Wanhua Chemical: Break the Cycle and Win with Products

The protagonist of this issue is Wanhua Chemical. Before talking about Wanhua Chemical, let me tell you something first. It's called MDI, and its Chinese name is very long: diphenylmethane diisocyanate.

Its uses are as bizarre as its name.

It can be used in furniture, construction, shoemaking, tanning, transportation, automobile industry, sports, medical equipment and other industries. It can be said that if oil is the blood of industry, then MDI is the adhesive of industry, penetrating into all aspects of domestic industry.

In other words, as long as China's industry is developing, there will be no shortage of market for domestic MDI products.

Faced with Wanhua Chemical, which produces such important products, the market is also very generous. Currently, Wanhua Chemical's price-to-earnings ratio has reached about 37 times.

This price-to-earnings ratio is extremely exaggerated for a chemical company. The general market usually gives a chemical company a single-digit price-to-earnings ratio considering it is a traditional cyclical industry, but Wanhua can have such a high price-to-earnings ratio. What is the logic behind this?

In the past ten years, Wanhua’s ROE has been above 20% for nine years. The secret behind this lies in Wanhua Chemical’s technological monopoly in the field of MDI.

Currently, there are only 8 chemical companies in the world that have independent intellectual property rights for MDI and can produce it independently. Wanhua Chemical is the only Chinese company among them.

For a profitable product, if the technical threshold is low, new companies and capital will often rush in, resulting in overcapacity, a sharp decline in product profit margins, and widespread losses among participants. This is a common situation in the domestic chemical industry.

However, the production of MDI has deep technical barriers, and its core technology has been difficult to break through for many years. This forms a moat deep enough to keep out countless companies that want to come in.

The price of MDI products has also been rising rapidly recently.

Polymer MDI began to rise in early July, from 11,750 yuan/ton in early July to 22,540 yuan/ton in November 10, an increase of more than 90%.

Pure MDI started to rise in early August. The price rose from 13,590 yuan/ton to 30,250 yuan/ton on November 10. The increase exceeds 120%

And starting from October, major MDI manufacturers around the world will enter a period of intensive maintenance, and output will be further affected. It is expected that MDI products will enter the rising space.

As mentioned earlier, the downstream applications of MDI cover multiple industrial categories of the national economy. Wanhua Chemical’s output expanded from 40,000 tons in 2000 to 2.1 million tons in 2019, a rapid increase in volume. growth, smoothing out the impact of price fluctuations.

Even in the low price period, it still has strong profitability. For example, MDI prices were at low levels throughout 2019, but Wanhua still achieved a net profit of more than 10 billion, which was not much different from 2018.

In addition, in order to reduce dependence on MDI and reduce cyclicality, Wanhua expands business volume as much as possible.

Judging from the scale of the multiple businesses deployed, Wanhua has made great strides in expanding its territory. The production capacity of the 750,000-ton PDH unit and the 1 million-ton ethylene unit ranks among the top in the country.

The petrochemical business can form synergy with Wanhua’s original polyurethane business in the industrial chain. The hydrogen from the propylene oxide unit, one of the products, can be used to produce polyether polyols, and the hydrogen from the propane dehydrogenation unit can be used for Aniline device.

In addition, Wanhua also has an underground gas storage of 1.46 million cubic meters, which can effectively avoid the price difference between propane in winter and summer.

In short, Wanhua is working hard to break the industry cyclicality through its growing product scale and richer product portfolio.

In the future, Wanhua will not only monopolize the domestic market, but also occupy the global market.

Wanhua has currently built three integrated chemical industrial parks in Yantai, Ningbo and Hungary. In the next two years, Wanhua Chemical will expand its MDI production capacity by 500,000 tons and 300,000 tons in Yantai and Ningbo respectively, and expand its manufacturing capacity by 400,000 tons in Fujian. A total of more than 1.2 million tons of production capacity will be implemented in the future.

At the same time, although overseas MDI giants Covestro and BASF also have production expansion plans, their numbers are far less than Wanhua Chemical. For example, Covestro only plans to add 220,000 tons of production capacity in the future, and Wanhua Chemical's production capacity for MDI products will significantly lag behind its international peers.

In summary, a chemical monopoly giant that breaks through the industry cycle is gradually taking shape. The future of Wanhua Chemical is worth looking forward to.