Huaan: The chemical industry cycle is under pressure but repair is expected. The rebound in supply side will help boost the recovery of the industry.

Huaan released a research report stating that since 2023, due to the impact of multiple factors such as the global economic downturn and the continuous expansion of industry capacity, the chemical industry has gradually weakened. The chemical industry has experienced a decline for two years, and the most pessimistic period has passed. From the supply side, the growth rate of capital expenditure in the chemical industry will slow down in 2024; from the demand side, real estate policies continue to be loosened, purchase restrictions and credit policies are gradually relaxed, and with the further expansion of exports of new energy vehicles, the demand for chemical products overseas is further opened up, and the supply and demand situation gradually improves. With the gradual recovery of the economy, continuous reform and optimization on the supply side, the chemical industry is the strongest weapon in the economic cycle, with global competitive advantages, and the industry is expected to begin an upturn cycle. Pressure on the cycle is expected to be restored, and supply-side reforms will help drive the recovery of the economy. Since 2023, due to the impact of the global economic downturn and the continuous expansion of industry capacity, the chemical industry has gradually weakened. As of September 10, 2024, the China Chemical Products Price Index (CCPI) closed at 4382 points, a decrease of 8.99% from 4815 points at the beginning of 2023, with a historical percentile of 37.17%. As of June 21, 2024, the price-earnings ratio of the basic chemical industry sector was 27.24%, which is in a relatively low percentile. The chemical industry has experienced a downturn for two years, and the most pessimistic period has passed. From the supply side, the growth rate of capital expenditure in the chemical industry will slow down in 2024; from the demand side, real estate policies continue to be loosened, purchase restrictions and credit policies are gradually relaxed, and with the further expansion of exports of new energy vehicles, the demand for chemical products overseas is further opened up, and the supply and demand pattern gradually improves. With the gradual recovery of the economy, continuous reform and optimization on the supply side, the chemical industry is the strongest weapon in the economic cycle, with global competitive advantages, and the industry is expected to begin an upturn cycle. Recommend focusing on cyclical targets with a good supply and demand pattern, high-quality new materials targets for domestic substitutes, and high-dividend dividend targets. Recommended focus on bottomed-out cyclical targets with a sustained good supply and demand pattern: [Wanhua Chemical Group (600309.SH)], [Satellite Chemical (002648.SZ)], [Zhejiang Nhu (002001.SZ)], [Zhejiang Juhua (600160.SH)], [Xinfengming Group (603225.SH)], etc. High-quality new materials targets for domestic substitutes: [Cathay Biotech Inc. (688065.SH)], [Anhui Huaheng Biotechnology Co., Ltd. (688639.SH)], [Shandong Sinocera Functional Material (300285.SZ)], [Shandong Bailong Chuangyuan Bio-Tech (605016.SH)], etc. High-dividend dividend targets: [CNOOC Limited (600938.SH)], [China Petroleum & Chemical Corporation (600028.SH)], [Meihua Holdings Group (600873.SH)], [Yunnan Yuntianhua (600096.SH)], etc. Chemical sector in the first half of 2024: Overall pressure, increased sector differentiation The polyurethane sector had operating income of 104.142 billion yuan in the first half of 2024, a year-on-year increase of 0.11%; net profit attributable to shareholders was 8.466 billion yuan, a year-on-year decrease of 4.78%; non-recurring net profit attributable to shareholders was 8.36 billion yuan, a year-on-year decrease of 3.00%. In the first half of the year, affected by market competition and product price fluctuations, performance declined year-on-year. In the long run, overseas supply-side shrinkage is expected to drive up domestic polymeric MDI exports. With the implementation of the old-for-new policy, the stable development of downstream traditional industries, and the vigorous development of new energy industries, demand is expected to see a significant increase. The phosphorus fertilizer and phosphorus chemical sector had operating income of 64.557 billion yuan in the first half of 2024, a year-on-year decrease of 1.92%; net profit attributable to shareholders was 4.623 billion yuan, a year-on-year increase of 9.95%; non-recurring net profit attributable to shareholders was 4.444 billion yuan, a year-on-year decrease of 11.91%. In the first half of the year, phosphate rock prices remained high, and demand in the phosphorus fertilizer and phosphorus chemical industry remained stable, with continued improvement in sentiment and good performance. Due to environmental protection policies restricting new capacity additions in the phosphorus chemical industry, and the gradual decline in phosphate rock grade, the central axis of value-added phosphate rock prices is expected to remain high, while the country's high attention to food security ensures that phosphorus fertilizer demand continues to make steady progress, with high sentiment expected to be maintained. The fluorine chemical sector had operating income of 28.662 billion yuan in the first half of 2024, a year-on-year increase of 5.53%; net profit attributable to shareholders was 1.941 billion yuan, a