Guotai Junan: Maintaining a "buy" rating for the basic chemical industry, the sector may gradually emerge from the bottom of the cycle and begin a mild recovery by 2025.

Guotai Junan has released a research report stating that it maintains a "buy" rating on the basic chemical industry. Looking at the fourth quarter of 2024 and the next two years, in the short term, although the peak season of "Golden September and Silver October" in 2024 is not strong, industries with rigid supply have shown strong profit resilience, such as MDI, titanium concentrates, phosphorus rock, and trichlorosucrose. In the medium to long term, the basic chemical sector may gradually emerge from the bottom of the cycle in 2025 and start a mild recovery, recommending leading companies with cost advantages and high-quality enterprises with growth trends. Guotai Junan's main points are as follows: Maintain a "buy" rating on the basic chemical industry. From January 1, 2024, to October 31, 2024, the basic chemical industry (CI005006) fell by 0.76%, ranking 22nd among primary sub-industries. During the same period, the Shanghai and Shenzhen 300/CSI 500 rose by 14.90% and 9.09% respectively, with excess returns of -15.67% and -9.85% relative to the Shanghai and Shenzhen 300/CSI 500. The basic chemical index rebounded after falling in the first three quarters of 2024 and resonated overall with the two major indices. Since September, influenced by policies from the central bank and the China Securities Regulatory Commission, the industry has performed poorly due to the downward trend in industry prosperity. The traditional peak season of "Golden September and Silver October" overall was not strong, but with the expected implementation of stable growth policies domestically and the impact of overseas interest rate cuts bringing about loose liquidity, the basic chemical industry may usher in structural opportunities. Profits in the industry were under pressure quarter-on-quarter in Q3. 1) In the first three quarters of 2024, the sector achieved operating income of 1,855.253 billion yuan, a slight decrease of 1.45% year-on-year; achieving a net profit attributable to the parent company of 104.171 billion yuan, a year-on-year decrease of 8.45%, with a net profit margin of 5.61%. 2) Looking at individual quarters, the operating income and profit of the basic chemical industry in Q3 of 2024 were under pressure, with operating income of 626.431 billion yuan (yoy -3.38%, qoq -4.33%), and a parent company's net profit of 30.17 billion yuan (yoy -16.34%, qoq -23.92%). 3) In the first three quarters of 2024, more than half of the sub-industries saw year-on-year growth in net profit, with 20 out of 33 sub-industries showing an increase, mainly in dye chemicals, nylon, and chlor-alkali. Looking at each quarter individually, the industry remained under pressure in Q3 of 2024, with only 13 out of 33 sub-industries showing a year-on-year increase, and only 4 sub-industries showing a quarter-on-quarter increase in net profit. In Q3 of 2023, among the major sub-sectors, the losses in the three sub-industries of cotton, film materials, and titanium dioxide accounted for more than 50%, while the losses in most other sub-industries ranged from 10% to 30%. The chemical industry is currently in a bottoming phase. On the supply side, although capital expenditures have decreased significantly year-on-year, capital expenditures and construction projects are still at historical highs, and it is expected that the improvement in supply-demand relations will take some time; on the demand side, as the recovery in demand is gradual, the momentum for an upward reversal still needs time to develop. Despite the weak overall supply-demand relationship in Q3, there are still investment opportunities in the market. Some sub-sectors have seen significant improvements in profitability due to disruption or events on the supply side, such as dye chemicals, fluoride chemicals, and civilian explosives, so attention should be paid to investment opportunities brought about by tightening industry supply or reshaping patterns from the bottom up. In addition, due to the impact of Trump's oil policies, we believe it is also important to pay attention to sub-industries and sectors that are expected to benefit from lower oil prices. Risk warning: Economic recovery falls short of expectations, concentrated release of production capacity, trade frictions, etc.