Cinda Securities: The investment value of private refining in the era of stock competition is expected to increase, with a focus on recommending Hengli Petrochemical and others

According to the Zhitong Finance APP, Xinda Securities released a research report stating that in terms of costs, with the central oil price falling and the optimization of refining costs, chemical refineries are expected to benefit; in terms of industry supply and demand, the refining industry is gradually entering an era of stock competition against the backdrop of slowing capacity growth and the elimination of outdated capacity, coupled with a steady recovery in demand, the supply and demand pattern of the industry may improve. Private refining integration has significant advantages in scale, cost, technology, and efficiency, while its downstream continues to layout chemical new materials, enhancing the high added value of products. Against the backdrop of cost optimization and improvement in the industry supply and demand pattern, profit elasticity is expected to be released.

The firm focuses on recommending leading private large refineries with scale advantages, long chemical industry chains, and rich layouts of high added value products: Hengli Petrochemical (600346.SH), RSPC (002493.SZ); and suggests paying attention to: EASTERN SHENGHONG (000301.SZ).

Xinda Securities' main points are as follows:

Cost center declines, profit elasticity of refining enterprises is expected to be released

In the first half of 2025, the crude oil fundamentals are weak, and the central oil price has declined. Based on the firm's review of historical data, under the backdrop of the declining central oil price, the price spread of chemical products, especially olefin products, has significantly improved. Taking domestic advanced private refining capacities Zhejiang Petrochemical and Hengli Refining as examples, the firm calculated the theoretical net profit levels under different central oil price scenarios. With oil prices at $80/70/60, the theoretical net profits of Zhejiang Petrochemical are approximately 5.3 billion, 10.7 billion, and 13.8 billion yuan, respectively, while Hengli Refining's theoretical net profits are approximately 1.6 billion, 4.5 billion, and 7 billion yuan, respectively. With the decline in oil prices, the cost side of the chemical sector has been optimized, and the profit elasticity of private large refineries as chemical refineries is expected to be released. In addition, benefiting from the decline in coal prices, the fuel costs of refineries have also been optimized. Considering the coal consumption of Hengli Refining and Zhejiang Petrochemical, compared to the same period last year, the corresponding coal consumption costs may decrease by approximately 1.174 billion and 824 million yuan, respectively. The optimization of fuel and raw coal and other auxiliary costs is expected to enhance the company's profitability.

Supply-side growth slows, refining industry may enter an era of stock competition

In 2024, domestic refining capacity growth will slow, but production and sales performance is weak. From the perspective of supply-side increments, 2025 is a key year for the refining industry. According to the National Development and Reform Commission's policy, the domestic crude oil primary processing capacity will be controlled within 1 billion tons by 2025. According to the firm's statistics, the domestic refining capacity in 2024 is 923 million tons, and it is expected that there will be an additional 58 million tons of refining capacity from 2025 to 2030, with refining capacity expansion nearing its end, and the total approaching the policy "red line." From the perspective of supply-side reductions, policies are still continuously exerting force. In May 2025, the National Development and Reform Commission emphasized again the need to accelerate the elimination of inefficient and outdated refining capacities. In addition, the recent central government has frequently released signals to "reduce competition," coupled with tax reforms further compressing the survival space of local refineries, which may promote the accelerated exit of outdated refining capacities. The firm has conducted future refining capacity outlooks based on different scenarios. According to the firm's hypothetical calculations, in a neutral scenario, it is expected that the domestic refining capacity growth will significantly slow down from 2025 to 2026, and negative growth in refining capacity may occur from 2027 to 2028. The overall competitive landscape of refining is expected to improve, and the competitive advantages of advanced capacities may become more prominent The demand side may maintain a steady weak recovery, focusing on structural opportunities in chemical products

From the perspective of actual consumption of chemical oils, China's per capita consumption of chemical products is still relatively low and is currently in a phase of continuous improvement. Except for the temporary decline in demand in 2022 due to the pandemic suppressing domestic economic activities, there has been overall steady growth in recent years. According to IEA forecasts, the average annual growth rate of domestic chemical oil demand is expected to be around 3%-4% from 2025 to 2026. In addition, ongoing consumer policies are expected to further support the growth of chemical oil demand. Taking olefin and aromatic products as examples, in terms of polyolefins, retail consumption has a high correlation with polyolefin consumption. The bank hypothesizes various scenarios for retail consumption growth and predicts future polyolefin consumption. Under a neutral assumption, the bank expects polyolefin consumption growth to be around 1-4% from 2025 to 2030, indicating a relatively weak recovery on the demand side. For aromatics, benefiting from the expansion of downstream production capacity, the demand for aromatics is expected to recover. Considering that the supply side of aromatics may enter a "vacuum period" for new production, the sector may welcome structural opportunities. Private refining and chemical companies possess multiple advantages such as integration, scale, and high-end capabilities, which are expected to drive profit recovery against the backdrop of industry recovery.

Slowing capital expenditure + strengthening shareholder returns, highlighting the long-term investment value of private refining

In recent years, private refining has strengthened shareholder returns, maintaining a relatively high dividend payout ratio. Due to high debt being a characteristic of the initial investment and output phase of large projects in the petrochemical industry, combined with the historically high capital expenditure intensity of private refining, short-term asset-liability ratios are under pressure. However, in recent years, some leading refineries have indicated that they will gradually optimize their debt levels in the future. According to the bank's calculations, a 5% decrease in overall debt ratio corresponds to an optimization of financial costs by about 9-12%. Furthermore, during the phase of slowing capital expenditure, private refining companies are gradually entering the investment return period, and free cash flow is expected to continue improving. The bank estimates the intrinsic value of private refining projects through discounted free cash flow and believes that, without considering the valuation background of other businesses of private refining, the current valuation level of private refining enterprises may be lower than the equity value of their refining assets, and their long-term investment value is expected to become more prominent.

Risk factors: 1. Risk of downstream demand recovery in refining not meeting expectations; 2. Risk of slow elimination of outdated production capacity; 3. Risk of capital expenditure exceeding expected growth; 4. Risk of significant fluctuations in crude oil prices; 5. Risk of chemical product capacity being released beyond expectations; 6. Risk of differences in the selection of valuation parameters