April 1, 2022
WANHUA CHEMICAL(600309)SERIES 1：ON THE WAY TO BECOMING A GLOBAL CHEMICAL LEADER DRIVEN BY INNOVATION AND PROJECT INVESTMENT
类别：公司 机构：中国国际金融股份有限公司 研究员：Xiongwei JIA/Qichao ZHAO/Xiaofeng QIU/Di WU/Yaping XIAO/Yilin HOU 日期：2022-03-29
We think Wanhua Chemical’s （Wanhua） recent share price correction presents opportunities for investment in the medium and long term. The company has made breakthroughs in technologically challenging production techniques and developed technologies on its own by leveraging its sound innovation system and sustained R&D spending. Meanwhile, Wanhua relies on heavy capex to further expand production capacity of its core products, build an integrated presence in the value chain, and achieve industrialized production of new products. These moves have helped Wanhua continue to expand its scale. We estimate that new projects that the firm has planned to build since end-2021 require capex of more than Rmb80bn. We calculate based on current product prices that these projects may generate revenue of over Rmb140bn after coming online. In our view, Wanhua’s mid- and long-term growth is highly visible thanks to its sustained R&D, innovation, and heavy capex for the coming years. We think Wanhua is on the way to becoming a global chemical leader.
We are not pessimistic about 2022 earnings from methylene diphenyl diisocyanate （MDI） and toluene diisocyanate （TDI）。 Wanhua further expands capacity to increase market share.
No new MDI or TDI facilities are scheduled to start production in 2022 across the globe. We expect MDI and TDI demand to continue to rise amid global economic growth. Europe accounts for 27% and 28% of global MDI and TDI capacity. We think rising natural gas prices in Europe could increase MDI and TDI costs, thus boosting Chinese exports of these two chemicals. Meanwhile, Wanhua’s polyurethane projects had a capacity utilization rate of 100% in 2021, and Covestro’s polyurethane output recovered gradually in 4Q21. We think leading firms have strong capabilities in balancing sales volume and prices.
We are not pessimistic about Wanhua’s 2022 earnings from MDI and TDI. Covestro expects global MDI demand to expand at a 6% CAGR in 2021-2026. We believe global new MDI capacity before 2026 should mainly come from Wanhua. We think Wanhua’s MDI projects in Ningbo and Fujian （2.2mtpa） are likely to come on stream in the coming years. We expect Wanhua to further expand its market share by leveraging its global lead in low cost levels.
Wanhua continues to expand and solidify its petrochemical business to pave the way for building an integrated presence along the value chain. In order to expand its presence to cover the full value chain and generate synergies, the company has built world-class propylene oxide （PO） and acrylic ester （AE） integrated facilities and a 1mtpa ethylene project （including the relevant chemicals）。 Earnings from this ethylene project declined recently due to higher crude oil prices. However, profit from the PO-AE integrated facilities remained decent thanks to favorable supply-demand conditions of acrylic acid and esters. Wanhua’s planned ethylene phase 2 project targets the high-end polyolefin market. The firm’s 400ktpa propylene oxide project and 480ktpa bisphenol A （BPA） project are also designed to produce polyether polyol and polycarbonate, in addition to propylene oxide and BPA. We think these petrochemical projects will likely further expand Wanhua’s coverage along the value chain.
A large number of technologically-challenging industrialization projects on new materials:
In the market for aliphatic diisocyanate （ADI） series products, Wanhua shifted from being a follower to a leader in 2021. Prices of these products increased notably as overseas facilities were hit by force majeure events. We think ADI will likely remain an important earnings source for Wanhua’s new material business.
We expect the firm’s 40,000t nylon 12 project to start production in 2-3Q22, thus helping Wanhua gain a foothold in the nylon 12 market that has long been dominated by foreign firms. Wanhua’s citral and derivatives project is slated to come online in 2023. We think the company’s aromatics business may launch a large number of new products by leveraging its citral product. Wanhua is ahead of peers in pushing for import substitution of POE, and its POE project is now in the industrialization stage.
In addition, the company also expanded its presence in cathode materials for lithium-ion batteries. We believe new-energy materials are likely to become an important growth driver for Wanhua in the next stage of development.
Financials and valuation
We leave our earnings forecasts unchanged. The stock is trading at 10.4x 2022 and 8.3x 2023e P/E. We maintain an OUTPERFORM rating and our TP of Rmb135, offering 73% upside and implying 18.0x 2022e and 14.5x 2023e P/E.
MDI and TDI prices lower than expected; earnings from petrochemical business decline significantly; progress in new projects slower than forecasted.