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Basic chemical industry: weak economy, focus on growth, focus on cyclical structural opportunities

Zhangjiagang Sansu Machine Co.,Ltd | Updated: Dec 07, 2018

Industry review in 2018: profitability remains high, growth rate and profitability decline month on month. In the past 18 years, environmental protection has continued to accelerate the clearance of outdated production capacity in the chemical industry under high pressure, and demand has been basically stable. The cost side benefits from the oil price center moving up, the cost support is strong, chemical prices continue to rise, leading to rapid growth in revenue performance. In the third quarter of this year alone, the pressure of weak demand and insufficient upward momentum in prices have led to weak growth in both volume and price. In the chemical products that are mainly tracked, 70% of the average prices in the third quarter were increased year on year, and 59% were further increased month on month. 48% of the average price difference in the third quarter is higher than that of the previous year, 40% is higher than that of the previous quarter, and the profitability of the product has declined significantly from the previous quarter. The peak of the cycle has passed. As for the valuation, as of November 30, the average PE of the chemical industry was 14 times, which was 0.39% of PE and 1.5 times of PB in the past five years, which was 0.62% of PB in the past five years, and the valuation was close to the lowest level in the past five years.

Industry outlook in 2019: weak demand and downward expectation of short-term prosperity. Supply side: capital expenditure of the industry increased rapidly in the past 18 years, mainly due to the expansion of production by giants in refining, chemical and polyurethane industries. Demand: global economic growth slowed down and demand weakened. Real estate sales are under pressure. The growth rate of demand for automobiles, household appliances, textiles and other industries has slowed down or even turned negative. Export: there is great uncertainty in export. Cost: crude oil prices fell sharply in October and cost support weakened. Since the fourth quarter, the price gap of most chemical products has narrowed significantly. Only some industries, such as fluorine chemical industry and phosphorous industry chain, have shown strong performance, and the profit of industrial chain has been gradually transferred to the middle and lower reaches. In the chemical products we observed, 78% of the product prices were below 40% of the historical percentile, and 56% of the product price difference was below 40% of the historical percentile. We believe that the oil price is likely to fluctuate in a wide range, the overall growth rate of demand slows down, but there are still some structural opportunities. Moreover, the overall price gap of chemical products is at a relatively low historical level, and we expect the downturn of the economic boom to be limited.