Hualu Hengsheng – The “King of the Red Sea” in energy storage is poised to shift focus to new business areas

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Hualu Hengsheng – The \"King of the Red Sea\" in energy storage sector is poised for a transition into new business areas. Author/Source: Hualu Hengsheng New Energy. Date: 2022-01-26. Clicks: 19. Thanks to the prosperous cycle in the chemical industry and the competitive advantages accumulated over the years, Shandong Hualu Hengsheng Chemical Co., Ltd. saw its performance improve steadily in 2021, moving from good to even better. In the first three quarters of 2021, the company achieved record-high levels in both revenue and total profits; its net profit ranked third among the 299 listed companies in the chemical raw materials and chemical products manufacturing sector across the country. Its indicators such as sales profit margin, return on equity, and rate of asset preservation and appreciation were all at the leading level in the industry. In 2022, Hualu Hengsheng will focus on strengthening and enhancing the company’s competitiveness as its core goal, paying attention to sector shifts and industrial transformation, coordinating efforts to optimize existing assets and upgrade new ones, while also making preparations for energy storage and strategic planning. “To summarize the vision for 2022 in one word, it is transformation and upgrading – shifting from basic chemical raw materials to the fields of new energy and high-end chemical new materials, and moving from companies that compete on cost factors to those that compete on value creation. ”Qi Shaoqing, deputy general manager of Shandong Hualu Hengsheng Chemical Co., Ltd., said. A strong core business combined with a favorable economic cycle has enabled the \"King of the Red Sea\" to achieve record-breaking results. At the beginning of the year, a reporter visited the Hualu Hengsheng Industrial Park located at the border between Shandong and Hebei, where large trucks were lined up loading products, creating a scene of intense activity. In 2021, Hualu Hengsheng maintained a strong momentum of robust production and sales as well as performance growth. As a company that evolved from the former Texas Fertilizer Plant, Hualu Hengsheng’s main products are part of industries characterized by fierce competition. For many years, its performance indicators have ranked among the top among the more than 200 listed companies in this industry, earning it the title of “King of the Red Ocean” within the sector. In the first three quarters of 2021, Hualu Hengsheng achieved operating revenues of 18.2 billion yuan and total profits of 6.6 billion yuan, setting new historical highs; its net profit ranked third among the 299 listed companies in the chemical raw materials and chemical products manufacturing sector in China. The sales profit margin is 36.23%, the return on equity is 31.13%, and the profit per employee is 1.6 million yuan; both the quality of assets and operational efficiency are at leading levels in the industry. “This is partly due to the chemical industry entering a period of prosperity, with product prices rising and remaining high. ”Qi Shaoqing said that the overall development prospects in the upstream segment of the chemical industry are very good, and Hualu Hengsheng’s products fall in this upstream, early-stage category, so its performance is naturally good. On the other hand, this is also related to companies consistently adjusting their product portfolios around their core business in order to enhance their competitiveness in the industry. The coal chemical industry chain is long; starting from coal gasification, hundreds of chemical products can be derived. In recent years, Hualu Hengsheng has invested over 2 billion yuan each year to expand and enhance this chain as well as to pursue high-end development. The proportion of new chemical materials in its product portfolio has increased significantly, and the company has gradually shifted from its traditional focus on nitrogen fertilizer production to a model characterized by close coordination among four key business areas and efficient integrated production. “The fertilizer sector continues to maintain its advantages; polyurethane raw materials are becoming increasingly available, carbonylation-derived products are being developed in greater detail, new chemical materials are forming clusters, and this sector is also entering the field of new energy. ”Gao Wenjun, the board secretary of Hualu Hengsheng, said that as a state-owned enterprise, it must assume social responsibilities. The profit margin on fertilizers is low, and in September and October prices even dropped below cost. The company relies on the chemical industry to generate profits, with the majority of its additional income coming from the chemical sector; currently, the profit contribution from the company’s mid-to-high-end chemical products exceeds 60%. Hualu Hengsheng adheres to lean operations and meticulous management, continuously striving to reduce costs, improve quality, and enhance efficiency. “This ensures stable business operations; even when market conditions are poor, we can still fare well ； When market conditions are good, our profitability becomes evident. ”Qi Shaoqing used data as an example, stating that for instance, a company’s operating costs can be about 15% lower than the industry average ； Currently, the maintenance cycle for facilities in the chemical industry is generally one to two years, while Hualu Hengsheng has extended it to 4 years. Overcoming the constraints posed by energy, coal, and electricity, production capacity has returned to normal levels. In recent years, Hualu Hengsheng has carried out extensive optimization efforts; the facilities built before 2000 were largely phased out, while new facilities are equipped with the latest technological solutions. The enterprise’s comprehensive energy consumption per 10,000 yuan of output value has decreased by 41.87% compared to the same period in 2017 ； High-end chemical products worth tens of thousands of yuan account for 60% of a company’s profits, yet their energy consumption accounts