Orient Securities has released a research report expressing optimism for a recovery in the chemical industry's prosperity, driven by a collective shift in corporate operating strategies guided by multiple factors. To identify the best opportunities, the firm favors two dimensions: first, leading companies with large market shares, strong pricing power, and significant motivation for change; second, leading enterprises with substantial competitive advantages that show a notable improvement in profitability following a strategic shift. Based on this, Orient Securities primarily favors five sectors: MDI, petrochemicals, phosphorus chemicals, PVC, and PET bottle chips. The main views of Orient Securities are as follows.
The long-held expectation of a market-share-oriented strategy is now undergoing a transformation. For a long time, a market-share-driven approach has been the dominant theme in China's chemical industry, with most companies building their competitiveness around cost advantages. Although policies such as supply-side reforms, environmental inspections, and dual-carbon goals have raised industry entry barriers and significantly increased market concentration, they have not diminished the expansion ambitions of entrepreneurs. However, after years of rapid development, the chemical industry is gradually reaching the limits of market share growth. Internally, policy adjustments, including the "one profit and five rates" metric for central state-owned enterprises and "anti-involution" measures, are curbing low-quality expansion. Externally, the increasing frequency of anti-dumping and anti-subsidy investigations has made overseas market share expansion more difficult. The firm believes these changes signal to the industry and its leaders that the previous share-oriented expectations must change.
Exchanging market share for returns is set to become a trend. Under policy guidance, companies are finding that merely halting expansion and waiting for demand to absorb inventory and excess capacity is no longer sufficient to meet the demands of the new environment. Instead, sacrificing some existing market share to boost returns in the short term has become a more rational choice. The true driver behind this collective strategic shift is not policy alone but a change in the mindset of entrepreneurs and management, which is the most significant difference between this round of industry recovery and previous cycles. Taking recently well-performing sectors like PET bottle chips, caprolactam, and silicones as examples, some simple patterns can be observed. The firm believes that state-owned enterprises, being more responsive to policies, are more likely to adjust their operating strategies under the new conditions. For industries dominated by private enterprises, if market concentration is sufficiently high and leading companies hold a strong advantageous position without fearing long-term negative impacts from short-term share reductions, they are also expected to emerge from downturns by adjusting their strategies.
The firm prefers industries with strong expansion constraints and dominant leaders. The primary criteria for sector selection are two-fold: the strength of expansion constraints and the depth of the leading company's advantage. Stronger expansion constraints lower expectations for future share-driven growth and increase the likelihood of strategic adjustments, with constraints mainly arising from policy and energy consumption factors. The depth of a leader's advantage not only helps constrain industry expansion but also determines the potential height of the industry's return recovery.
For investment recommendations and targets: MDI includes Wanhua Chemical; Petrochemicals include China Petroleum & Chemical Corporation (Sinopec), Rongsheng Petrochemical, and Hengli Petrochemical; Phosphorus chemicals include Sichuan Chuanhuan Technology, Yunnan Yuntianhua, and Xingfa Group; PVC includes Zhongtai Chemical, Xinjiang Tianye, Chlor-Alkali Chemical, and Tianyuan Group; PET bottle chips include Wankai New Materials. Risks include changes in the macroeconomic landscape, developments in emerging economies, errors in capacity statistics, and the impact of altered assumptions on forecast results.
