Guosheng: Which construction companies are likely to benefit from the logic of rising chemical prices?

1. With the logic of price increase in chemical products, which construction companies are expected to benefit? With the improvement of supply and demand patterns and the backdrop of "anti-internal competition", chemical products are expected to see price increases. From the supply side, the investment growth rate of the chemical raw materials and chemical products manufacturing industry has been continuously declining since 2022, with the investment growth rate turning from positive to negative in June 2025. The in-construction projects/fixed assets of the basic chemical sector of Shenwan from the peak of 33.8% in 2022 has continuously declined to 24.4% in 2025 Q1-3. Considering that the construction cycle of the chemical industry is generally around 3 years, with a significant decline in capital expenditures, the addition of new production capacity in the chemical industry in China has significantly decreased. In addition to the reduction in new production capacity, due to the dual control of energy consumption, the deepening of environmental protection policies in 2025, and the large-scale shutdown of chemical facilities in Europe, Japan, and South Korea due to cost disadvantages in 2025 (especially ethylene, propylene and other basic chemical raw materials), some old and outdated production capacity in the chemical industry is accelerating its exit, and the global supply pattern has improved. From the demand side, although traditional demand is weak currently, due to inventory replenishment in the manufacturing industry, pre-holiday stocking before the Spring Festival, increased exports, and growth in demand for new types of manufacturing, some chemical product demands have strong support. From the data perspective, the manufacturing PMI in December 2025 was 50.1%, returning to the expansion zone for the first time since April 2025, with both production and new orders rising simultaneously, showing marginal improvement in manufacturing demand. From the inventory cycle perspective, the chemical industry may be at a critical point of transitioning from active destocking to passive destocking. Although the inventory of the chemical raw materials and products industry increased slightly year-on-year (8.3% at the end of November) in the latter half of 2025 due to weak demand, the inventory growth rate of finished products in major downstream sectors (textiles, rubber products) has been continuously declining since March 2025, and the inventory gap in the industrial chain has widened. The chemical industry chain has a structure of moderate upstream inventory and low downstream inventory, and once demand improves in the future, the demand for downstream replenishment is expected to trigger rapid destocking of chemical products in the upstream, providing strong support for price elasticity in a situation of tight spot prices. From the policy perspective, the "prevention of vicious internal competition" proposed in the July 2024 meeting of the Central Political Bureau has evolved from a slogan into substantive industry action. This is not only policy guidance, but also a spontaneous choice under the pressure of enterprise cash flow. Leading enterprises have begun to actively lead the industry in forming a consensus against internal competition, avoiding grabbing market share through price reduction, but rather by reducing production levels to support prices, and repairing their balance sheets. In recent years, some construction companies have actively extended their industrial advantages to the chemical industry, and the subsequent price increase in chemical products is expected to contribute to their performance: China National Chemical Engineering (601117.SH): Bottom-quality undervalued blue-chip company, excellent cash flow, benefiting from the anti-internal competition in the chemical industry. The company has a production capacity of 200,000 tons of caprolactam and 200,000 tons of caprolactam. With the advancement of the anti-internal competition, the prices of related products are expected to rebound from the bottom, which is expected to bring significant performance elasticity to the company's industrial sector. At the end of last year, the caprolactam industry held two self-discipline meetings in a row, with measures to counteract internal competition supporting product prices beginning to show a clear rebound, with current prices at around 9,400 yuan/ton, up 16.8% from the lowest point since 2025. Estimating that for every 1,000 yuan increase in caprolactam prices, profits are expected to increase by about 200 million yuan, accounting for 3.5% of the 2024 attributable profit. The previously lower-than-expected profitability of the company's industrial projects was one of the main factors suppressing its valuation, and the subsequent improvement in profitability is expected to drive a faster recovery in valuation. The company has high quality financial statements, low interest-bearing debt ratios, and positive operating cash flow from 2018 to 2024, with a ratio of operating cash flow to attributable net profit totaling 1.33, indicating a consistently excellent cash flow situation, and the company's dividend payout rate in 2024 was 20%, with significant potential for further increase. The current stock price corresponds to a PB ratio of 0.83 times, which is in the historical low range, with sufficient safety margin. Shandong Sunway Chemical Group (002469.SZ): With the backdrop of "anti-internal competition", the improving trend in prices of existing chemical products is expected to continue, and the profit release of new cellulose products is imminent. As of the end of 2024, the company's aldehyde/alcohol/acid/ester products had capacities of 170,000/260,000/30,000/100,000 tons/year, making it a leading domestic producer of n-propanol, residual ethanol recovery, and n-octanol sales companies. In the first half of 2025, the chemical sector achieved operating income of 730 million yuan, accounting for 58% of the total; a gross profit margin of 18.6%, with a gross profit of 135 million yuan, accounting for 54%. Since the second half of 2025, the prices of core products such as n-propanol have significantly decreased, which is expected to put pressure on profits, with a recovery expected in 2026: 1) Recent core chemical product prices have bottomed out and rebounded, with the improving trend expected to continue in the context of "anti-internal competition": as of January 23, the benchmark price for n-propanol from Business Times was 5,500 yuan/ton, up 5.8% from the beginning of the month (5,200 yuan/ton) and 6.8% from the recent low (5,150 yuan/ton); the price of n-butanol is 6,500 yuan/ton, up 10% from the beginning of the month (5,900 yuan/ton) and 24% from the low point in December 2025 (5,250 yuan/ton); the price of octanol is 7,150 yuan/ton, up 3% from the beginning of the month (6,950 yuan/ton) and 11% from the low point in December 2025 (6,450 yuan/ton). 