The Zhitong Finance app learned that Huacheng Securities released a research report saying that standing in the present,The trending market for chemical products has not yet started. Two conditions are needed to confirm the inventory cycle: Domestic policy continues and US treasury replenishment is being carried out simultaneously. Currently, it is recommended to focus on observing the 2024Q2 window period. Before the cycle starts, it is recommended to lay out industries that benefit from weakening costs on the downstream product end, including tires, chemical fibers, compound fertilizers, pesticide formulations, modified plastics, board products, etc.; at the beginning of the cycle, leaders are expected to be the first to experience a double hit in profit and valuation. It is recommended to focus on first-line targets with large increases such as Hualu Hengsheng (600426.SH); after the cycle is running, be optimistic about upstream re-inflation, and focus on Guanghui Energy (600256.SH), etc.

▍ The main views of Huacheng Securities are as follows:

In the third quarter of 2023, chemical prices recovered to a certain extent under the influence of factors such as rising crude oil, gold, nine, silver, ten expectations, exchange rate effects, linked futures, and small reserves.

Judging from the “chemical industry index - price” quantiles tracked, the historical price quartile of the chemical industry up to the end of the third quarter was 39.86%, up 14.40PCT from 25.46% at the beginning of the third quarter, but significantly lower than 52.21% in the same period in 2022 and 23.54% in the same period in 2019 before the pandemic. At the same time, benefiting from the marginal decline in coal prices and upstream resource prices such as phosphate ore, the price spread in the chemical industry recovered to a certain extent in the third quarter.

As of the end of the third quarter, the historical quantile of the “chemical industry index - price difference” tracked was 26.37%, up 15.56PCT from 10.81% at the beginning of the third quarter, while being higher than 19.60% in the same period in 2022, but slightly lower than 30.41% in the same period in 2019 before the pandemic. In terms of operating rate, as of the end of the third quarter, the average value of the “chemical industry index - operating rate” tracked was 68.50%, up 3.23PCT from 65.27% at the beginning of the third quarter, while at the same time being higher than 65.55% in the same period in 2022 and 65.77% in the same period in 2019, reflecting the small inventory replenishment choices of enterprises in anticipation of reduced inventories and demand recovery.

Looking at the sections, the third quarter of 2023:

1) Revenue: The top five industries with month-on-month growth were coal chemicals, tires, crude oil, titanium dioxide, and chemical fiber. The month-on-month changes were +14.7%, +11.9%, +9.1%, +9.0%, and +8.2% respectively; the latter five industries were pesticides, chlor-alkali, vitamins, natural gas, and thermal coal, with month-on-month changes of -17.0%, -11.4%, -3.6%, -1.9%, -1.3%, and -1.0%. Among them, the coal chemical and crude oil sectors have clearly benefited from the rise in product prices, while the tire sector has benefited from the boom in export orders and the gradual release of production capacity for new investment and construction by enterprises; industries with large declines are related to the decline in product prices.

2) Gross profit margin: The top five industries with month-on-month growth rates were coal chemicals, soda ash, phosphorus chemicals, petrochemicals, and tires. The month-on-month changes were +4.0 PCT, +3.7 PCT, +2.4 PCT, +2.4 PCT, +2.0 PCT, and +1.8 PCT; the bottom five industries were fluorochemicals, silicon chemicals, pesticides, coking coal, and fertilizers. The month-on-month changes were -3.5 PCT, -2.3 PCT, -2.2 PCT, -2.0 PCT, -2.0 PCT, and -1.9 PCT.

3) Net profit: The top five industries with month-on-month growth rates were chlor-alkali, coal chemicals, petrochemicals, tires, and phosphorus chemicals. The month-on-month changes were +250.1%, +133.9%, +94.9%, +42.9%, and +28.2%; the bottom five industries were pesticides, fertilizers, vitamins, silicon chemicals, and fluorine chemicals in that order, with month-on-month changes of -89.9%, -41.7%, -39.3%, -36.1%, and -30.0%. Among them, the chlor-alkali industry is mainly due to the base effect of 2023Q2, while the coal chemical, petrochemical, and phosphorus chemical sectors benefited from the increase in product prices combined with the decline on the cost side. The tire sector is mainly due to structural improvements brought about by falling raw material costs and strong exports.

The demand season is low, and we are waiting for the cycle to resonate and recover.

As 2023Q4 enters a low season of chemical demand, seeing that there is a lot of downward pressure on chemical prices, and at the same time, geopolitics have brought about upward risks in resource products. It is expected that 2023Q4 chemical midstream profit pressure will be high. As of November 4, the tracked chemical industry index - price and chemical industry index - spread percentiles were 33.90% and 16.38%, respectively, down 5.96PCT and 9.99PCT from the end of the third quarter; the average operating rate of the industry fell slightly to 68.02% from 68.50% at the end of the third quarter, while the inventory level increased to 84.71% from 64.14% at the end of the third quarter. The increase in inventory reflects the relatively lackluster demand side.

Standing at the moment, the trending market for chemical products has not yet started. Confirming the inventory cycle requires two conditions:

Domestic policy continues and US treasury replenishment is being carried out simultaneously. Currently, it is recommended to focus on observing the 2024Q2 window period. Before the cycle starts, it is recommended to lay out industries that benefit from weakening costs on the downstream product side, including tires, chemical fibers, compound fertilizers, pesticide formulations, modified plastics, board products, etc.; when the cycle starts, leaders are expected to be the first to experience a double blow in profit and valuation; after the cycle starts, they are optimistic about further upstream inflation.

Risk warning:

Safety incidents affected the commencement of construction; rapid iteration of technological routes; and industrial decoupling in the context of anti-globalization.