Preannounced net profit up 467.04-518.59% YoY in 1H24

Luxi Chemical Group preannounced its 1H24 results: Attributable net profit increased 467.04-518.59% YoY to Rmb1.1-1.2bn, and recurring net profit grew 539.74-596.86% YoY to Rmb1.12-1.22bn. It estimates its attributable net profit in 2Q24 at Rmb532-632mn, with QoQ growth changing from -6.3% to +11.3%. Its preannounced 1H24 results beat our expectations, mainly due to the higher prices of some products and lower raw material costs.

Trends to watch

Polyol products generated profits. According to corporate filings, polyol products (butyl and octyl alcohol), caustic soda, and formic acid generated earnings for Luxi Chemical Group. Data from Baiinfo shows that ASP of butyl alcohol and octyl alcohol in 1H24 increased 10.7% and 13.6% YoY to Rmb8,395/t and Rmb10,769/t, down 0.4% and 7.1% HoH. We attribute the YoY growth to YoY declines of 2.0% and 15.1% in prices of propylene and thermal coal. In 1H24, prices of caustic soda and formic acid reported YoY and QoQ declines. Therefore, we think polyol products were the main profit generators of Luxi Chemical Group in 1H24.

Capex bolsters growth. According to corporate filings, the worth of Luxi Chemical Group’s projects under construction was Rmb8.04bn at end- 1Q24, equaling 23% of the firm’s total assets. Its projects under construction include 300,000t of caprolactam capacity, 300,000t of nylon-6 capacity, 400,000t of organosilicon capacity, and 150,000t of propionic acid capacity. We expect its caprolactam, nylon 6, and organosilicon projects to come online in 2H24. In our view, the firm’s capex is conducive to its mid-to-long-term growth.

Integration with Sinochem bolsters transformation to a leading new chemical material provider. After the change of its actual controller, Luxi Chemical Group saw strategic support from Sinochem in coordinated development of the industry chain, technological R&D, and marketing. Luxi Chemical Group is an important channel for Sinochem to expand its new material business and is developing polycarbonate, polyamide (PA6), polyol, organosilicon, and fluorine materials. In 2023, the new material business of Luxi Chemical Group accounted for more than 63% of its total revenue, up 7.9ppt YoY.

Financials and valuation

Due to improving earnings of some products and lower costs, we raise our 2024 earnings forecast 10% to around Rmb2.01bn, and introduce our 2025 earnings forecast of Rmb2.41bn. The stock is trading at 11x 2024e and 9x 2025e P/E. Given the potential demand recovery for some chemical products and improving sector valuation, we maintain an OUTPERFORM rating and raise our TP 11.7% to Rmb14.5, implying 14x 2024e and 12x 2025e P/E, offering 24% upside.

Risks

Volatile product prices; rising coal prices; slower-than-expected progress in project implementation.