year-on-year increase of 14.40%; non-recurring net profit attributable to shareholders was 1.808 billion yuan, a year-on-year increase of 19.14%. In the first half of the year, industry performance grew significantly, with sentiment rising rapidly. With factors such as global demand recovery and the January implementation of the third generation refrigerant quota policy driving continued undersupply of refrigerants, market concentration is increasing, and sentiment is expected to improve. The coal chemical sector had operating income of 67.467 billion yuan in the first half of 2024, a year-on-year increase of 15.25%; net profit attributable to shareholders was 5.547 billion yuan, a year-on-year increase of 116.14%; non-recurring net profit attributable to shareholders was 5.717 billion yuan, a year-on-year increase of 121.86%. In the first half of the year, the profitability of the coal chemical sector was restored, and performance is expected to gradually stabilize and recover. With the implementation of the old-for-new policy and the optimization of supply-side cost reduction and efficiency improvement, the industry structure will be improved, and sentiment is expected to continue to recover. The pesticide sector had operating income of 76.429 billion yuan in the first half of 2024, a year-on-year decrease of 6.12%; net profit attributable to shareholders was 2.339 billion yuan, a year-on-year decrease of 55.07%; non-recurring net profit attributable to shareholders was 1.924 billion yuan, a year-on-yearA decline of 61.82%. In the first half of the year, the performance of the pesticide sector was under pressure due to factors such as price fluctuations of Shenzhen Agricultural Power Group and a decline in raw material prices. In the long term, with the trend of destocking, it is expected that the prices of agricultural chemical raw materials will return to a reasonable range, and the performance of enterprises is expected to be restored.Potassium fertilizer segment's operating income in the first half of 2024 was 12.675 billion yuan, a year-on-year decrease of 22.95%; net profit attributable to the parent was 4.055 billion yuan, a year-on-year decrease of 50.57%; non-net profit attributable to the parent was 3.974 billion yuan, a year-on-year decrease of 51.08%. In the first half of the year, intensified market competition led to a decline in potassium chloride prices, putting pressure on industry performance. In the long run, the global potassium fertilizer supply growth rate is expected to slow down, and the upward trend in the agricultural market is expected to drive stable growth in potassium fertilizer demand, helping to restore profitability and improve market sentiment. Organosilicon segment's operating income in the first half of 2024 was 22.688 billion yuan, a year-on-year increase of 7.38%; net profit attributable to the parent was 1.75 billion yuan, a year-on-year decrease of 30.86%; non-net profit attributable to the parent was 1.57 billion yuan, a year-on-year decrease of 30.35%. In the first half of the year, the organosilicon market saw capacity expansion, with the dual challenges of weak market demand and supply-demand imbalance keeping product prices at low levels, putting pressure on industry performance. In the long run, with capacity clearance and demand picking up, the organosilicon segment is expected to see recovery. The food and feed additives segment's operating income in the first half of 2024 was 43.678 billion yuan, a year-on-year decrease of 2.26%; net profit attributable to the parent was 4.105 billion yuan, a year-on-year increase of 15.57%; non-net profit attributable to the parent was 3.909 billion yuan, a year-on-year increase of 20.41%. In the first half of the year, the gradual clearance of supply-side capacity helped boost vitamin prices, strengthen profitability, and improve market sentiment. In the long run, with the recovery of the farming cycle, pork prices are expected to continue to rise, and market sentiment is expected to continue to improve. The civilian explosives products segment's operating income in the first half of 2024 was 25.379 billion yuan, a year-on-year decrease of 4.66%; net profit attributable to the parent was 1.993 billion yuan, a year-on-year decrease of 11.20%; non-net profit attributable to the parent was 1.825 billion yuan, a year-on-year decrease of 14.34%. In the first half of the year, the contraction of sales volume in civilian explosives enterprises and weak market demand led to a decline in industry performance. In the long run, in the first half of the year, the upstream cost end, the price of raw material ammonium nitrate has shown a downward trend, which is expected to bring profit space for the civilian explosives industry. The titanium dioxide segment's operating income in the first half of 2024 was 22.66 billion yuan, a year-on-year increase of 9.71%; net profit attributable to the parent was 2.216 billion yuan, a year-on-year increase of 49.08%; non-net profit attributable to the parent was 2.113 billion yuan, a year-on-year decrease of 56.90%. Market capacity clearance and increased industry demand drove performance growth. Risk warning 1. Risk of significant fluctuation in the prices of chemical products; 2. Risk of changes in industry and regulatory policies; 3. Force majeure and safety production risks; 4. Risk of intensifying conflicts in certain regions globally; 5. Risk of trade disputes between countries and regions; 6. Risk of a sharp decline in macroeconomic conditions.