Original source：Morgan Stanley Asia LimitedFirst published on Unhidea：Original source date：
Key takeaway
Morgan Stanley has raised its earnings forecasts and rating for Baofeng Energy, betting that tight oil-product supplies will widen coal chemicals’ cost advantage. The thesis depends on whether the oil-coal price spread and dividend-yield valuation can hold.
Why did the price target fall despite the upgrade?
Morgan Stanley upgraded Baofeng Energy from Equal-weight to Overweight while cutting its price target from 32.50 yuan to 30 yuan. The new target implies upside of about 41% from the closing price of 21.33 yuan on 23 October 2026.
The change stems from the valuation method: the bank switched from a price-to-earnings to a dividend-yield valuation. Using its forecast dividend for 2026 and a target dividend yield of 4%, it arrived at a price target of 30 yuan. That implies a price-to-earnings ratio of about 11.5 times, below the 15 times implied by the previous target.
How does tight fuel supply translate into coal chemicals profits?
Morgan Stanley expects geopolitical tensions and constrained refining capacity to keep global fuel supplies tight, prompting refiners to favor gasoline, diesel and jet fuel production and leaving less naphtha for petrochemical production.
Tighter naphtha supply will raise the marginal cost of producing olefins via the naphtha route, widening Baofeng Energy’s cost advantage in coal-to-olefins production over oil-based routes. The bank also believes China’s emphasis on energy security and feedstock self-sufficiency supports the strategic position of coal chemicals.
The thesis is also constrained by coal prices: rising coal prices have already weighed on the company’s recent earnings. If coal supply shortages push prices above expectations, the cost advantage could be squeezed.
How much were earnings forecasts raised?
The bank raised its assumptions for oil prices and naphtha price spreads for the fourth quarter of 2026 and for 2027. It consequently raised its gross profit forecasts for Baofeng Energy by 20% and 13% for 2026 and 2027, respectively, and its earnings-per-share forecasts by 21% and 13%, respectively.
The new model forecasts earnings per share of 2.67 yuan for 2026 and 2.60 yuan for 2027, above the market consensus figures of 2.40 yuan and 2.52 yuan, respectively, listed on the first page. Under the bank’s forecasts, earnings per share in 2027 would still be below the 2026 level.
Morgan Stanley expects a wider naphtha-coal price spread to prompt the market to raise its earnings forecasts for the fourth quarter of 2026 and for 2027 over the coming months. This view depends on the spread remaining high.
What do the dividend valuation and oil-price scenarios imply?
Morgan Stanley said Baofeng Energy’s forecast dividend yield at the time was about 5.7%, above the roughly 4% level for large A-share energy companies. The bank believes coal chemicals’ earnings benefit from tight energy markets, allowing the company to be viewed as a dividend-yield stock as well.
In the bull case, if Brent crude averages 100 dollars per barrel in 2027, the bank expects the company’s earnings to be about 15% above the base case. Combined with a target dividend yield of 3%, this produces a scenario valuation of 46 yuan.
In the bear case, if Brent crude falls to 70 dollars per barrel in 2027, lower naphtha costs would narrow the advantage of coal-to-olefins production. The bank expects earnings to be about 35% below the base case; combined with a target dividend yield of 5%, this produces a scenario valuation of 15 yuan.
