China refineries and the PX-PTA-polyester chain Report Interpretation

Overview

The report examines China private refiners and the PX-PTA-polyester chain following stronger 2Q26 profitability. HSBC expects a supply-led improvement in 3Q26 refining earnings and stable downstream margins, with Tongkun its preferred stock and Hengli also rated Buy.

Core views

HSBC argues that China refining profitability should improve sequentially in 3Q26 after a strong 2Q, driven by a combination of lower effective crude costs, tighter product supply and improved export economics. Refiners accelerated crude purchases and inventory building when prices fell sharply in late June; low-cost barrels are expected to create inventory gains in 3Q. Supply conditions are also tightening as utilisation at Shandong teapot, gasoline, diesel and independent refiners has continued to decline. China has eased refined-product export restrictions, and the report estimates incremental export profit of roughly RMB2,000-3,000/t or more for diesel and around RMB1,000/t for gasoline at current domestic-international price differentials. The report distinguishes 2Q26 refinery margins by crude sourcing. Zhejiang Petrochemical recorded the weakest gross processing margin among local private mega-refiners because its heavier reliance on Middle East crude left it with less feedstock-cost advantage. Hengli's procurement timing was favourable, although HSBC believes its inventory gains were limited because its 2Q procurement costs were already relatively low. Eastern Shenghong benefited materially from optimised crude procurement and lower feedstock costs, supporting both refining-margin improvement and net-profit growth. Tighter chemical supply is a second earnings driver. MEG imports fell 36% in 7M26, while import dependence was 27% in 2025 according to Baiinfo. The resulting drawdown in port inventories to historical lows supported a rapid recovery in MEG spreads and margins in 3Q. Hengli has 1.8mtpa of MEG capacity and Tongkun has approximately 1.1mtpa of attributable capacity, including its 20% Zhejiang Petrochemical stake. HSBC estimates that stronger 3Q versus 2Q MEG profitability could add approximately RMB630m of quarter-on-quarter profit for Hengli and RMB220m for Tongkun. For the downstream PX-PTA-polyester chain, HSBC sees a stronger earnings floor rather than a major demand-led expansion. PTA production declined in 1H26, including at Hengli, as leading producers reduced utilisation to protect margins. Polyester producers have similarly favoured profitability over volume and market share. Smaller filament producers account for about 30% of industry capacity but are already operating close to full utilisation, limiting their ability to add supply if prices rise. Leading producers including Tongkun and Xinfengming are targeting reasonable polyester profitability of around RMB300-400/t, and HSBC expects this coordinated production discipline to sustain relatively healthy margins. However, further profit-per-tonne upside depends on a meaningful recovery in end demand; absent that recovery, the report expects stable rather than sharply expanding margins. HSBC prefers Tongkun over Hengli. Tongkun's 2Q net profit rose 378% year-on-year to RMB2.3bn, supported by polyester discipline and higher investment income from Zhejiang Petrochemical. HSBC expects investment income to rise further in 3Q26 as Zhejiang Petrochemical benefits from refined-product exports and inventory gains. It raises Tongkun's 2026-28 net-profit estimates by 69%, 18% and 8%, respectively, and believes consensus underestimates 2026 refining-cycle upside, though its 2027-28 estimates are 15% below consensus as refinery profitability moderates with easing Middle East conflict conditions and normalising crude prices. For Hengli, HSBC lowers 2026-28 revenue forecasts because constrained oil supply reduces production and utilisation, but raises gross-margin assumptions for supply tightening and inventory gains. Net-profit estimates change by 10%, 18% and -1% for 2026-28, respectively. HSBC's estimates are slightly above consensus for 2026-27 and it expects the market to increasingly recognise inventory gains and product-profit upside. Hengli remains Buy with a RMB29.40 target price, up from RMB27.80, based on an unchanged 10x EV/EBITDA multiple applied to higher 2026 EBITDA; the target implies about 56% upside from the reported current share price. For Xinfengming, 2Q net profit rose 166% year-on-year to RMB1.07bn on supply discipline and inventory gains. HSBC raises 2026-27 net-profit estimates by 40% and 3%, but expects the inventory-gain contribution to recede from the elevated 2Q level. Its 2026-28 earnings estimates are 6%, 24% and 19% below consensus, respectively, because it does not expect a sharp demand recovery to support higher 2027-28 margins. HSBC considers the valuation to already reflect normalized polyester profit of RMB300-400/t and maintains Hold, with a target price of RMB17.80, up from RMB17.50, implying about 5% downside. The report cautions that the refining upswing is not yet a fully structural supply-demand recovery. A normalisation of geopolitical conditions could lower oil prices and restore Middle Eastern supply, weighing on refining margins and refined-product export profits.

Analysis framework

HSBC assesses refinery and chemical earnings through crude procurement timing, refinery utilisation, product supply-demand balances, import dependence, inventories and product spreads. It then translates margin changes into company earnings sensitivities, revises forecasts against consensus, and values individual stocks using EV/EBITDA or PB-ROE approaches.

