In the third quarter, the industry began to show an obvious turning point, and the profit growth rate fell annually. The chemical PPI began to show a continuous downward trend in September. From the start-up rate and inventory data, the industry is currently in a passive replenishment inventory cycle. PPI in the chemical industry has the possibility of continuing to decline. We expect the industry boom cycle to decline next year. The chemical industry has maintained a high boom in the past two years. The substantial improvement of the profitability of enterprises and the continuous withdrawal of backward production capacity have enabled leading companies to have the conditions for a new round of production expansion. From the perspective of the completion of new fixed assets investment in the industry, the growth rate of industry capacity in the second half of the year has shown signs of recovery, and the industry is entering a new round of production expansion cycle. We believe that the current industry supply and demand pattern is undergoing marginal changes. The supply contraction in the past two years has led to supply and demand constraints, which has changed the logic of chemical PPI upstream. In the future, our focus should be shifted from the past supply contraction to the growth of demand.

Long-term layout of key investment lines throughout the year

1. Focusing on a new round of capacity expansion cycle, the capacity scale of leading companies continues to expand, and the industry concentration is expected to further enhance. We suggest that long-term investment targets should be selected along the key direction of this round of expansion of chemical industry.

2. In the downturn cycle of industry boom and capacity expansion cycle, we suggest focusing on more efficient enterprises in production and management, which are expected to stand out from the new round of capacity expansion cycle and further enhance market share.

3. From the point of view of profit transfer within the chemical industry chain, we suggest that next year we focus on the downstream links of the chemical industry chain, especially the material-related industries associated with the innovative industry chain (mainly characterized by the obvious growth of demand, the rapid expansion of downstream industry space, and the high value-added of products and technology). Next year, we hope to usher in the recovery of profit space.

Key recommendation companies throughout the year

We propose to focus on Hengli Share, the leading enterprise in the new round of expansion cycle (building crude oil refining-olefin and aromatics-polyester-chemical fiber industry chain), satellite petrochemical (continuous layout along the upstream and downstream of ethane and propane industry chain), Wanhua Chemistry (MDI, TDI), Wanhua Chemistry (continued to expand the global leading position in new production capacity, long-term layout of downstream new material fields), Hualu Hengsheng Sheng (the most efficient level of coal chemical industry). Taiwanese and Longbaili (chlorinated titanium dioxide is the mainstream green process in the industry in the future).

Risk hints:

The implementation of environmental protection supervision policy is less than expected, which leads to the acceleration of industry supply growth; the sharp decline in chemical prices has a greater impact on the profitability of some sub-industries; the delay in the commissioning of new projects leads to lower than expected profits of enterprises.