RONGSHENG PETROCHEMICAL(002493)：TO INVEST OVER RMB100BN TO BUILD FLAGSHIP PLATFORM FOR NEW CHEMICAL MATERIALS

　　1H22 results slightly missing market expectations
Rongsheng Petrochemical announced its 1H22 results: Revenue grew 74.9% YoY (or 59.4% QoQ) to Rmb147.6bn, while attributable net profit decreased 18.3% YoY (or 14.2% QoQ) to Rmb5.37bn. In 2Q22, attributable net profit declined Rmb865.1mn QoQ to Rmb2.25bn. Net operating cash flow increased 40.6% YoY to Rmb31.1bn in 1H22 and stood at Rmb12.5bn in 2Q22, indicating healthy cash inflow. However, the results missed market expectations due to Rmb634mn in forex losses.
　　Subsidiary Zhejiang Petroleum & Chemical’s (ZPC) net profit reached Rmb8.54bn in 1H22 and declined Rmb2.14bn QoQ to Rmb3.20bn in 2Q22, due to pressure from high oil prices and sluggish demand. Zhongjin Petrochemical’s net profit was Rmb638mn in 1H22 and earnings from para-xylene (PX) rose QoQ in 2Q22 thanks to growing market demand. Rongsheng’s pure terephthalic acid (PTA) and polyethylene terephthalate (PET) generated combined revenue of about Rmb211mn in 1H22, increasing YoY thanks to high profit from PET. The firm’s businesses registered profit growth in line with its peers. ZPC has almost completed building its Phase II project. In 1H22, the project contributed Rmb2.7bn in construction-in-progress (CIP) assets and Rmb57.4bn in fixed assets. There are Rmb28.1bn in assets to be converted into fixed assets, including Rmb24.1bn in public projects and supporting facilities. The firm’s fixed assets rose by Rmb30.6bn in 2Q22.
　　Trends to watch
　　We expect approval of No.3 ethylene project to enhance firm’s overall competitiveness, and demand in refining and chemical industry to bottom out. The firm announced on August 14 that ZPC’s No.3 ethylene project and supporting downstream facilities were approved, and we think they may start operation in 2H22. Meanwhile, we expect the Phase I and Phase II projects to create synergies and enhance the firm’s overall competitiveness. As crude oil prices undergo adjustments in 3Q22, we expect cost pressure from high oil prices to ease.
　　Proposes investing over Rmb100bn in building new material capacity to create flagship platform for new chemical materials. The firm unveiled three large projects recently. It plans to invest Rmb34.5bn in building an ethylene project (with a capacity of 1.40mnt/yr) and the supporting downstream facilities, Rmb19.2bn in a high-performance resin project, and Rmb64.1bn in a high-end new material project. ZPC would take charge of these projects with a total investment of nearly Rmb120bn, and we expect a profit of Rmb16.4bn/yr. As a leading private enterprise in the refining and chemical industry, Rongsheng has integrated refining projects with a capacity of 40mnt/yr and ample cash flow. We expect management to build the ZPC project into a large-scale flagship platform for new chemical materials, given the decision to invest over Rmb100bn in new materials and high-performance resin without expanding basic refining capacity. We think the three projects will come on-stream during the 14th Five-Year Plan period (2021-2025), buttressing Rongsheng’s earnings growth over 2024-2025.
　　Financials and valuation
　　As demand in the refining and chemical industry has so far missed our expectations in 2022, we lower our 2022 and 2023 net profit forecasts by 21.2% and 14.9% to Rmb11.7bn and Rmb15.1bn. The stock is trading at 13.4x 2022e and 10.3x 2023e P/E. Given the firm will start a new round of investment in new chemical materials, we maintain an OUTPERFORM rating and our target price of Rmb17.50. Our TP implies 15.2x 2022e and 11.7x 2023e P/E with 13.6% upside.
　　Risks
　　Oil prices stay high or fall rapidly; industry-wide downturn for chemical products; slow approval of new projects.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。