China Galaxy Securities: Performance diverges across chemical sub-sectors; recommend focusing on related cyclical elasticity investment opportunities.

China Galaxy Securities has released a research report stating that on the cost side, the Brent crude oil price is expected to remain at a mid-to-high level with wide fluctuations in the short term. On the supply side, on one hand, in recent years the pace of capital expenditure in China's chemical industry has become more cautious, and projects under construction and existing capacity will be gradually absorbed; on the other hand, domestic supply-side self-discipline constraints are strengthening and overseas outdated capacity is accelerating its exit, and the supply side is expected to contract. On the demand side, the continued advancement of China's shift between old and new growth drivers and the gradual return of overseas orders to China make demand growth for chemical products foreseeable. The bank believes that supply-side contraction and demand-side momentum are expected to help lift the chemical industry's prosperity, and recommends focusing on related cyclical elasticity investment opportunities. The main views of China Galaxy Securities are as follows: In the first three quarters of 2026, the performance of chemical industry sub-sectors improved year on year In the first three quarters of 2026, the petrochemical and basic chemical sectors achieved operating revenue of RMB3.0803 trillion and RMB2.3859 trillion, respectively, changing by 3.9% and 18.6% year on year, respectively; they achieved net profit attributable to parent companies of RMB81.8 billion and RMB164.9 billion, respectively, changing by 123.5% and 40.3% year on year, respectively. The profitability of the petrochemical sector increased sharply year on year, partly due to the low base in the same period last year, and partly due to the sharp rise in international crude oil prices amid intensified geopolitical conflicts, which drove up prices and profits across the entire chain. In the first three quarters of 2026, the average prices of Brent and WTI crude oil were US$88.9/barrel and US$83.4/barrel, respectively, up 27.1% and 25.1% year on year, respectively. The year-on-year improvement in performance and recovery in profitability of the basic chemical sector may be related to the improvement in supply-demand dynamics in some sub-sectors, coupled with cost-side increases driving the gradual recovery of chemical product prices and price spreads. In 26Q3, the performance of the basic chemical sector declined quarter on quarter In 26Q3, the petrochemical and basic chemical sectors achieved operating revenue of RMB1.0706 trillion and RMB812.6 billion, respectively, changing by 7.7% and 16.9% year on year, respectively, and by 3.1% and -3.8% quarter on quarter, respectively; they achieved net profit attributable to parent companies of RMB26.2 billion and RMB44.4 billion, respectively, up 149.46% and 10.9% year on year, respectively, and changing by 2.8% and -35.3% quarter on quarter, respectively; sales gross margins were 15.4% and 17.4%, respectively, changing by 0.8 and -0.2 percentage points year on year, respectively, and declining by 1.8 and 3.2 percentage points quarter on quarter, respectively. In May-June, geopolitical conflicts temporarily eased, and international crude oil prices fell significantly from their intra-year highs. Since July, geopolitical conflict disruptions escalated again and repeatedly, and the center of international crude oil prices moved higher amid fluctuations. In 26Q3, the average prices of Brent and WTI crude oil were US$91.3/barrel and US$85.4/barrel, respectively, up 33.9% and 31.5% year on year, respectively, and down 5.6% and 7.4% quarter on quarter, respectively. Thanks to the maintenance of a high price center for crude oil and related products across the industrial chain, the performance of the petrochemical sector maintained positive growth in 26Q3. The sector's sales gross margin declined quarter on quarter, mainly due to factors such as a significant increase in raw material costs during the period and a narrowing of refining and chemical price spreads. The quarter-on-quarter decline in the performance of the basic chemical sector in 26Q3 was mainly due to factors such as continued cost-side pressure, gradually weakening downstream demand, and the gradual erosion of inventory gains. In 26Q3, the portfolio weighting of the basic chemical sector declined quarter on quarter, while that of the petroleum and petrochemical sector increased quarter on quarter From the perspective of market value of heavily weighted holdings, in 26Q3 funds mostly flowed out of growth sectors such as technology and partly shifted to defensive sectors. The top five sectors by quarter-on-quarter increase in market value of heavily weighted holdings were pharmaceuticals, banks, coal, petroleum and petrochemicals, and real estate, with their market value of heavily weighted holdings accounting for 11.23%, 2.39%, 0.93%, 1.37%, and 1.12% of the total market value of heavily weighted holdings in the sample funds, respectively, up 4.81, 1.14, 0.55, 0.54, and 0.47 percentage points quarter on quarter, respectively. The basic chemical and petroleum and petrochemical sectors ranked 7th and 14th among first-level sectors by market value of heavily weighted holdings, accounting for 3.38% and 1.37%, respectively, changing by -0.67 and 0.54 percentage points quarter on quarter, respectively. Risk warnings 1. The risk of intensified international trade frictions; 2. The risk of a sharp rise in raw material prices; 3. The risk that downstream demand falls short of expectations; 4. The risk that projects fail to reach production as expected.