China Galaxy Securities: Bullish on the structural opportunities in the chemical industry in 2025 and the industry valuation recovery space.

China Galaxy Securities issued a research report stating that this week, the prices of chemical products have shown a weak performance, while the price differentials have shown a strong performance. On the supply side, in recent years, the capital expenditure and growth rate of in-construction capacity in the chemical industry have slowed down, but it is expected that existing capacity and in-construction capacity still need time to be absorbed. On the demand side, with the gradual manifestation of the policy stimulus effects by 2025 and the gradual strengthening of end-industry recovery momentum, the potential of domestic demand is expected to be fully unleashed. They are optimistic about the structural opportunities and industry valuation recovery space of chemical products in 2025, and recommend focusing on the following three investment themes: first, comprehensively expanding domestic demand to seize growth certainty opportunities; second, cultivating new high-quality productivity, the timing for domestic substitution of new materials is right; and third, some resource products are expected to maintain high levels of prosperity, focusing on the growth brought by scale expansion. Key points from China Galaxy Securities are as follows: Oil market: Demand expectations pressure, oil prices center marginally lower. As of February 28, Brent and WTI oil prices reached $73.18 per barrel and $69.76 per barrel respectively, down 1.68% and 0.91% from the previous week; in terms of the average price for the week, the average price this week decreased by 2.77% and 2.78% respectively compared to the previous week. On the supply side, various factors disturb expectations for oil supply, watching for substantial changes in production. On the one hand, U.S. President Trump is committed to resolving the Ukraine conflict, and there is room for a decline in geopolitical risk premiums. In addition, whether OPEC+ will increase production on time in April will also have a significant impact on the supply side. On the other hand, with U.S. President Trump restarting the "maximum pressure" campaign on Iran's nuclear program, there is still significant uncertainty in Iran's oil supply to foreign countries in the future. In terms of demand, in the short term, as of the week ending February 21, the refinery utilization rate in the United States was 86.5%, an increase of 1.6 percentage points from the previous week; according to seasonal patterns, refinery utilization rates are expected to continue to rise. In the medium term, on February 27, U.S. President Trump announced that starting March 4, he would impose a 25% tariff on products imported from Mexico, Canada, and an additional 10% tariff on Chinese products imported to the U.S., raising concerns that trade disputes could inhibit global economic growth and thereby reduce oil demand. In terms of inventories, as of the week ending on February 21, U.S. commercial crude oil inventories were at 430.16 million barrels, a decrease of 2.33 million barrels from the previous week. The bank believes that supply side uncertainties will continue to support oil prices, but weak demand expectations will limit the upside of oil prices, with the short-term reference range for Brent crude oil prices being between $70-80 per barrel. It is recommended to closely monitor OPEC+ production policies, Iranian oil supply situation, global trade disputes, and other indications. Inventory transformation: This week, crude oil had a negative return, while propane had a positive return. According to the model constructed by the bank, the mean profit and loss of crude oil inventory transformation this week was -388 yuan/ton, and it was 88 yuan/ton from the beginning of the year to the present; the mean profit and loss of propane inventory transformation this week was 122 yuan/ton, and it was 77 yuan/ton from the beginning of the year to the present. Price changes: This week, the prices of chemical products have shown a weak performance, with potassium fertilizer, organic silicon DMC, and other prices leading the way. Among the 170 products tracked by the bank, 44 products increased compared to the previous week, accounting for 25.9%, 79 products decreased, accounting for 46.5%, and 47 products remained unchanged, accounting for 27.6%. The products with the highest price increases this week include potassium chloride (57% powder, Qinghai), LNG (nationwide), dichloromethane, R32 (Zibo Feiyuan), hydrofluoric acid (Zhejiang), ammonium phosphate (55% powder, Jiangsu), titanium concentrate (TiO2 > 47%, Sichuan), etc. Price differential changes: This week, the price differentials of chemical products showed a strong performance, with EVA, ethyl acetate, and other price differentials leading the way. Among the 130 product differentials tracked by the bank, 66 differentials increased compared to the previous week, accounting for 50.8%, 59 differentials decreased, accounting for 45.4%, and 5 differentials remained unchanged, accounting for 3.8%. The top performers in terms of price differentials this week include succinic anhydride differential (butane), MTBE differential (C4), PA6 differential (hexanediamine), polypropylene acrylamide differential (acrylonitrile), ABS differential (olefins), alkylated gasoline differential (C4), polyester chip (with light) differential (PTA), butadiene differential (C4), etc. Investment recommendations: This week, the prices of chemical products have shown a weak performance, while the price differentials have shown a strong performance. 1) In terms of valuation, as of February 28, the PE ratios (TTM) of petrochemical and basic chemical industries were 16.4x and 23.7x respectively, with a premium level of 4.6% and -16.6% compared to the historical average levels since 2014 of 15.7x and 28.4x. Currently, the valuation of the basic chemical industry is at a relatively low level since 2014, indicating medium to long-term allocation value. 2) On the supply side, in recent years, the capital expenditure and growth rate of in-construction capacity in the chemical industry have slowed down, but it is expected that existing capacity and in-construction capacity still need time to be absorbed. On the demand side, with the gradual manifestation of the policy stimulus effects by 2025 and the gradual strengthening of end-industry recovery momentum, the potential of domestic demand is expected to be fully unleashed. They are optimistic about the structural opportunities and industry valuation recovery space of chemical products in 2025, and recommend focusing on the following three investment themes: first, comprehensively expanding domestic demand to seize growth certainty opportunities; second, cultivating new high-quality productivity, the timing for domestic substitution of new materials is right; and third, some resource products are expected to maintain high levels of prosperity, focusing on the growth brought by scale expansion. Risk factors: 1. Risk of significant increase in raw material prices; 2. Risk of lower-than-expected downstream demand; 3. Risk of production reaching capacity below expectations; 4. Risk of intensifying international trade frictions, etc.