Why did third-quarter earnings beat expectations?

  • Wanhua Chemical’s net profit was 5.6 billion yuan in the third quarter of 2026, up 84% year on year; it fell 12% quarter on quarter because of a high base in the previous quarter. The result was significantly above market consensus and Morgan Stanley’s forecast range of 4.5 billion–5 billion yuan.
  • Morgan Stanley believes savings on selling, administrative and other expenses, lower finance costs, and fewer one-off items recorded were the main reasons earnings beat expectations. Quarterly gross profit was broadly in line with changes in product prices.

Can the earnings improvement continue?

  • Addressing concerns about earnings sustainability after an easing of tensions in the Middle East, Morgan Stanley expects Wanhua Chemical’s short- to medium-term earnings outlook to remain markedly better than in 2025: new polyurethane supply is limited and channel inventories are extremely low.
  • The bank believes supply and demand conditions and a stable competitive landscape will keep the polyurethane market tight in the short to medium term; this assessment underpins its positive view of future earnings.

What are the effects of trade restrictions and costs?

  • Regarding possible further EU restrictions on Chinese imports, including chemicals, Morgan Stanley believes that, if imposed, the restrictions could reroute polyurethane trade flows, as happened after the United States imposed anti-dumping duties on Wanhua’s MDI exports.
  • The bank also notes that excessively high petrochemical prices could suppress demand, in turn hurting sales volumes and prices; prolonged supply disruptions for feedstocks such as liquefied petroleum gas and naphtha could also cause substantial losses.

How does the institution view valuation?

  • Morgan Stanley believes the company’s fundamentals have diverged from its share-price performance and reiterates its overweight rating on Wanhua Chemical. The bank uses sustainable earnings of 19 billion yuan and a price-to-earnings multiple of 15 as the basis for its mid-cycle valuation.
  • The bank also values the approximately 5.1 billion yuan in additional earnings that could result from longer-lasting global supply disruptions at a price-to-earnings multiple of 10; sales volumes boosted by restocking and new-product penetration proceeding as planned are also listed as upside factors.