Central China Securities: Chemical Sector Continues Bottom Recovery with Improved Q1-Q3 Profit Growth

Stock News11-21

Central China Securities maintained a "market perform" rating on the basic chemical sector. Investment opportunities are seen in two areas: 1) segments benefiting from anti-involution policies with substantial supply-side improvement potential and strong profit elasticity (pesticides, organic silicon, polyester filament, and spandex); 2) resource-intensive sectors like potash and phosphate fertilizers amid potential Fed rate cuts.

Key observations: 1. Performance recovery: - Q1-Q3 2025 revenue reached ¥1.99 trillion (+5.69% YoY), with net profit at ¥117.06 billion (+7.58% YoY) - Q3 showed accelerated growth versus H1 results - 18 subsectors reported both revenue and profit growth, though with significant divergence

2. Subsector highlights: - Agrochemicals, fluorochemicals and new energy-related segments led growth due to optimized supply-demand dynamics - Fluorochemicals, potash, synthetic resins, chlor-alkali and compound fertilizers showed notable margin improvements - Overall gross margin rose to 17.69% (net margin: 6.17%)

3. Financial health: - Debt ratios declined QoQ in Q3 - Operating cash flow improved significantly - CAPEX slowdown continued with declining construction-in-progress - Inventory turnover days increased slightly YoY

4. Regional divergence: - Henan-based chemical companies underperformed sector averages: - Revenue: ¥56.42 billion (Q1-Q3, -2.21% YoY) - Net profit: ¥2.83 billion (Q1-Q3, -29.33% YoY) - Gross margin: 16.61% (net margin: 5.02%)

Risks: Demand shortfalls, excessive capacity expansion, energy price volatility.

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