HUAFON CHEMICAL(002064)：OPTIMISTIC OUTLOOK FOR SPANDEX;EARNINGS LIKELY SOARED IN 3Q21

Preannounces 3Q21 net profit up 367-400% YoY

    Huafon Chemical preannounced that its attributable net profit in 3Q21 increased 367-400% YoY to Rmb5.8-6.2bn, and earnings in 3Q21 grew 238-308% YoY to Rmb1.95-2.35bn, in line with our expectations.

    Trends to watch

    Spandex prices continued growing rapidly in 3Q21; earnings improved. Spandex Price Index for China released by China & Chemical Fiber Economic Information increased solidly in 3Q21, with the peak exceeding Rmb80,000/t and quarterly ASP reaching Rmb75,300/t (+163% YoY and 19% QoQ). While spandex prices continued growing, prices of PTMEG (raw material of spandex) only edged upward QoQ in 3Q21. The expanding gap between raw material prices and spandex prices drove up Huafon Chemical’s earnings in 3Q21, in our view. We think spandex demand will continue growing, but new spandex supply will likely started in 1H22. Therefore, we expect spandex price ramp-up to continue moving forward. Considering that the firm’s new spandex project (40,000t/yr) will likely start operating before end-2021, we think earnings from its spandex business in 4Q21 will continue rising.

    Adipic acid prices edged upward. In 3Q21, crude oil prices increased despite some volatility and demand for adipic acid prices recovered, slightly driving up adipic acid prices. ASP of adipic acid prices increased 80.3% YoY and 7.8% QoQ to Rmb11,000 in 3Q21. On the supply side, we expect Huafon to maintain leadership and enhance its competitive advantages in the adipic acid industry, although some competitive companies are also emerging in the industry. On the demand side, we expect adipic acid demand to grow rapidly, thanks to the development of PBAT and nylon industries.

    Capacity expansion to accelerate; upbeat on growth upside. We expect the firm to accelerate its construction of spandex (300,000t) and adipic acid (400,000t) projects during the 14th Five-Year Plan period, given the optimistic outlook for spandex and adipitc acid industries. Considering that the firm’s controlled shareholder, Huafon Group, has penetrated deeply into the value chain and has developed polyurethane, nylon 66 chip, and PBAT businesses, we think Huafon Chemical can better mitigate risks than most of its peers.

    Valuation and recommendation

    Given higher earnings from spandex business and increasing adipic acid prices, we raise our 2021 and 2022 earnings forecasts 15% and 20% to Rmb8.1bn and Rmb8.32bn. The stock is trading at 6.8x 2021e and 6.6x 2022e P/E. We maintain an OUTPERFORM rating. Based on higher earnings forecasts and lower valuation of the overall chemical sector, we keep our target price at Rmb20, implying 11.4x 2021e and 11.1x 2022e P/E with 68% upside.

    Risks

    Elimination of outdated production capacity disappoints; demand from downstream textile and apparel industries falls sharply.