Methodology notes

• Industry AnalysisSupply-demand framework

  Refinery, MEG, PTA and polyester supply-demand balance analysis

  The report links lower utilisation, import restrictions, production cuts and limited incremental capacity to tighter supply, improved spreads and stronger margins.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Crude-to-refining-to-PX-PTA-polyester earnings transmission

  HSBC traces how crude procurement costs, refined-product exports and downstream chemical spreads affect profits across the integrated chain.

• Valuation methodsEV/EBITDA valuation

  Hengli EV/EBITDA valuation

  HSBC applies an unchanged 10x EV/EBITDA multiple, described as the average level of China peers in 2025, to its higher 2026 EBITDA estimate.

• Valuation methodsPB valuation

  PB-ROE valuation for Tongkun and Xinfengming

  The report derives target PB multiples from forecast ROE, cost of equity and long-term growth, then applies them to forecast book value per share.

Asset mapping & comparison

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

• Tongkun (601233.CH)

  Preferred covered refiner and polyester producer

  Strengths

  A 20% Zhejiang Petrochemical stake, expected 3Q investment-income improvement, supply discipline and future Xinjiang coal-MEG capacity expansion.

  Weaknesses

  HSBC expects refining profitability to moderate in 2027-28 as crude prices normalise.

  Comparison

  Preferred over Hengli; HSBC estimates are 18% above consensus for 2026 but 15% below consensus for 2027-28.

  Risks

  Lower polyester spreads from weak demand, an earnings miss at the 40mtpa Zhejiang Petrochemical complex, and oil-price-driven inventory losses.

• Hengli (600346.CH)

  Covered integrated refiner and chemical producer

  Strengths

  Well-timed crude procurement, 1.8mtpa MEG capacity and potential earnings benefit from tightening industry utilisation.

  Weaknesses

  Lower production and utilisation reduce revenue forecasts.

  Comparison

  Second to Tongkun in HSBC's preference ranking, although both are rated Buy.

  Risks

  Lower petrochemical profitability, inventory losses from oil-price volatility, weaker export economics if geopolitical conditions normalise, and intensifying US restrictions.

• Xinfengming (603225.CH)

  Covered polyester producer

  Strengths

  Benefits from coordinated polyester production cuts and the industry's focus on stable profit per tonne.

  Weaknesses

  HSBC sees limited 2027 earnings momentum without a sharp demand recovery and forecasts below-consensus earnings for 2026-28.

  Comparison

  Less preferred than Tongkun and rated Hold because valuation already reflects normalized polyester profitability.

  Risks

  Higher raw-material costs and inventory losses from significant oil-price fluctuations.

Key data

• MEG imports-36% in 7M26Lower imports contributed to historically low port inventories and stronger 3Q MEG spreads.
• Incremental 3Q MEG profitcRMB630m for Hengli; RMB220m for TongkunHSBC estimate of quarter-on-quarter benefit versus 2Q from stronger MEG profitability.
• Diesel export profit upliftRMB2,000-3,000/t or moreEstimated incremental profit from exports at current domestic-international price differentials.
• Tongkun 2Q net profitRMB2.3bn, +378% y-o-ySupported by polyester discipline and Zhejiang Petrochemical investment income.
• Xinfengming 2Q net profitRMB1.07bn, +166% y-o-ySupported by coordinated production cuts, spread discipline and inventory gains.
• Hengli 2026-28 net-profit estimate changes+10%, +18%, -1%Revenue forecasts were lowered but gross-margin assumptions increased.
• Tongkun 2026-28 net-profit estimate changes+69%, +18%, +8%Reflects stronger investment income and core polyester earnings assumptions.
• Xinfengming 2026-27 net-profit estimate changes+40%, +3%Higher 2026 earnings are partly offset by expected moderation in inventory-gain benefits.

Impact & implications

HSBC expects near-term earnings momentum to favour integrated refiners with low-cost crude exposure, export capability and MEG capacity. It sees supply discipline as making PTA-polyester profits more durable, but identifies demand recovery as the necessary condition for material additional upside.

Risks

• A normalisation of geopolitical conditions could restore Middle Eastern supply, lower oil prices and reduce refining margins and export profitability.
• Petrochemical and polyester profitability could weaken if end demand disappoints.
• Sharp crude-oil price movements could cause inventory losses.
• Tongkun faces risk of an earnings miss from the 40mtpa Zhejiang Petrochemical complex.

What to watch

• Refinery utilisation trends, especially at Shandong teapots and independent refiners.
• Crude-price movements and the extent of low-cost inventory gains in 3Q26.
• MEG imports, port inventories and spreads.
• Refined-product export restrictions, export volumes and diesel export arbitrage.
• PTA and polyester operating rates, industry production discipline and downstream demand recovery.
• Zhejiang Petrochemical's refining and export contribution to Tongkun's investment income.