Changhua Chemical Technology (CCT) is a professional large-scale manufacturer

of polyether series products in China. CCT is deeply engaged in the polyether industry, and its products cover polyether for flexible foam (POP, PPG), CASE polyether and special polyether. CCT was recognized as a "high-tech enterprise" in 2022 and awarded the "2023 National Specialized and Sophisticated SMEs (Small- and medium-sized enterprises)”.

CCT has benefited from the increase of concentration rate of polyether market due

to its strong competitiveness: In the polyether industry, the backward production capacity withdraw from the market, while the competitiveness of enterprises with leading position and innovative self-developed technology is being further improved. In terms of products, CCT focuses on the polyether business, and has developed a number of core technologies in product formulation, production process, etc., with stable product quality, low odor and low VOC. In terms of customers, the company has established stable cooperative relations with a number of high-quality customers such as large automobile OEMs or their supporting manufacturers, multinational chemical enterprises, and well-known home furnishing brands.

The production capacity of raw material propylene oxide expands, and the cost of

polyether tends to stabilize: The price of soft foam polyether is highly correlated with the price of raw material propylene oxide. As the production capacity of propylene oxide continues to expand, the price of propylene oxide continues to decline. As of September 2023, the domestic PO price has been lower than 10,000 yuan/ton. According to Baichuan Yingfu, by the end of 2025, domestic propylene oxide production capacity will increase by 84% compared with 2022 production capacity levels. Market supply continues to increase, and PO prices may fall further, easing the pressure on the polyether raw material side.

The new POP project enhances the CCT's supply capacity: CCT's product sales

continue to increase, and the total sales of polyether products reached 212,900 tons in 2022. CCT's new 180,000-ton POP project has been put into operation in September 2023, which will further improve the company's profitability.

Earnings Forecast & Rating: We initiate with the BUY rating, and expect that CCT’s net profit will increase by 14%/48%/1% YoY to Rmb0.10/0.15/0.15bn in 2023/2024/2025 respectively, with corresponding P/E at 35/24/23x respectively, considering that CCT's product quality is excellent and its production capacity continues to to expand.

Risks: Intensified market competition, ineffective product promotion, fluctuation in product prices, fluctuation of macroeconomic.