Industry associations and analysts in the outlook for the basic chemical industry in 2007 stated that after the peak of booming growth from 2002 to 2004, the basic chemical industry gradually entered the stage of declining economy from 2005, and the industry as a whole is still in decline. Among them, there are many varieties of chemical products, and the unbalanced growth of downstream demand has caused short-term surges in prices and profits for some products.

Industry analysts believe that there is an opportunity for industry growth or recovery in sub-sectors such as soda ash, potash fertilizer, organic silicon, MDI, phosphor chemical, printing and dyeing auxiliaries, plastics, and tires, and relevant leading companies deserve attention.

Capacity expansion exports increase

According to the statistics of the China Petroleum and Chemical Industry Association, with the successive production of new production capacity in recent years, the output of most chemical products continues to grow rapidly. From January to November of last year, the 65 major types of petroleum and chemical products that the association focused on tracked up were 61 kinds of production, which accounted for 93.8% of the total, which was 44% of the increase of more than 10%, accounting for 2/3 of the total.

The association believes that with the expansion of domestic production capacity, the import of many chemical products has shown a declining trend. With the increasing pressure from domestic sales, companies have focused their markets overseas and the number of exports has increased rapidly. The unit price of exports has declined; high-end products are still dependent on imports, while export products are mostly large road goods, low added value, and the import and export trade structure has exposed major problems.

With the country increasing macroeconomic control and controlling the excessive expansion of credit funds, the growth rate of investment in fixed assets across the industry tends to fall. However, investment in some regions and areas has not yet significantly subsided. In the national economy, where the demand for chemical products remains strong, the economic benefits of the chemical industry have increased in 2007, but the growth rate has continued to decline.

Soda Ash Industry Recovers This Year

Most industry analysts are optimistic about the recovery of the soda industry, as well as leading listed companies with raw material advantages.

Guojin Securities Research Institute believes that the soda ash industry will recover in 2007 in the context of lower domestic production capacity growth, rapid demand growth, and low raw salt prices.

According to the study, due to sluggish industry conditions and domestic policy restrictions, the production capacity of domestic soda ash industry has slowed down significantly. It is expected that the domestic soda ash production capacity will increase below 1 million tons in 2006 and 2007; meanwhile, downstream industries such as alumina and daily-use glass products With rapid development, the demand for soda ash continues to grow rapidly. From January to October 2006, the apparent demand for soda ash products in China increased by 13.87% year-on-year, which was higher than the increase in output. Taking into account that the glass industry may recover next year, the demand for soda ash industry will continue to exist.

Due to the increase in production capacity, the domestic supply of crude salt (especially coastal areas) will be sufficient, and it is expected that prices will remain low in the future, Guo Jin Securities pointed out.

CITIC Research believes that the full release of production capacity led to the decline in the price of crude salt to become the key factor in the bottom recovery of the soda industry in 2006. The inertial effect of capacity expansion and the decision of autumn salt listing to determine the price of raw salt still have room to fall. In 2007, the soda ash industry continued to enjoy cost reduction.

Potash prices will remain high

CITIC Securities Research believes that the world average potash fertilizer production capacity increased by 2.1% from 2006 to 2010 at an average annual rate. The growth is slow, the monopoly pattern has not changed, and the North American inventory is below the 5-year average, indicating that the international potash fertilizer price will remain high in the future.

The research department believes that the price of imported potash still determines domestic prices. In 2006, the import volume was small, and “recommended” was insufficient. Foreign potash accidents led to closure and it was decided that the import price of potassium chloride would increase in 2007. At the same time, the ocean freight rate has reached a record high, and the high profit rate of potash fertilizer has made up for the appreciation of the renminbi, and the import tariff has dropped from 3% to 1%.

China Construction Bank Investment & Securities Co., Ltd. Research Institute pointed out that due to the scarcity of domestic potash fertilizer resources, the prospects of the potash fertilizer industry are more optimistic.

Silicone industry is in strong demand

Citic Securities Research Department said that the silicone industry will be the representative of the 2007 valuation differentiation of the chemical industry, and further promote the stock price rise.

The research department believes that in 2006, the domestic and international organic silicon markets have continued to prosper, and domestic and foreign companies have raised their prices to reflect strong demand, fully verifying the judgment that “the price decline is not the turning point of the silicone industry”. The latest progress in the domestic silicone new construction project is firm and the assertion that “the expansion of production capacity is not to worry”. In addition, large companies monopolize the domestic silicone industry and will undoubtedly significantly increase the barriers to entry.

Basic Chemical Inflection Point Game

Guotai Junan Securities Cui Yiyi Kangkai

Potash, MDI, and silicone have good growth

In 2006, the profit growth rate of China's chemical industry fell sharply, and the industry's profit rate continued to decline. However, the industry's investment in fixed assets continued to grow, which exacerbated the problem of overcapacity of some products. The chemical industry has ended its previous cycle of economic cycle and has entered a downslide. In the sub-industries, nitrogen fertilizers and chlor-alkali industries are in cyclical downturns. Plastics, tires, and soda ash industries are facing inflection points or industrial recovery opportunities. Potassium fertilizers, MDI, and organic silicon are located in the booming cycle, and TDI is shifting from maturity to recession.

