Core views:

Oriental Energy has transformed into a propane dehydrogenation (PDH) leader. As the Russia-Ukraine war has pushed up oil prices, the Company’s PDH cost advantage may be further boosted. As its Ningbo project (Ph. I & II) started up in Feb and Jun 2021, respectively, and Maoming project (Ph. I) is slated for operations at end-2022, we see good growth prospects ahead. The Company is also building a sustainable aviation fuel facility to extend its hydrogen energy value chain. We forecast its 2022E-24E attributable net profit to be Rmb520mn/1,570mn/ 1,720mn, which imply EPS of Rmb0.32/0.95/1.04. We initiate coverage with a “BUY” rating.

Abstract:

Company overview: Founded in 1996, Oriental Energy has transformed from a world-class integrated LPG company to a world-leading PDH operator. In 2021, chemicals such as propylene/PP and hydrogen made a higher contribution to the Company’s revenue, which was 38.7%, and became a new earnings growth driver.

With firm feedstock supply and product demand, the Company has covered the economical and eco-friendly PDH+PP value chain. The Company operates mainly PDH and PP units, and develops high-end PP composite materials. Its PDH process has notable advantages in investment cost, construction cycle and production cost. We estimate that at an oil price of US$70/barrel, the production cost of PDH is Rmb485/3,693/1,401 lower than that of CTO/MTO/naphtha-to-olefins, respectively. As the Russia-Ukraine war has pushed up global oil and natural gas prices, the Company’s PDH cost advantage may be further boosted. In addition, the Company adopts Honeywell UOP’s C3 OleflexTM PDH technology, which features high activity, high selectivity, a low wear rate, low emissions, high safety and recyclability.

The PDH leader is set for growth on hydrogen utilization and economies of scale. The Company now produces 90kt/year of hydrogen as a by-product. When its Maoming facility (Ph. I & II) comes online in 2022-23, its by-product hydrogen output could double. Amid the policy tailwind for hydrogen energy development in Maoming, the Company may post significant additional revenue from hydrogen energy utilization. We expect the Maoming facility, when operational, to add Rmb4bn of revenue from the 200kt/year hydrogen output. To achieve higher-value utilization of hydrogen energy, the Company signed a strategic cooperative agreement with Honeywell UOP to jointly build China’s first sustainable aviation fuel production facility, extending its hydrogen energy value chain and driving its earnings growth amid the carbon neutrality trend. With its production facilities in Zhangjiagang, Ningbo and Maoming becoming all up and running, the Company is likely to have 3mt PDH capacity and 2.4mt PP capacity at end-2022, making it the world’s largest PP producer with a complete product lineup.

Potential risks: Overcapacity in the sector; disappointing technology and process innovation; highly volatile operating costs; PDH capacity expansion missing expectations; lower revenue due to the disposal of the LPG trading business; a sharp earnings decline due to a low operating rate amid a worsening pandemic situation; and safety hazards in production.

Investment recommendation: As the Company has shifted from an LPG trader to a world-leading propylene/PP producer, its profitability is on track to improve substantially. With the start-up of the Ningbo project’s Ph. I & II in Feb and Jun 2021, respectively, and the scheduled operations of the Maoming project (Ph. I) at end-2022, we see vast earnings growth prospects ahead. We forecast its 2022E-24E attributable net profit to be Rmb520mn/1,570mn/ 1,720mn, which imply EPS of Rmb0.32/0.95/1.04. We select PDH operators in the sector - Wanhua Chemical (600309.SH), Satellite Chemical (002648.SZ) and Bohai Chemical (600800.SH) - as comparable companies, and combine the PB and PE valuation methods. Given PDH projects’ stronger profitability in a high oil price environment, we expect the Company’s Maoming project (Ph. I) to earn hefty profits after starting operations at end-2022, increasing the Company’s PDH/PP capacity by 67%/100% and thus resulting in 200%-300% YoY net profit growth in 2023. Referring to the sector’s 2023E average PE ratio of 8.3x and 2022E average PB ratio of 2x as well as ROE levels (the average 2020-21 ROE of the peers is 15% vs 12% at the Company), and given the Company’s growth prospects in the next two years, we assign it a 11x 2023E PE ratio and a 1.7x 2022E PB ratio, which imply a target price of Rmb11. We initiate coverage with a “BUY” rating.