for only 42% ； Over the past five years, the comprehensive energy consumption per unit of coal-based synthetic ammonia, methanol, and acetic acid has decreased by 12.36%, 12.9%, and 22.5% respectively, achieving energy savings, consumption reduction, and comprehensive utilization of resources. Driven by its cost advantage, the total sales volume of Hualu Hengsheng’s products increased by 9.61% year-on-year in the first three quarters of 2021. However, Qi Shaoqing told reporters that these achievements were the result of the company overcoming difficulties such as a shortage of energy consumption quotas, tight coal supplies, and power rationing. Qi Shaoqing explained that in the early part of 2021, Hualu Hengsheng’s production remained stable, with its main facilities operating safely and steadily over extended periods of time. However, after September 2021, factors such as the dual controls on energy consumption, time-limited power supply, soaring coal prices, and supply shortages had a significant impact on both fertilizer and chemical production. "In previous years, coal prices were around 300 to 400 yuan per ton when low, and 700 to 800 yuan per ton when high; but last year, the price reached 2,600 yuan per ton at its peak, which directly increased production costs. ”Qi Shaoqing said, \"Coal-based urea manufacturers occupy a low position in the overall coal supply chain; during times of shortage, it’s not even possible to purchase coal at high prices, and the coal inventory is only sufficient to cover production for three or four days.\" ” Coupled with time-limited power cuts, this forced the enterprises’ compound fertilizer production facilities to shut down, reducing the urea production capacity to 50%. Subsequently, thanks to the active coordination at the provincial and municipal levels as well as the supervision and efforts of the relevant ministries, the coal shortage gradually eased in early November 2021, and production returned to normal levels. Currently, the company’s capacity utilization rate is 80%. In addition, starting from December 2021, electricity prices in Shandong were raised by 20%, which increased the cost of electricity for Hualu Hengsheng by 0.077 yuan per kilowatt-hour. This resulted in an additional electricity cost of around 16.5 million yuan per month, or 200 million yuan per year. “The cost increases resulting from higher electricity prices are not the main issue; companies can absorb them through cost control. What’s crucial now is the lack of energy consumption targets, which prevents companies from making full use of their production capacity. ”Qi Shaoqing said that the recent Central Economic Work Conference proposed that energy used for new renewable energy sources and raw materials should not be included in the overall control of energy consumption. By creating the conditions for shifting from a system of dual control over energy consumption to one based on dual control over total carbon emissions and their intensity, this represents a significant advantage for enterprises. Strengthening competitiveness and shifting to new growth areas – The chemical industry is a traditional and cyclical industry that is highly affected by market conditions. Hualu Hengsheng expects that as the international economy continues to improve, and driven by the new framework featuring a domestic economic cycle as the core with mutual promotion between the domestic and international cycles, the market will stabilize, energy prices will drop to reasonable levels. Fertilizer products will remain in a tight supply situation in the first half of 2022, but will face more severe market challenges in the second half of the year. To this end, Hualu Hengsheng Company will continue to optimize its structures in terms of products, technology, resources, market access, and transportation. It will focus on five key areas: pooling resources to drive development, advancing new projects to higher levels, improving efficiency through green and low-carbon practices, tapping potential to enhance profits and strengthen competitive advantages, and reshaping the brand’s value. These efforts aim to consolidate existing strengths, foster new sources of momentum, and enhance the company’s resilience. Qi Shaoqing used “transformation and upgrading” to describe the company’s vision for 2022. He said that enterprises will focus on shifting their business areas and undergoing industrial transformation, coordinating efforts to optimize existing assets and upgrade new ones, making efforts in energy storage and strategic planning. They will shift from new coal chemical industries and basic chemical raw materials to the fields of new energy and high-end chemical materials, and transform from companies that compete based on costs to those that compete by creating value. Against the backdrop of **vigorous implementation of the ‘dual carbon’ initiative, the chemical industry faces greater pressure to reduce carbon emissions.** Gao Wenjun said that enterprises will adapt to the shift toward dual control of energy consumption, actively promote the implementation of projects related to new energy and new materials, thereby driving an increase in their production and sales volumes. At the same time, efforts should be made to save energy and reduce carbon emissions, achieve carbon neutrality, further optimize the structure of raw materials, products, and energy use, research on technologies for carbon sequestration, carbon reduction, and even negative carbon emissions, and pursue a path of green, low-carbon, and ecological development. To overcome development bottlenecks and create opportunities for growth, Hualu Hengsheng is also building a modern coal chemical complex in Jingzhou, Hubei. The first phase of this project requires an investment of 11.5 billion yuan, and it consists of two sub-projects: a gas power platform within the park and a platform for the comprehensive utilization of syngas ； Phase II and Phase III projects will build on the foundation of Phase I to produce high-end new chemical materials, fine chemicals, and other products. “We aim to create a new Hengsheng within 5 to 8 years. ”Qi Shaoqing said.