Preannounced attributable net profit down 80-83% YoY in 1H24

Eastern Shenghong preannounced that its attributable net profit in 1H24 fell 80-83% YoY to Rmb300-350mn. It estimated its attributable net profit in 2Q24 fell 89-94% YoY to Rmb50-100mn. Its preannounced earnings are largely in line with our and market expectations.

Trends to watch

Refining and petrochemical earnings remained low; aromatics earnings were still high. In 2Q24, the average Brent crude oil price was US$85/bbl (up US$3/bbl QoQ) and fluctuated between US$80/bbl and US$90/bbl. Refining and petrochemical earnings remained low, with the average price spread of ethylene falling about 20% QoQ to Rmb941/t in 2Q24. Earnings of aromatic hydrocarbons remained strong in 2Q24, with the price spread of pure benzene and paraxylene (PX) growing 30% and 3% QoQ to Rmb2,918/t and Rmb2,669/t. In 3Q24, we expect the firm’s earnings of PX to marginally weaken, as the peak season for refining in the US is coming to an end and oil blending demand is trending down QoQ.

Completion of projects to help improve efficiency. The Lianyungang Chemical Industrial Park has ample hydrogen resources, which has a significant positive impact on the firm’s aromatics business. We expect the firm's PX production capacity to increase after its hydrogen project in Lianyungang is completed in 2H24. Meanwhile, we think the gas-based chemicals production base in Lianyungang Chemical Industrial Park enjoys ample resources and sound production conditions. We think the firm may further optimize raw materials for olefin production to improve its overall competitiveness.

New material projects continue to contribute new capacity. We expect the firm’s four ethylene vinyl acetate (EVA) production facilities (totaling 750,000t/yr of capacity) to commence production in 2H24-1H25. Its 200,000t/yr of propylene oxide capacity and 450,000t/yr of propylene oxide styrene monomer (POSM) capacity may come online in 2H24- 1H25, the 100,000t/yr of polyolefin elastomers (POE) capacity is likely to start operating in 1H25. In addition, its 340,000t of maleic anhydride capacity, 300,000t of 1.4-Butanediol (BDO) capacity, and 180,000t of polybutylene adipate-co-terephthalate (PBAT) are scheduled to commence operation in 2025-2026. We believe the firm will largely complete its new material projects in 2024-2026, implying substantial growth potential in the long term.

Financials and valuation

Given the slower-than-expected recovery of the firm’s refining and petrochemical business, we lower our 2024 and 2025 earnings forecasts 42% and 30% to Rmb2.1bn and Rmb2.8bn. Considering earnings forecast revisions and valuation growth driven by new material businesses, we cut our target price 22% to Rmb9.0, implying 29x 2024e and 21x 2025e P/E, offering 12% upside. We maintain an OUTPERFORM rating. The stock is trading at 25x 2024e and 19x 2025e P/E.

Risks

Slower-than-expected construction and operation of new projects; disappointing EVA earnings.