Why did profit beat expectations as spreads narrowed?

  • In the third quarter of 2026, Wanhua Chemical reported revenue of 66.55 billion yuan, up 25% year over year and 5% above Goldman Sachs’ estimate; net profit was 5.6 billion yuan, up 84% year over year and 10% above the bank’s estimate.
  • The growth did not come from a continued rise in gross margin: the margin was 15.4% for the quarter, up 2.6 percentage points year over year but down 3.6 percentage points quarter over quarter and 0.8 percentage points below Goldman Sachs’ estimate.
  • Cost control made up for the gross margin shortfall. Operating expenses rose 13% year over year but were 27% below Goldman Sachs’ estimate; earnings before interest and taxes reached 7.56 billion yuan, up 71% year over year and 15% above the bank’s estimate.

Did revenue growth come from higher prices or volumes?

  • Polyurethane sales rose more than 35% year over year, with volume up 19% and the average selling price up 17%. However, the average selling price fell 17% quarter over quarter from its second-quarter peak, remaining at approximately 14 thousand yuan per tonne.
  • Specialty chemicals sales rose more than 40% year over year, driven by a 31% increase in average selling price and 12% volume growth; petrochemical sales rose 13%, mainly on a 12% year-over-year increase in average selling price, while volume was broadly flat.
  • Goldman Sachs’ industry tracking shows that MDI and TDI spreads remained high year over year but narrowed quarter over quarter, particularly for MDI; spreads for most high-performance material products also narrowed quarter over quarter as selling prices fell. Petrochemical product spreads were relatively high both year over year and quarter over quarter.

Where did the cash flow improvement come from?

  • Third-quarter operating cash inflow was 9.14 billion yuan, up 41% year over year and 85% quarter over quarter; capital expenditure fell to 3.12 billion yuan, below the approximately 5 billion to 6 billion yuan recorded in each of the second quarter and the year-earlier third quarter.
  • These two changes drove quarterly free cash flow to 6.02 billion yuan, versus negative figures in both comparison quarters; the net debt ratio fell to 60% at the end of the third quarter from 66% at the end of the second quarter, a three-year low.

How does Goldman Sachs view future growth and valuation?

  • Goldman Sachs believes that if oil prices remain high for an extended period, the company’s chemical product spreads, although below their peaks, could remain relatively high; market share gains and new product expansion could support continued volume growth. An unexpected rise in oil prices could also increase raw material costs and depress earnings.
  • Goldman Sachs raised its earnings-per-share forecasts for 2026 and 2027 by 1% each, maintained its buy rating and nudged its 12-month price target up from 108 yuan to 110 yuan.
  • The bank rolled its valuation benchmark forward to 2027, while lowering its enterprise value-to-EBITDA multiple from 8 times to 7.5 times as spreads normalized from their second-quarter peaks and growth slowed. The petrochemical and specialty chemicals businesses are still ramping up and are currently also weighing on overall margins.