Guotou Securities: Optimistic about the potential long-term bullish market of dyes driven by China's environmental protection and dual carbon policies.

Guotou Securities released a research report stating that the improvement in the structure of intermediates for dispersed dyes is expected to ultimately drive up the prices of dispersed dyes; the intermediate for reactive dyes, H acid, has experienced supply tightening due to force majeure events in the past 25 years, and may also have potential for price increases. In recent times, the price expectations for these two types of dyes have been gradually confirmed as leading companies have started to raise prices. The future outlook remains positive for the potential long bull market driven by the improvement in structure and the continued traction of China's environmental protection and dual carbon policies. Guotou Securities' main viewpoints are as follows: Industry reshuffling is relatively thorough, with environmental protection and dual carbon creating long-term barriers. China is the largest producer of dyes globally, but the dye industry is typically high in pollution. Producing 1 ton of dispersed dyes generates 20-40 tons of wastewater, while producing 1 ton of reactive dyes generates 10-20 tons of wastewater, making it a key area for environmental and safety production regulation. In recent years, with stricter environmental regulations, some companies that do not meet environmental standards have been punished, leading to some small and medium enterprises exiting the market. Currently, the dye industry shows high concentration. According to Baichuan Yingfu and various companies' announcements, the industry concentration of dispersed dyes based on capacity CR4 reaches 67.2%; and for reactive dyes CR4 reaches 65.3%, indicating a considerable reshuffle in the industry. Additionally, the recent joint issuance of the "Opinions on Promoting the Construction of Zero-Carbon Factories" by the Ministry of Industry and Information Technology and other departments, by 2030, zero-carbon factories will further expand into areas such as steel, non-ferrous metals, petrochemicals, building materials, textiles, etc. As an important part of the textile industry, the carbon emission requirements are expected to be tightened concurrently. The bank believes that with the continuing reinforcement of environmental and dual carbon policies, the limited capacity expansion of the industry may lead to further clearing without worrying about potential capacity shocks. The structure of dye intermediates is superior; focus on integrated advantage companies. Intermediates play an indispensable role in dye production, with the production process of dispersed dye intermediates involving processes such as nitration and hydrogenation, generating a large amount of waste acid. With the stricter national environmental policies, many non-compliant small factories have been shut down, leading to a depletion of the current supply of intermediates with a highly concentrated structure, mostly located in the Yangtze River Delta region compliant with the latest environmental standards, with limited supply elasticity; the production process of the H acid intermediate for reactive dyes is difficult to handle waste water and involves high-risk sulfonation and nitration reactions, with significant pressures on environmental and safety production, resulting in the gradual elimination of many small and medium backward capacities. Considering that the consumption of H acid in the production of reactive dyes is 0.2 tons, and its value accounts for a large proportion, about 30-50% of the production cost of reactive dyes, the cost transmission mechanism is relatively effective. According to records from Zhejiang Runtu, the current effective capacity of H acid is less than 60,000 tons, with a gap of over 10%, and after the recent shutdowns for maintenance by the two major H acid manufacturers, the effective capacity may be further reduced by over 25%. With the deepening optimization of the two critical intermediates, the bank believes that top companies with outstanding integration and scale effects are expected to capitalize on the intermediates and establish synergy, potentially causing small and medium dye companies to reduce production and watch due to pressure on raw material costs, enhancing the sustainability of this round of dye price increases. Drawing a parallel with citral in the VA industry, the elasticity of this round of price increases may exceed expectations. The bank believes that the relationship between intermediates and dyes can be compared to that between citral and VA, as they share the following characteristics: 1) complex synthetic processes, high concentration of production capacity in an oligopolistic structure, with most top companies having strong integration capabilities; 2) the intermediates/citral account for a high proportion of production costs in downstream dyes/VA; 3) but dyes/VA account for a relatively low proportion of the costs of downstream clothing/feed, making them more prone to price increases due to price insensitivity. Learning from history, in 2017-2018, a fire at BASF's citral plant combined with an accident at DSM's plant in Switzerland led to an extreme shortage of VA supply, causing prices to rise from 123.5 RMB/kg to 1425 RMB/kg, an increase of over ten times. In terms of dyes, dispersed dye prices reached historical highs of 45,000 RMB/ton in 2015 and 2019, before entering a downward trend, with current prices at only 19,000 RMB/ton; and reactive dye prices reached historical highs of 33,000 RMB/ton in 2016, with current prices at 23,000 RMB/ton, indicating significant upside potential for both. The bank believes that the main change in this round of dye market is the irreversible concentration of intermediates, which may evolve into a potential long bull market led by top companies, with the price upside potential exceeding expectations. Recommended focuses: Zhejiang Runtu, Zhejiang Longsheng Group, Zhejiang JiHua Group, Jiangsu Jinji Industrial, Shanghai Anoky Group, Jiangsu Yabang Dyestuff, Hangzhou Flariant, Zhejiang Wanfeng Chemical, Zhejiang Hisoar Pharmaceutical, etc. Risk warnings: Environmental inspection efforts are lower than expected, downstream demand falls short of expectations, significant fluctuations in raw material prices, safety production risks, etc.