There is no doubt that the performance growth in 2017 will be certain. The average price of MDI will drop next year, but there is no need to be too pessimistic. We believe that the average price of MDI in 2017 is likely to be a high point in recent years. Regardless of looking forward or backward, it is impossible to expect the price to return to the high point at the beginning of the year in the context of new production capacity. A decline in the average price in 2018 is a high probability event.
So is the decline in MDI pessimistic? From a global perspective, the picture we saw last year and this year is that while production capacity is rushing to new highs, prices are also refreshing us cognition. The commissioning of Wanhua Yantai Industrial Park in 2015 was the main new production capacity in the past two years (excluding the 200,000 tons of the original old factory, plus the expansion of Lianheng and a little contribution from Chongqing BASF, the number is expected to be around 600,000 tons). However, Except for a false shot in 2015 as oil prices fell, prices have continued to rise in 2016. We cannot judge where the bottom of MDI prices will be from the end of 2015 to the beginning of 2016 without the factor of oil prices. However, from the demand side, it seems that global support is very strong in absorbing the 600,000 tons of new production capacity. Last year’s growth rate of 6% meant that the world added 350,000 tons of demand. Based on a neutral growth rate (4%), we estimate that the new demand this year and next will be 250,000 tons and 260,000 tons respectively. Given that there is not much effective new production capacity in 2017, the company’s sales are expected to increase this year. After all, the 930 accident in 2016 had a certain impact on the company’s output, and the annual operating rate averaged less than 70%. After Sadara and Lianheng are put into production, there will be a quiet period of about 5 years before Wanhua’s U.S. equipment is put into production. During this period, each company can only rely on small-scale technological transformation and expansion to meet the new market demand. From this point on, we also It is understandable that the company’s own nominal production capacity has expanded by another 200,000 tons when the current operating rate is not yet full.
The level at which performance can be maintained in 2018 is related to the current valuation. What is the reasonable MDI price is the key issue.
The reason why the market is unwilling to give a higher valuation at the current high point is that after the price drop of MDI in 2018, the performance will drop significantly. Objectively speaking, the performance in 2017 is expected to be a short-term high point. Of course, it may not take too short time for the company to reach this high point again, but the next time it reaches this high point, it may not rely on MDI. The power lies in TDI, PC, which will be put into production in the future, as well as special materials and functional materials that are slowly growing. Therefore, returning to the reasonable price level of MDI allows us to estimate where the reasonable performance will be in 2018. If a reasonable valuation level of 15 times is given, the expected net profit for 18 years implied by the current market value of 640 is less than 4.5 billion. We believe that this is a number that can produce a large expected difference. Due to the release of new production capacity in 2018, it is expected that MDI prices will be under pressure, and short-term performance will also be affected. However, through sorting out the historical profit spread, we can see that this is a stable and controllable space, which is in line with MDI’s role as A highly oligopolistic market structure is characteristic of products. We conservatively estimate that when MDI returns to normal profitability in 2018, the company’s net profit level will still be close to 6 billion, and the current stock price is still undervalued. Looking further forward, PC and TDI will be put into production, and special materials that are more profitable than MDI are also growing. 2018 will only exist as a visible short-term performance low point, and 19 will return to the growth track.
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