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2024 is the first year that the third generation of refrigerants will be produced according to quotas. Since the quota was implemented, the price of refrigerant has increased significantly.
As of now, 2024 is halfway through. Although the company's semi-annual report has not yet been released, it is foreseeable that the refrigerant head companies Juhua Co., Ltd. (600160) and Sanmei Co., Ltd. (603379) will presumably hand over a good answer.
However, the price increase of refrigerant is true, but the limit is also true. So, who can grab more profits in a limited market? Who will suffer more from idle capacity?
First, raw materials rely on outsourcing, and the gross profit margin is low
According to the quota allocation of the third generation of refrigerants in 2024, the total quota of each variety (excluding R23) will reach 746,000 tons, of which the quotas of the three mainstream varieties of R32, R125 and R134a are 23.96, 16.57 and 215,700 tons respectively.
At the company level, the allocation quota of mainstream varieties of Juhua Co., Ltd. was 224,200 tons, accounting for 30.7%; Sanmei's share quota was 117,100 tons, accounting for 16%.
In intuitive comparison, the quota size of Juhua shares is about twice that of Sanmei shares.
Source: Ping An Securities
However, although the quota of Juhua shares is high, it is not advantageous in terms of profitability.
The production of refrigerants starts with fluorite. Sulfuric acid and fluorite powder are commonly used as raw materials in industry to produce anhydrous hydrogen fluoride (AHF), which is the main raw material for the production of refrigerants, accounting for about 30% of the production cost of refrigerants.
At present, Juhua shares are not involved in the production of fluorite, and the required fluorite is purchased from the market. Although it has its own production capacity of hydrofluoric acid (i.e., aqueous solution of hydrogen fluoride) of about 130,000 tons/year, it is not self-sufficient, and about 60% of the hydrofluoric acid demand needs to be outsourced.
In contrast, although Sanmei also divested its upstream fluorite fine powder processing business in 2016, it has a production capacity of 221,000 tons of AHF. Judging from historical data, based on the advantages of AHF's self-production, the gross profit margin of Sanmei shares is generally higher than that of Juhua shares.
Source: Public Data Collation
However, judging from the chart above, 2023 is an exception. In the past ten years, the gross profit margin of Juhua refrigerant surpassed Sanmei for the first time, which was 13.14% and 11.61% respectively.
However, this does not mean how good Juhua's performance is, Sanmei's gross profit margin is low, and it is more of its own problems.
2023 is a special time. After the end of the quota war, the market supply gradually stabilized, but the gross profit margin of Sanmei did not increase but declined. According to Sanmei, it is mainly affected by the inventory of high-priced raw materials at the end of 2022, the company's costs have increased and its profitability has declined.
Source: Sanmei 2023 results and forecast
In other words, there is a time mismatch in between. Then, in turn, after the high-priced inventory is consumed, the profitability of Sanmei will also be repaired. At that time, the weak gross profit margin advantage of Juhua shares is afraid that it will disappear again.
Second, the quota battle has landed, and the production capacity is idle
In addition to the difference in gross profit margin, the development paths of Sanmei and Juhua are also different. Juhua has a higher production capacity, but after the quota battle is implemented, the problem of overcapacity is also more serious.
According to the Montreal Agreement, the production and sales of third-generation refrigerants in mainland China will be based on the average of 2020-2022, frozen in 2024, and then forced to shrink.
Therefore, in order to compete for higher production quotas, from 2020 to 2022, the third generation of refrigerant manufacturers generally expanded their production on a large scale. Juhua shares are a typical representative of production expansion.
According to the data, as of the end of 2019, the refrigerant production capacity of Juhua Co., Ltd. was 43.38 (10,000 tons/year), and the capacity utilization rate was as high as 90.84%. By the end of 2023, its refrigerant production capacity has expanded to 737,200 tons. The capacity utilization rate also dropped to 69.81%.
Source: Juhua 2019 annual report (left) and 2023 annual report (right)
On the contrary, Sanmei shares have long stopped the pace of expansion.
It should be said that the third-generation refrigerant of Sanmei Co., Ltd. has been in a state of overcapacity for a long time. According to the 2019 data, except for HFC-134a, the capacity utilization rate of the other three generations is below 60%. Therefore, from 2019 to 2023, there will be no new production capacity of Sanmei's third-generation refrigerant, totaling about 167,000 tons.
Source: 2019 annual report (left) and 2023 annual report (right)
Judging from the results, Juhua shares, which continue to expand production, have naturally obtained higher production quotas. However, if you combine production capacity and quota, you will find that although Juhua's production quota is higher, the proportion of production capacity is not high, at 66%. Although Sanmei's production quota is less than half, it already accounts for 70% of its third-generation production capacity.
Source: Ping An Securities statistical data collation
In terms of absolute scale, the production capacity outside the quota of Juhua shares is 117,600 tons, and Sanmei shares are 50,000 tons. Obviously, Juhua shares have a more serious problem of idle capacity.
Third, the fluorine chemical industry has a structural surplus and the competition is intensifying
Strictly speaking, excess refrigerant capacity is not completely idle. If it is said that it is idle, the second generation has already begun. Second-generation refrigerant production quotas were frozen in 2013 and have been gradually reduced since 2015.
However, under the Montreal Protocol, there is no limit to the amount of HCFCs (hydrochlorofluorocarbons, second-generation refrigerants) that can be produced as feedstocks, as raw materials for downstream fluoropolymers, fluorine fine chemicals, etc., and for other non-ODS (ozone-depleting substances) applications. At present, this principle also applies to the feedstock use of HFCs (hydrofluorocarbons, third-generation refrigerants).
That is to say, after the refrigerant production quota is implemented, although the remaining capacity cannot be used to produce refrigerants, it can be used in other fluorine chemical fields.
Source: Guojin Securities
Juhua Co., Ltd. is a comprehensive leader in fluorine chemical industry, in addition to fluorine refrigerant products, fluorine raw materials, fluoropolymer materials, fluorine-containing fine chemicals and other products. Therefore, for Juhua shares, overcapacity is not terrible, as long as other fluorine chemical products have the ability to consume.
It's just that today, the fluorine chemical industry itself is difficult to protect, and there is already a structural overcapacity problem.
In recent years, with the rapid development of new energy sources such as lithium batteries and photovoltaics, the market demand for high-performance fluoropolymer products has grown rapidly. However, the mainland is mainly based on GM, concentrated in the low-end market, and the homogeneity of domestic enterprises is serious. At present, the basic products of fluoropolymers have been overcapacity, and the competition for low-end products has been extremely fierce.
The data shows that in 2023, the revenue and gross profit margin of Juhua's fluorine-containing fine chemicals, fluorine chemical raw materials, and fluoropolymer businesses have declined significantly.
Source: Juhua 2023 annual report
And, in this crowded track, there are constantly new players looking for opportunities to enter. For example, Sanmei Co., Ltd. is a relatively pure refrigerant manufacturer. However, its annual report has also repeatedly mentioned that it should extend to the field of high value-added products such as fluoropolymers and fluorine fine chemicals based on the existing industrial chain.
In the future, with the further transfer of idle capacity of fluorine refrigerants, the market structure of fluorine chemical industry may further deteriorate.
Note: This article does not constitute any investment advice. The stock market is risky, and you need to be cautious when entering the market. There is no harm in buying and selling.