2Q Net Profit Reaches Record High; UBS Raises Target Price to Rmb40.00
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2Q Net Profit Reaches Record High; UBS Raises Target Price to Rmb40.00
A widening coal-to-olefins spread drove Baofeng Energy's Q2 attributable net profit up 85% YoY and 66% QoQ. UBS maintains its Buy rating and remains positive on the medium- to long-term resilience of the spread.
- Revenue and attributable net profit in 1H26 increased 32% and 70% YoY, respectively, to Rmb30.2bn and Rmb9.7bn.
- Q2 attributable net profit reached Rmb6.07bn, a record quarterly high for the company.
- Q2 olefins gross profit per tonne rose to Rmb4,590, with the olefins business contributing approximately 86% of 1H gross profit.
- UBS raised its 2026–2028 EPS forecasts by 5%–15% and increased its target price from Rmb38.20 to Rmb40.00.
Report interpretation
Overview
Baofeng Energy delivered record quarterly profit in 2Q26, driven by higher crude oil and olefins prices and a wider coal-to-olefins spread. UBS believes tighter approvals for new domestic olefins projects, the gradual exit of high-cost and aging overseas capacity, and a potential slowdown in industry capacity expansion will support medium- to long-term spread performance.
Core views
The core driver of earnings improvement was higher olefins profitability rather than a significant sequential increase in sales volume. The company is advancing the Ningdong Phase IV project and continues to deleverage; as capital expenditure declines and cash flow increases, there is potential for further improvement in shareholder returns.
Analysis framework
The report assesses operating performance using company-disclosed sales volumes, selling prices, feedstock costs, and product-level gross profit per tonne, with the coal-to-olefins spread and industry supply-demand dynamics serving as the primary basis for earnings forecasts; valuation uses DCF.
Methodology notes
Discounted Cash Flow Valuation
An 8.6% WACC is used to calculate the target price; the Rmb40.00 target price implies forecast P/E multiples of approximately 15.4x and 15.0x for 2026 and 2027, respectively.
Coal-to-Olefins Spread and Unit Profitability
Profit elasticity is assessed through changes in polyethylene and polypropylene prices, coal costs, sales volumes, and olefins gross profit per tonne.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- 600989.SSCore Covered Name
- Strengths
- The olefins business is the primary source of gross profit, with significant improvement in Q2 unit profitability; earnings upgrades, deleveraging, and potential improvement in shareholder returns provide support.
- Weaknesses
- Earnings are sensitive to the coal-to-olefins spread and the relationship between oil and coal prices.
- Comparison
- The olefins business contributed approximately 86% of 1H gross profit, significantly higher than the coke and coal mining businesses.
- Risks
- A sharp increase in coal prices, weaker downstream demand, adverse changes in the oil-coal price spread, delays in new capacity commissioning, and environmental constraints.
Key data
- 1H26 RevenueRmb30.2bn, +32% YoYBroadly in line with the company's earnings guidance.
- 1H26 Attributable Net ProfitRmb9.7bn, +70% YoYDriven by improved olefins profitability.
- 2Q26 Attributable Net ProfitRmb6.07bn, +85% YoY and +66% QoQA record quarterly high for the company.
- Q2 Olefins Gross Profit per TonneRmb4,590/tonneA significant increase from the 1H average of Rmb3,682/tonne.
- 2026–2028 EPS Forecast Revision+5% to +15%2026E/2027E/2028E EPS are Rmb2.60/Rmb2.66/Rmb3.12, respectively.
- Target PriceRmb40.00Previous target price: Rmb38.20.
- Forecast Shareholder Return80.6%Including 75.4% forecast share-price upside and a 5.2% forecast dividend yield.
Impact & implications
If the coal-to-olefins spread remains elevated, the company's high proportion of olefins business will continue to support profit growth and valuation upside. If Ningdong Phase IV begins operations as planned by the end of 2026, it will serve as a catalyst for subsequent capacity growth; however, declining oil prices have already narrowed the Q3 spread, and short-term earnings volatility remains a concern.
Risks
- Downstream chemical product demand is weaker than expected.
- A sharp increase in coal prices compresses coal-to-olefins profits.
- Lower crude oil prices or changes in the oil-coal price spread narrow olefins spreads.
- New olefins capacity comes on stream more slowly than expected.
- Environmental requirements may constrain the development of the coal chemicals industry.
What to watch
- Coal-to-olefins spreads and trends in crude oil, coal, and polyolefin prices.
- Approvals for new domestic olefins projects and the pace of industry capacity additions.
- Progress toward commissioning the Ningdong Phase IV project by the end of 2026.
- Changes in the company's capital expenditure, debt repayment, and shareholder return policies.
- Approvals and investment decisions for the Inner Mongolia Phase II and Xinjiang projects.