In the first quarter, Jiangsu Eastern Shenghong's net profit plummeted by 60%, its asset-liability ratio climbed to 83%, and its short-term solvency came under significant pressure.

This article is translated from "Securities Star," author: Zhao Zixiang Jiangsu Eastern Shenghong (000301.SZ) achieved a milestone in performance in 2023, with revenue exceeding one trillion in just the first three quarters, and annual revenue reaching the 140 billion mark, doubling from 2022. However, compared to this, the company's profitability is slightly "thin," with last year's net profit barely reaching 700 million. In the first quarter of 2024, Jiangsu Eastern Shenghong experienced a situation of "increased revenue but decreased profits," with quarterly net profit plummeting by over 60%. Securities Star noted that Jiangsu Eastern Shenghong has been continuously increasing its debt in recent years through various "money-burning" actions such as capacity expansion, equity acquisitions, and extending the industrial chain. By the end of the first quarter of 2024, the company's debt-to-asset ratio had risen to 83%, an increase of over 40 percentage points from 2018. At the same time, the company's current debt size is relatively large, with a sharp increase in short-term borrowings and a decrease in cash and cash equivalents balance from the previous year, posing a significant challenge to the company's future debt repayment ability. Increased revenue but not profits in the first quarter of this year Public information shows that Jiangsu Eastern Shenghong focuses on two major industries: chemical fibers and petroleum and chemical new materials. According to the annual report data, its petroleum and chemical new materials business is mainly composed of Shenghong Refining, Elbon Petroleum, and Hongkong Petrochemical. In 2023, Shenghong Refining achieved operating income of 99.193 billion yuan, with a net profit of 481 million; Elbon Petroleum had operating income of 16.948 billion, with a net profit of 751 million; Shenghong Chemical Fiber had revenue of 24.088 billion, with a net profit of 107 million. In 2023, Jiangsu Eastern Shenghong officially became a "trillion-dollar giant," with annual revenue reaching 140.44 billion yuan, a year-on-year increase of 119.87%; and a net profit of 717 million yuan. However, the company's first quarter report for 2024 showed that the company achieved operating income of 36.739 billion yuan, a year-on-year increase of 24.34%, with a attributable net profit of 247 million yuan, a decrease of 66.53% year-on-year, and net cash flow generated from operating activities of 981 million yuan, a decrease of 60.15% year-on-year. Why did profitability significantly decline in the first quarter? According to the company announcement, the company made a provision of 515 million yuan for asset impairment in the first quarter, with inventory impairment provisions amounting to 504 million yuan. Investors raised questions to the management at the performance briefing, asking: "Which sector's inventory produced such a large asset impairment?" Jiangsu Eastern Shenghong responded, "The company made provisions for asset impairment mainly for the impairment of inventory, which includes raw materials, work-in-progress and semi-finished products, finished goods, goods issued, and materials in transit, among others." In fact, there were signs of declining performance at the end of 2023, as the annual report showed that Jiangsu Eastern Shenghong reported a loss of 1.762 billion in the fourth quarter of 2023, a decrease of 82.31% year-on-year; the net profit for the first three quarters were 717 million yuan, 963 million yuan, and 798 million yuan respectively, with year-on-year increase rates of 4.75%, 2.09%, and 1667.41%. It is worth mentioning that in the first quarter of 2024, the company's gross profit margin was 10.89%, a decrease of 3.46 percentage points year-on-year; the net profit margin was 0.66%, a decrease of 1.82 percentage points year-on-year, indicating a significant decline in profitability. Asset-liability ratio continues to rise, debt repayment ability under pressure As a "trillion-dollar giant," Jiangsu Eastern Shenghong has been deeply involved in the fields of new energy, new materials, petroleum refining, and polyester fiber for many years, possessing diverse ethylene production processes and gradually forming a vertically integrated chemical industry complex. The company currently has a 16 million tons/year refining and integration unit, a 2.4 million tons/year methanol-to-olefin (MTO) unit, and a 700,000 tons/year propane dehydrogenation (PDH) unit, leading to an ever-increasing debt size as a result of business expansion. Securities Star noted that from 2018 to 2022, Jiangsu Eastern Shenghong's asset-liability ratio has been rising continuously, reaching 40.75%, 56.34%, 64.17%, 77.72%, 78.56%, 81.34%, and further increasing to 83.23% by the end of the first quarter of 2024, reaching a historical high. Securities Star learned that by the end of the first quarter of 2024, among the nearly 400 listed basic chemical industry companies in the A-share market, Jiangsu Eastern Shenghong ranked 12th with a 82.23% asset-liability ratio, although the total market value of the top 11 companies was less than 30 billion, less than half of Jiangsu Eastern Shenghong's total market value of 62 billion yuan (as of May 23), including two ST companies. The continuous increase in the asset-liability ratio is backed by various forms of liabilities of Jiangsu Eastern Shenghong. The annual report shows that by the end of 2023, Jiangsu Eastern Shenghong's total liabilities reached 154.723 billion yuan, compared to 134.433 billion yuan at the beginning of 2023. Securities Star noted that by the end of last year, Jiangsu Eastern Shenghong's total current liabilities due within one year, including short-term borrowings, short-term payments due, and installments of long-term borrowings principal and interest due within one year, amounted to 12.95 billion yuan, increasing by over 3 billion from the 98.54 billion yuan at the beginning of 2023. Additionally, as of theBy the end of 2023, Jiangsu Eastern Shenghong's short-term borrowings reached 41.698 billion yuan, accounting for 21.92% of total assets, an increase of 6.59 percentage points compared to 15.33% at the beginning of the year, exceeding 10 billion yuan. The company attributed the increase mainly to the increase in borrowing.The annual report shows that the year-end balance of cash and cash equivalents of Jiangsu Eastern Shenghong at the end of 2023 was 6.386 billion yuan, a decrease of several billion yuan from 10.166 billion yuan in 2022. During the reporting period, the company's net increase in cash and cash equivalents was -3.78 billion yuan, compared to 2.28 billion yuan in the same period last year. Although by the end of 2023, the net cash flow generated from financing activities of Jiangsu Eastern Shenghong increased to 9.983 billion yuan, the high level of short-term borrowings and current liabilities due within one year will still pose a great challenge to the company's debt repayment ability for this year and beyond, and the company will also face significant pressure on its capital chain. (This article was first published on Securities Star, authored by Zhao Zixiang) This article is reproduced from "Securities Star", authored by Zhao Zixiang.