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Author: Da Lianhua. He who masters the chemical industry masters the world. To conclude right away: I am highly optimistic about the growth potential of Rongsheng Petrochemical in the next two years! It was previously analyzed that the basic valuation of large-scale refining operations must be aligned with their vacuum distillation capacity. The article explains that after achieving vertical integration, the basic valuation of companies involved in large-scale refining is still determined by their vacuum distillation capacity; Hengli Petrochemical is used as a benchmark for valuation purposes, thereby serving to establish the basic valuation for other companies. Today we discuss the horizontal valuation brought about by vertical development. “\"Strategic alliances and coordination\" will be the main theme for the future development of large petrochemical enterprises; against the backdrop of carbon neutrality, the approval requirements for large-scale petrochemical projects are becoming increasingly stringent. Take Hengli Petrochemical’s second phase of refining and processing operations as an example: from the company’s high confidence last year to its complete silence on this topic at the annual results presentation, this indirectly shows that even industry leaders face numerous uncertainties when applying for large-scale projects. Hengli Petrochemical promptly adjusted its strategy by focusing on downstream polyester production capacity; for example, it established a production facility for 1 million tons of polyester film in Kunshan, one for 1.5 million tons of industrial fibers in Suzhou, ones for 2.7 million tons of consumer fibers in Nantong and Wujiang, and one for 900,000 tons of biodegradable polyester in Yingkou. It also invested in the development of the Dalian Fine Chemicals Park. These projects are expected to be put into operation over the next three years, generating profits in the order of 10 billion yuan. Given Hengli Petrochemical’s current profit levels, the future increase in profits by 10 billion will have an annual compound growth rate of around 18%, indicating that the company has entered a phase of steady development. Turning to Rongsheng Petrochemical, its main business entities are three: Zhejiang Petrochemical, CICC Petrochemical, and Yisheng PTA. In the first quarter, Zhejiang Petrochemical achieved profits that exceeded expectations, reaching 4.4 billion. As Phase II of the facility comes online in June and operates at full capacity, Zhejiang Petrochemical’s profitability is set to increase quarter by quarter; the annual profit is expected to exceed 20 billion, with profits projected to be over 30 billion next year. Although Rongsheng Petrochemical’s refining capacity is similar to that of Hengli Petrochemical, Zhejiang Petrochemical’s strong horizontal network serves as the driving force that enables Rongsheng Petrochemical to overtake Hengli and continue to widen the gap between the two. Ethylene is the most fundamental raw material in the chemical industry; those who control ethylene control the chemical industry. Zhejiang Petrochemical’s strength lies in its possession of the largest ethylene production capacity in the country: 4.2 million tons for phases 1 and 2, with an additional 3.2 million tons planned for phase 2.5, bringing the total to 7.4 million tons. Its production capacity and level of cracking are far superior to those of CNPC and Sinopec. Zhejiang Petrochemical will become the largest producer of ABS, PC, and Eva in the country, with a product range covering C2, C3, and C4 materials. Rongsheng Petrochemical holds 51% of the shares in Zhejiang Petrochemical, giving it an indirect stake in an ethylene production capacity of 3.78 million tons, while Hengli Petrochemical has an ethylene production capacity of only 1.5 million tons. As a result, although both companies have a refining and petrochemical production capacity of 20 million tons, there is a significant difference in their actual production capacities; this factor will determine that their future development paths will differ greatly. Apart from Zhejiang Petrochemical providing support to Rongsheng Petrochemical, what the market tends to overlook is the huge potential of CICC Petrochemical. Back then, the start of construction of the PX plant by CICC Petrochemical was a landmark event that boosted the overall valuation of Rongsheng Petrochemical in the market. In the past, Rongsheng Petrochemical’s PE valuation was consistently higher than that of Hengyi Petrochemical; currently, Rongsheng Petrochemical’s PE valuation remains higher than that of Hengli Petrochemical. The market is willing to assign a higher PE rating to Rongsheng due to its advanced strategic positioning within the industry. According to the current plans, the second phase of Sinopec Petrochemical will begin construction this year, with an investment