Although the overall prosperity cycle of our country's basic chemical industry has passed, due to the large number of sub-industries in the chemical industry chain, due to the differences in upstream raw materials, downstream demand, and their own development, the sub-sectors have different future development trends. Long-term investment value of the advantages of the industry and high-quality companies.

In the overall investment direction of the chemical industry, we recommend that investors continue to focus on growth-oriented sub-sectors with persistently growing demand and insufficient domestic supply, such as potash, MDI, and silicones. In the selection of investment themes, we believe that the fall in the prices of energy and some raw materials in the second half of this year may bring some inflection point opportunities to downstream companies that have been unable to bear the costs; in addition, we still insist on energy saving and consumption reduction in investment strategies in the second half of this year. It is the judgment of the future development direction of the industry. New coal gasification technology and building energy conservation will remain the focus of attention in the industry.

Five key companies continue to "gain more"

Yantai Wanhua (600309 Quotes, Information, Consultation, and More): Technical reforms and expansion of production drive stable growth. At present, the Ningbo factory has normal production, and the monthly production capacity has reached a maximum of 17,000 tons. This year is still the company's investment year. The planned technological transformation has completed 16 production lines of 240,000 tons/year, and the production capacity has continued to expand, which has driven the company's performance to grow steadily. The company is the first batch of independent innovation pilot companies, and it is expected that various preferential policies, including tax incentives and R&D tax credits, are expected to be implemented next year. It is reported that institutional arrangements such as the restructuring of the group companies and the incentive mechanism of senior management stocks are also expected to emerge, and will undoubtedly be beneficial to the company's improvement of its governance structure and enhancement of corporate cohesion and transparency. In the current situation where the overall valuation of the market has moved upwards, the company, as one of the few domestic companies with a monopoly on core technologies, should enjoy a higher premium. It is estimated that the company's EPS in 2006, 2007, and 2008 will be 0.64 yuan, 0.93 yuan, and 1.08 yuan, and the target price will be 25 yuan within one year, maintaining the "overweight" recommendation.

Salt Lake Potash (000792 Quotes, Information, Consulting, More): There is still room for price increases. The company holds the largest potash resource in the Chaerhan Salt Lake in China and completed 1.8 million tons of potassium chloride production in 2006. Yuantong Company’s 200,000 tons plant will be completed by 200,000 tons in 2007 and 300,000 tons will be changed. The heating center being built is expected to be completed by the end of 2007, and the annual output will increase by more than 100,000 tons. The company plans to build another 500,000 tons of new equipment in 2007, and its production capacity will continue to expand. The Xining-Geermu section of the Qinghai-Tibet railway has been repaired, and product shipments can be guaranteed. In 2007, the price of imported potassium chloride may continue to rise, and the company’s product prices will have room for growth, and the performance will maintain a considerable growth. Currently, the Group is carrying out salt lake comprehensive development projects, and it is expected to be incorporated into listed companies after achieving revenues, and eventually achieve overall listing. It is expected that the company's EPS in 2006, 2007 and 2008 will be 1.01 yuan, 1.20 yuan and 1.32 yuan, and the target price will be 27 yuan within one year, and the "overweight" proposal will be maintained.

Sofitel (000662 Quotes, Information, Consulting, More): Brand Infusion to Eliminate Market Concerns. The company is a rare cosmetics manufacturing company in the A-share market, has a nationwide, strong and effective marketing network and good brand awareness, and has achieved a special status in the industry with highly differentiated market positioning. The company's private placement of funds for the new project in Guangzhou Conghua production base, is expected to be put into production in mid-2007, when the company's production capacity will increase significantly, sales revenue will be significantly improved, driving the company's performance to a new level. The company has completed the "Suo Fu Te" trademark right into the listed company, lifted the existing market doubts and better reflect the company's investment value. Taking into account that the company will pay a certain amount of brand usage fees in the future, adjust the company’s earnings forecast to 0.50 yuan, 0.61 yuan, 0.75 yuan for 2006, 2007, and 2008, with a target price of 10 yuan, and maintain the “overweight” recommendation.

Xingxin Materials (600299 Quotes, Materials, Consulting, and more): Silicone production expands to catch up with good years. The company is the leading enterprise of organic silicon and chemical new materials in China. The newly-built 100,000 tons of organic silicon monomer unit was put into production at the end of 2006. Considering that the price of organic silicon monomer will not drop sharply in 2007, the timely expansion of production capacity will make the company It's a good time to catch up with the profit. This directional injection of additional assets reflects the Group’s creation of the company as a platform for the integration of chemical new materials business, and gradually realizes its intention of listing as a whole. The Group promises to inject Rhodia Silicone assets into listed companies in the future to bring the market to the company’s future silicones. The business is especially good for the development of downstream application technologies. It is expected that the private placement will be completed in early 2007, which can basically reflect the full-year earnings of the newly injected assets, and will not dilute the company’s current year performance. It is expected that the company’s performance in 2007 will return to a higher level of growth, and the EPS after the issuance will reach RMB 1.00. Maintain the "careful increase in shareholding" proposal, target price of 20 yuan within one year.

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