares have a layout in many fields such as liquid crystal materials, OLED materials, zeolite environmental protection materials, medicine, semiconductor materials and lithium battery materials. This type of chemical enterprises have rich experience in chemical synthesis research and development, typical enterprises include Xinhe Cheng, Wanrun shares and so on.

Multi-variety, platform-type development in the same application scenario

In addition to the extension of the industrial chain based on technology and raw materials, the development model of providing comprehensive solutions based on the same application scenario will also become the trend direction of the future fine development of the chemical industry.

Wanhua Chemical's product layout is a representative of multi-category solutions in the same application scenario. Although the product types of Wanhua Chemical are more complex, the terminal ideas of product development are many representative industries, and the automobile industry chain is an important thinking destination for Wanhua Chemical to develop products. Wanhua Chemical products are used in automotive interior, exterior, structural components and new energy vehicle batteries and other components. The POE that is being laid out is an important material for automotive lightweight, and the layout of terpolymer materials, electrolyte and other directions is another important direction of Wanhua in the field of new energy vehicles.

3. Characteristics of enterprises with future development potential

Through reviewing the ranking changes of several important indicators of A-share chemical listed companies, we believe that chemical enterprises should have the ability to grasp the industrial trend, and on this basis, give full play to their capital advantages, research and development advantages, and the courage to invest capital, and have the development opportunity in the new situation of dual-carbon.

3.1. Grasp the industrial opportunities, development depends on choice

Because of the special attributes of the middle reaches of the chemical industry, the fields involved in the listed companies in the industry cover most manufacturing fields, and the changes in the industry trend have brought about obvious changes in the chemical industry leaders. The cyclical rotation of the development trend of the industry and the rapid development of the emerging industry, every five years to follow the change of industrial trends, chemical leaders also change with. With the rise of new energy-related industries under the carbon neutral policy in recent years, especially the rapid development of the new energy automobile industry, Njie Shares, Tianci Materials and other new energy segment leaders began to occupy the top ten market capitalization list. In the five years from 2015 to 2020, the rapid development of private refining and chemical enterprises has made refining and chemical enterprises quickly enter the top ten.

However, it is not difficult to find that evergreen trees such as Wanhua Chemical have occupied the top ten positions in the chemical market value since 2005, and have been in the first position for many years. Through our analysis above, although it has a certain relationship with the special properties of the polyurethane industry, Wanhua Chemical has grasped the development trend of the industry, integrated refining and chemical upward, and entered new materials downward. Important decisions such as the rapid layout of the new energy field also make Wanhua Chemical able to maintain long-term green.

Therefore, we believe that the chemical enterprises with potential in the future should follow the trend of The Times, grasp the industry trend, and carry out forward-looking industrial layout, and the industrial investment logic will eventually let the later comers catch up and even surpass.

3.2. Behind the choice is the support of multiple factors such as capital, research and development, and cost

In the context of correct planning and choice, we believe that its abundant capital (cash flow, ability to absorb funds), long-term continuous R&D investment accumulation and other factors have important supporting roles for the future development of enterprises. We have counted the top 10 listed chemical companies in the following four dimensions since 2018 (2018 was chosen because accounting standards began to require the disclosure of R&D expenses) : Market value appreciation (simulation of enterprise development), cumulative R&D expenses (simulation of R&D investment), cumulative increase in fixed assets (simulation of capital expenditure intensity), cumulative cash flow from operating activities (simulation of access to funds).

Through comparison, we find that Wanhua Chemical, Rongsheng Petrochemical, Hengli Petrochemical and other companies have good performance in multiple dimensions such as capital acquisition ability, capital expenditure intensity and research and development investment, which makes their market value increase in the past four years among the top ten. Njie Shares, Salt Lake Shares, Tianci Materials, Satellite petrochemical, Sinoma Technology is by grasping the development trend of the industry, in the new energy, refining and chemical track has outstanding performance.

Although some traditional enterprises have capital advantages, the lack of research and development and capital investment makes the growth relatively lagging, so we believe that capital advantages, research and development advantages and capital investment under the selection track are crucial to the development of chemical enterprises.