HENGLI PETROCHEMICAL(600346)：POISED TO BENEFIT FROM DALIAN’S 14TH FYP PLAN TO DEVELOP THE PETROCHEMICAL INDUSTRY

What's new

    Recently, the municipal government of Dalian unveiled a plan1 to develop the petrochemical industry during the 14th Five-Year Plan (FYP) period (“the plan”). We expect the plan to boost Hengli Petrochemical’s growth.

    The highlights of the plan are as follows:

    The city of Dalian plans to maintain at least 50mnt/yr oil refining capacity by 2025 (vs. 52.7mnt/yr at present), and have 5mnt/yr ethylene capacity and 9mnt/yr paraxylene capacity.

    Dalian plans to support the construction of four petrochemical projects, including Xizhongdao refining project, 1mnt/yr light hydrocarbons-to-ethylene project, 1mnt/yr propane dehydrogenation (PDH) project, and 1mnt/yr polyester-based functional material project.

    Dalian plans to accelerate the adoption of basic petrochemical products in downstream sectors and increase the proportions of medium to high end and special petrochemical products.

    Comments

    We expect the plan to benefit Hengli Petrochemical’s ethylene capacity expansion and PDH project. So far only Hengli Petrochemical’s 1.5mnt/yr ethylene project has been built in Dalian. According to the plan, the city’s ethylene capacity should reach 5mnt/yr by 2025. Therefore, we do not exclude the possibility that the municipal government of Dalian will support Hengli Petrochemical’s 1mnt/yr light hydrocarbons-to-ethylene project, even as it already has a Xizhongdao refining project. In addition, given the advantageous port facilities of Dalian, we expect Hengli Petrochemical to proceed with its 1mnt/yr PDH project as planned.

    Expanding to downstream sectors; increasing the proportions of medium to high-end and special petrochemical products. Hengli Petrochemical has completed an integrated refining project and plans to build new ethylene and PDH projects. We think it will likely leverage its advantages in raw materials, business scale, infrastructure and capital to develop and utilize high value-added products based on ethylene, propylene and aromatics.

    Corporate strategy falls in line with the local government’s plan. In our report Expecting return to rapid growth driven by new material projects on December 29, 2021. In the report, we pointed out that Hengli management used its resources efficiently in 2021, creating more possibilities for its long-term growth. For example, the company reduced energy consumption for the refining and petrochemical production site on Changxing Island to make room for approval of incremental projects. According to the strategic plan it released in its 1H21 financial report, the company plans to extend its six new-material value chains. Therefore, we think the company’s strategic plan is in line with that of the municipal government of Dalian. We expect Hengli Petrochemical’s total investment to reach at least Rmb70bn in the next two years.

    Valuation and recommendation

    We maintain our 2021 and 2022 earnings forecasts, and introduce a 2023 earnings forecast of Rmb23bn. We leave our target price unchanged at Rmb36 (14x 2022e P/E with 49% upside) and maintain OUTPEROFRM.

    The stock is trading at 9x 2022e P/E.

    Risks

    Risk related to exchangeable bonds’ conversion into equity; disappointing progress of new projects; refinancing risks.