2) Acceleration in the construction of isooctanoic acid and high-end cellulose production lines, with profit release imminent: the company is fully promoting the "acetate and butyrate cellulose product optimization and improvement technological transformation project" and "cellulose derivatives and associated equipment refitting and upgrading project", with a capacity of 50,000 tons/year isooctanoic acid and 15,000 tons/year of high-end cellulose (acetate cellulose 5,000 tons/year, propionate cellulose 3,000 tons/year, butyrate cellulose 5,000 tons/year, cross-linked carboxymethyl cellulose sodium 2,000 tons/year) expected to be put into operation one after another in 2026, high-end cellulose products are expected to have superior profitability, which may become a new growth point for the industrial sector. In addition, the company's engineering sector has seen a high increase in newly signed orders (135% year-on-year growth in Q1-3 of 2025), with a reserve of orders on hand at the end of Q3 reaching 1.6 billion, and potential orders such as the Luoyang Oil and Luhe Refinery project and potential orders in Xinjiang coal chemical industry are expected to further open up growth space. The company has sufficient cash on hand, with a dividend payout rate as high as 99% in 2024, and with an average dividend payout rate of 84% from 2023 to 2024, the expected dividend yield for 2026 is around 5%, making it highly attractive for investment. East China Engineering Science and Technology (002140.SZ): Supply contraction supports the stability of ethylene glycol prices, and the improvement in profitability of the industrial sector is expected to promote valuation uplift. The company has invested in and built 5 high-end chemical production projects, including East China Tianye Biodegradable Materials, Inner Mongolia New Materials Ethylene Glycol, and East China (Anhui) Carbon-based New Materials, with a capacity of 60,000 tons/year PBAT, 40,000 tons/year PBT, and 300,000 tons/year coal-based ethylene glycol having officially commenced operation. In the first half of 2025, the ethylene glycol project entered the trial operation phase, producing 6.7 million tons of ethylene glycol products, achieving operating income of 330 million yuan, accounting for about 7% of total revenue, and operating at full capacity since October 2025, with the revenue share of the industrial business expected to further increase throughout the year. As for prices, ethylene glycol prices have been declining since the second half of 2025, with recent temporary supply contractions on the supply side supporting the stabilization of prices. Since November 2025, domestic coal-based and integrated ethylene glycol units have been successively shut down for maintenance, resulting in a reduction in supply. Multiple units outside the mainland have reduced load and undergone maintenance due to poor economic performance and geopolitical disturbances, with Iran's two units totaling 3.3 million tons/year of ethylene glycol shutting down in November 2025, with no set restart date; since January, Taiwan's South Asia, Kuwait's EQUATE, and several units in Saudi Arabia have successively started maintenance plans. The anticipated decrease in imported sources and resonance with domestic maintenance relieve short-term supply pressure. In the medium to long term, with the background of "anti-internal competition", obsolete production capacity is expected to be accelerated in clearing out, supply and demand are expected to become balanced, and industry prices and profitability levels are expected to return to a reasonable range. The company's main business in engineering is stable, with ample orders on hand, vast growth potential in overseas markets, and a current stock price corresponding to a PE ratio of around 16 times in 2026, with valuation expected to rise due to the anticipation of industrial profitability improvement. Zhejiang Southeast Space Frame (002135.SZ): With an annual production capacity of 500,000 tons of polyester filament, the price recovery is expected to contribute to an increment in performance. The company's subsidiary Southeast New Materials produces and sells polyester filament, including polyester pre-oriented yarn (POY), polyester drawn yarn (FDY), polyester textured yarn (DTY), polyester chips, with an annual production capacity of 500,000 tons (production/sales in 2024 were 471,000/465,000 tons). The company's polyester business achieved revenues of 3.12 billion yuan in 2024 and 1.24 billion yuan in the first half of 2025, with year-on-year changes of -2.3% and -21.0% respectively, accounting for 27.8% and 27.3% of total revenues, with gross profit margins of 1.62% and 0.46% respectively. Looking at historical prices of polyester filament, prices have been lingering near historic lows since 2025, with the main factors expected to be the still strong elasticity of supply and weak demand absorption, lacking price-trend catalysts. Recently, polyester filament has been showing a slight stabilization and recovery trend, and if prices of raw materials such as PTA and MEG increase in addition to industry controls against "anti-internal competition", prices are expected to further rise, driving the Zhejiang Southeast Space Frame's polyester business profitability recovery. 2. Investment recommendation As we begin in 2026, we believe that there is momentum for price increases in chemical products: 1) With the industry's capital expenditures declining and the backdrop of environmental protection limiting production and some chemical enterprises shutting down due to cost disadvantages, the competitive landscape continues to improve; 2) The demand side is showing improvement signals from the manufacturing PMI data; 3) From an inventory cycle perspective, there is a structure of moderate upstream inventory and low downstream inventory, and downstream replenishment is expected to trigger rapid destocking of chemical products in the upstream; 4) Under the guidance of anti-internal competition policy, leading enterprises are actively reducing production levels to support prices. In recent years, some construction companies have actively extended their industrial advantages to the chemical industry and are expected to benefit from the subsequent price increases in chemical products. We recommend and focus on: China National Chemical Engineering (caprolactam capacity of 200,000 tons, caprolactam capacity of 200,000 tons, PE 7.5X), Shandong Sunway Chemical Group (capacity of 170,000/260,000/30,000/100,000 tons/year of aldehyde/alcohol/acid/ester products, PE 15X), East China Engineering Science and Technology (capacity of 60,000 tons/year PBAT, 40,000 tons/year PBT, and Inner Mongolia New Materials 300,000 tons/year coal-based ethylene glycol project has officially commenced operation, PE 16X), Zhejiang Southeast Space Frame (annual production capacity of 500,000 tons of polyester filament). Risks Risks include chemical prices not rising as expected, a slowdown in demand, and insufficient policy measures.