Hualu-Hengsheng 2025 net profit in line, with spreads improving in 1Q26

Overview

This report is UBS's earnings commentary on Hualu-Hengsheng (600426.SS). The company's 2025 revenue and net profit attributable to shareholders declined year on year, but overall results were in line with expectations. Entering 1Q26, spreads for major chemical products improved significantly, supporting UBS's upward revisions to earnings forecasts and target price.

Core views

The core view is that 2025 performance was weak but in line with expectations. In early 2026, seasonal demand strength, supply contraction in some chemicals, and rising oil prices jointly improved spreads for products such as urea, methanol, DMF, acetic acid, and adipic acid. As a coal-based chemicals company, it enjoys relative cost advantages in a high oil price environment, but rising coal prices remain a cost risk to watch.

Analysis framework

The report analyzes changes in segment revenue and gross margin, quarterly net profit performance, a spread tracking model for major products, earnings forecast revisions, and a DCF valuation framework, and supports the Buy rating with expected share price upside and expected total return.

Methodology notes

• Valuation methodsDCF

  discounted cash flow valuation

  UBS uses DCF as the basis for its target price valuation, keeps WACC unchanged at 8.6%, raises the target price to Rmb53.00, and implies 18x 2027E P/E.

• Industry cycle trackingHualu spread index

  spread tracking model

  UBS estimates the Hualu spread index by capacity-weighting products such as urea, DMF, acetic acid, adipic acid, and DMC to track changes in the profitability environment of key products.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hualu-Hengsheng (600426.SS)

  Covered company and rated name

  Strengths

  A coal-based chemicals integrated product platform with a rich product slate, including coal gasification, methanol, and synthetic ammonia capacity. Technology upgrades and capacity expansion are the main growth drivers, and the company has a clear cost advantage over peers.

  Weaknesses

  Revenue and net profit attributable to shareholders declined year on year in 2025, while revenue from new energy and new materials related products fell and gross margin declined.

  Comparison

  UBS forecasts 2026E EPS of Rmb2.51, above consensus of Rmb2.08; the Rmb53.00 target price implies 18x 2027E P/E.

  Risks

  Weaker demand, lower cost competitiveness for coal chemicals in a low oil price environment, urea oversupply or weaker exports, slower-than-expected ramp-up of new projects, and rising coal prices.

Key data

• 2025 revenueRmb31bnDown 10% year on year.
• 2025 net profit attributable to shareholdersRmb3.3bnDown 15% year on year, in line with UBS expectations.
• 4Q25 net profit attributable to shareholdersRmb942mUp 17% quarter on quarter, mainly due to income tax expense falling 88% qoq to Rmb24m.
• Average spread index since 1Q26+16% QoQAverage spreads for urea, methanol, DMF, acetic acid, and adipic acid improved by Rmb159/367/107/98/810 per ton versus 4Q25.
• Target priceRmb53.00Previous target price was Rmb51.20.
• 2026E EPS revisionRaised from Rmb2.25 to Rmb2.51Up 12%, above consensus of Rmb2.08.
• Expected share price upside42.6%Expected total return of 43.6% and expected dividend yield of 1.0%.
• Market capRmb78.9b / US$11.4bTrading data disclosed in the report.

Impact & implications

The report is mildly positive for the stock: results in line with expectations reduce the risk of downward revisions, while 1Q26 spread improvement and higher earnings forecasts reinforce the Buy case. If seasonal chemicals demand continues, oil prices remain elevated, and coal prices stay controlled, the company's cost advantages and earnings leverage from coal-based chemicals could continue to show through.

Risks

• An economic downturn weakens demand for coal chemical products.
• Cost competitiveness of coal chemicals declines in a low oil price environment.
• Tighter regulation of fertilizer use or breakthroughs in agricultural technology reduce urea demand.
• New domestic urea capacity comes on stream faster than expected, causing oversupply.
• Deteriorating global supply-demand conditions weaken urea exports.
• New projects such as caprolactam ramp up more slowly than expected.
• Fixed asset investment in the coal industry falls short of expectations, pushing coal prices higher.

What to watch

• Whether spreads for major products continue to improve after 1Q26.
• The sustainability of demand recovery during the March chemical peak season.
• The impact of Middle East developments on supply and prices of chemicals such as methanol and benzene.
• The net impact of oil and coal price trends on the cost advantage of coal-based chemicals.
• The progress of the company's new projects, especially caprolactam and nylon projects.
• New urea capacity additions, exports, and policy/regulatory changes in the urea industry.