of 40 billion yuan; it is scheduled to come online in 2023. By then, Sinopec Petrochemical will have a crude oil distillation unit with a capacity of 10 million tons, a PX plant with a capacity of 4 million tons, and an ethylene plant with a capacity of 1.6 million tons. The Zhejiang Petrochemical Phase 2.5 project, which involves an investment of 50 billion yuan, will also come online in 2023. By then, Rongsheng Petrochemical will have a total production capacity of: 30.4 million tons from the refining and vacuum distillation units (20.4 million tons from Zhejiang Petrochemical + 10 million tons from CICC), 8.08 million tons from PX units (4.08 million tons from Zhejiang Petrochemical + 4 million tons from CICC), and 5.38 million tons of ethylene (3.78 million tons from Zhejiang Petrochemical + 1.6 million tons from CICC). In China, comparable companies such as Hengli Petrochemical (with a crude oil distillation capacity of 20 million tons, PX production capacity of 2.5 million tons, and ethylene production capacity of 1.5 million tons), and Dongfang Shenghong (with a crude oil distillation capacity of 16 million tons, PX production capacity of 2.8 million tons, and ethylene production capacity of 1.1 million tons) all have capacities that are much smaller than those of Rongsheng Petrochemical. Based on their current market values, Rongsheng Petrochemical is valued at 190 billion, Hengli Petrochemical at 220 billion, and Dongfang Shenghong at 75 billion. Since Hengli Petrochemical’s large-scale petrochemical complex was the first to come online, previous articles used Hengli’s market value as a benchmark to determine the basic valuation of the other two companies; it was found that Rongsheng Petrochemical and Hengli Petrochemical have similar basic valuations, while Dongfang Shenghong’s basic valuation should be around 80% of that of Rongsheng or Hengli, which amounts to 160 billion at present. When comparing Rongsheng and Hengli, Hengli’s capacity for atmospheric and vacuum distillation is 20 million tons, which is less than Rongsheng’s 30.4 million tons; as a result, Rongsheng’s baseline valuation can be increased further. Moreover, the valuation resulting from Rongsheng’s 5.38 million tons of ethylene production will far exceed that resulting from Hengli’s 1.5 million tons of ethylene production. When comparing Rongsheng and Dongfang Shenghong, although Shenghong’s market value is currently 40% of Rongsheng’s, Rongsheng’s baseline valuation is nearly twice that of Shenghong. Thus, in terms of baseline valuation, the two companies are on a similar level. However, Rongsheng’s cross-sectional valuation is nearly five times that of Shenghong; even with the integration of Sierbang Petrochemicals into Shenghong’s operations, this strong advantage in cross-sectional valuation remains unchanged for Rongsheng. In addition, a brief analysis has been conducted regarding the interaction between Sinopec Petrochemical’s Phase II project and Zhejiang Petrochemical prior to its completion. The above is merely a relatively macro-level analysis; taking into account Zhejiang Petrochemical’s advantages in location, scale, industrial chain support, and policies, as well as the efficiency of the local area, Rongsheng Petrochemical has strong potential for future development. Of course, we cannot deny the excellence of Hengli Petrochemical and Dongfang Shenghong; any company that manages to enter the realm of large private petrochemical manufacturers is considered a leader in the industry. Now, among these leaders, Rongsheng Petrochemical is the top choice. This article discusses the scenario based solely on deterministic projects; uncertain events such as Hengli Phase II and the new Hengli 1.6 million tons of ethylene project are not considered as elements in the analysis for now. Given the gradual withdrawal of industrial fund shares over the next three years, Shenghong Refining & Chemicals is considered based on a production capacity of 16 million tons; however, until the remaining 24 million tons of production capacity for Lianyungang Refining & Chemicals is made available, this factor is not taken into account when assessing Shenghong’s growth potential. Zhejiang Petrochemical Phase III is not currently considered as a factor affecting the growth potential of Rongsheng Petrochemical. There is a saying I often make: when it comes to large private refineries in China, Rongsheng Petrochemical is a good example; as for large private refineries abroad, Hengyi Petrochemical serves as such an example. The reason behind the first part of this statement is clear, while I will explain the reason behind the second part later when I have time. Additionally, the analyses I write are based on broader logic and longer time frames, rather than just a few days or months; please do not leave comments asking whether it’s possible to buy now or what the trend will be tomorrow. Source: QueXing Stock APP