Pressure in the Second Half of the Year or Aromatics Price Increase Near Bottom

On August 21, Shanghai Petrochemical Corporation (00338-HK) (hereinafter referred to as Shanghai Petrochemical) held a mid-term performance conference. As one of the largest petrochemical enterprises in China, the performance of Shanghai Petrochemical Company declined significantly in the first half of this year, which the company said was due to the substantial increase in operating costs during the period.

In the first half of 2019, the operating income of Shanghai Petrochemical Company decreased by 0.37% to 519.9 billion yuan (unit: Renminbi). Similarly, the net returns of attribution decreased by 67.73% to 1.14 billion yuan, the non-net profits of attribution decreased by 67.64% to 1.138 billion yuan, and the net cash flows of operation or production decreased by 94.18% to 2.5 billion yuan, and the basic earnings per share decreased by 94.18% to 2 billion yuan. It decreased by 67.79% to 0.105 yuan per share.

Most of the products of Shanghai Petrochemical Company are sold in the domestic market of China, and the customers in East China are the main source of income. The company believes that under the increasing pressure of economic downturn, the pressure on the petroleum and chemical industries has led to a decline in efficiency. According to the data of Sinopec Federation, the revenue of China's petroleum and chemical industry increased by 2.2% to 6.1 trillion yuan in the first half of 2019, but the total profit decreased by 18.3% to 359.6 billion yuan. In addition to the double growth of revenue and profit in oil and gas exploitation business, both refining and chemical business are increasing revenue and decreasing profit. Revenue of refinery business increased by 2.2% to 1.91 trillion yuan, profit decreased by 62.4% to 41.28 billion yuan, and revenue of chemical business increased by 0.8% to 3.5 trillion yuan, profit decreased by 13.1% to 208.54 billion yuan.

Meanwhile, the company said that it was affected by the domestic and foreign environment at present, and the uncertainties in the industry increased. The factors affecting oil price fluctuation increased, including safety and environmental protection factors. Private refinery project products featuring large refinery, large ethylene and large aromatic hydrocarbons entered the market, which intensified the market competition in the domestic petrochemical industry. It is expected that downward pressure will intensify in the second half of this year. Executives at the company said on-site that the new market capacity will impact the aromatics business, but at present the price of aromatics has reached the bottom of the range.

From the point of view of Shanghai Petrochemical's sub-business, synthetic fiber business income increased by 629% to 1.22 billion yuan, gross interest rate increased by 270 percentage points to -7.78%, resin and plastic business income decreased by 179% to 5.13 billion yuan, gross interest rate decreased by 280 percentage points to 16.15%, and intermediary petrochemical products business income increased by 270 percentage points to -7.78% year-on-year. The gross profit rate dropped by 10.85 percentage points to 16.34% from the same period of last year, the operating income of petroleum products increased by 0.50% to 26.62 billion yuan, and the gross interest rate decreased by 831 percentage points to 24.53%. The trading income of petrochemical products increased by 524% to 13.31 billion yuan, and the gross interest rate decreased by 0.20 percentage points to 0.63%.

From the perspective of income regions of Shanghai Petrochemical, the income of East China, its main source of income, declined by a relatively small margin, from 16.28% to 35.01 billion yuan, while the income of other parts of China declined by 55.61% to 85.5 billion yuan, while the business of exporting overseas was the only bright spot, with income increasing by 92.81% to 15.9 billion yuan.

During the period of Shanghai Petrochemical Company, the capital expenditure was 350 million yuan, which was mainly used for 400,000 tons/year clean gasoline component plant of oil cleaning project, the second stage of PAN-based carbon fiber project with an annual output of 1500 tons, the light oil pipeline and trestle of the Ministry of Storage and Transportation, especially the recovery project, the safe and environmentally friendly closed coke removal, transportation and waste gas treatment project of 2 # delayed coking plant. Preliminary work and construction of low nitrogen combustion transformation project of 2# olefin cracking furnace.

In the second half of this year, the capital expenditure of the company will be funded by cash from operation and bank credit financing. This includes the planned start-up of 400,000 tons/year clean gasoline component plant, which is expected to be delivered in December; the second-stage project of the annual production of 1500 tons of PAN-based carbon fibers continues to advance; the implementation of the project of cleaning and diversion improvement in tank area of the storage and transportation department; the planned start-up of the Ministry of Environmental Protection and Water Affairs, the project of drying and reducing oil sludge, and the tank of the storage and transportation department. The functional renovation project of district break valves and the renovation of the ex-factory facilities of low-sulfur heavy marine fuel oil in storage and transportation department, etc.

The company believes that its core competitiveness lies in the quality of products, excellent position and vertical integration of operation and production mode. With more than 40 years of experience in petrochemical production and management, and in the core area of Yangtze River Delta where China's economy is most active and petrochemical products are in strong demand, it is closer to big customers with the support of perfect logistics and supporting facilities.

Company's market forecast for the second half of the year, the company believes that the uncertainties of world economic development continue to increase, international trade disputes will slow down economic growth, although the global interest rate reduction tide has boosted the economy, but the slowdown of global economic growth in the second half of the year will be a probable rate event. At the same time, Sinopec expects that the pressure of international crude oil price fluctuation will be greater in the second half of the year. China's economy is affected by Sino-US trade frictions. The market expects that the downward pressure will increase further in the second half of the year, but will not fall out of a reasonable range. China's petrochemical industry will face more costs and pressures when the new environmental protection policy is introduced. From the supply side, large quantities of petrochemical products in the domestic market are tending to be saturated or facing excess, and the market demand at the demand side will further slow down, and the market competition will intensify in the second half of the year.