Huachuang Securities: Under the impact of high oil prices in this round, the middle and upper reaches of the profit margin may have more resilience.

Huachuang Securities released a research report stating that demand for midstream industries has remained strong since 2025. The market has some concerns about the stability of their gross profit margin. During this period, they experienced tariff impacts, major cost impacts from the sharp increase in non-ferrous metals prices, and impacts from the significant rise in oil prices. As of February, the first two rounds of impacts had a relatively small effect on the midstream gross profit margin, and even with the recent price increases in the midstream sector, the gross profit margin showed a slight upward trend. After the third round of impacts, the resilience of midstream profits may become more pronounced. Huachuang Securities' main points are as follows: 1. Triple Challenges to Midstream Manufacturing Gross Profit Margin First Challenge: Tariff Impact Starting in April 2025, the United States significantly increased tariffs globally. From the perspective of tariff revenue, it was $81.6 billion in March of last year, increased to $296.7 billion by September of last year, and then dropped to $265.9 billion by February 2026. Therefore, the peak of tariff pressure was in Q2-Q3 of 2025. Second Challenge: Direct Cost Impact Since October 2025, there has been a significant increase in the prices of non-ferrous metals. Looking at the PPI for non-ferrous minerals and non-ferrous processing industries, the overall price increase was 18.6% (October 2025-February 2026), while the PPI for the midstream manufacturing industry increased by only 0.9% during the same period. The large increase in non-ferrous metals had a significant impact on their costs. Third Challenge: Oil Price Impact The third challenge may come from oil prices. The impact of oil prices may affect the cost side of the midstream through chemical or electricity price transmission, or it may affect price transmission through demand-side impacts. Historically, there have been periods when rising oil prices have further increased the midstream gross profit margin (Q2-Q3 2018), as well as periods when the gross profit margin declined (Q2 2021-Q3 2022). The impact of this round of oil price increases on the midstream gross profit margin remains to be seen. However, considering that non-ferrous metals play a larger role in midstream costs, and the impact of oil prices on Chinese electricity prices is lower than overseas, which may increase export market share, and the current high oil prices due to supply shocks may drive more energy investment and increase midstream demand, the midstream gross profit margin may be more resilient. In terms of the impact of oil prices on electricity prices, taking 2022 as an example, due to the Russia-Ukraine conflict, oil prices rose significantly throughout the year. European electricity prices (PPI basis, representing industrial electricity, the same below) rose by 61% for the whole year, and American electricity prices rose by 90.5%. Chinese electricity prices only rose by 5.1% for the whole year. 2. Review of Industrial Enterprise Profit Data for January-February In January-February, according to statistics from the Bureau of Statistics, profits of industrial enterprises above a certain scale increased by 15.2% year-on-year. In terms of inventory, as of February 2026, inventory increased by 6.6% year-on-year, compared to 3.9% previously. By ownership type, in January-February, the profit growth rate of state-owned enterprises was 5.3%, private enterprises increased by 37.2%, and foreign-funded enterprises and enterprises from Hong Kong, Macao, and Taiwan decreased by -3.8%. In terms of quantity, price, and profit margin decomposition, both quantity and price rose. The PPI year-on-year in January-February was -1.2%, compared to -1.9% in December of last year. Industrial added value grew at a rate of 6.3% in January-February, compared to 5.2% in December of last year; income growth in January-February was 5.3%, compared to -3.2% in December of last year. The profit margin was 4.92% in January-February, compared to 4.49% in the same period last year. Looking at the breakdown of profit margin, the gross profit margin was 15.2% in January-February, compared to 14.9% in the same period last year; the expense ratio was 8.66%, compared to 8.56% in the same period last year; and other income and expenses ratio was 1.58%, compared to 1.80% in the same period last year. By industry, in January-February, mining industry grew by 9.9% year-on-year, manufacturing industry grew by 18.9% year-on-year, and electricity, heating, gas, and water industry grew by 3.7% year-on-year. Within the manufacturing industry, midstream equipment manufacturing industry grew by 23.4% year-on-year, with the computer, communications, and other electronic equipment manufacturing industry growing by 2.0 times; electrical machinery and equipment manufacturing industry grew by 6.2%; special equipment manufacturing industry grew by 4.3%, general equipment manufacturing industry grew by 3.6%; and transportation equipment grew by 11.4%. However, the automobile manufacturing industry declined by 30.2%. Performance in some upstream manufacturing industries was relatively good, including non-ferrous metal smelting and processing industry growing by 1.5 times, chemical raw materials and chemical product manufacturing industry growing by 35.9%, and non-metallic mineral products industry growing by 16.2%. Relatively, downstream manufacturing industry performance was weaker, with a growth rate of -5.6%. The performance of the beverage industry declined by 17.2%. In terms of income, in January-February, the income growth rate of midstream manufacturing industry was 8.8%. The income growth rate of upstream manufacturing industry was 4.26%, downstream manufacturing industry was 2.8%, mining industry was -0.3%, and electricity, heating, gas, and water industry was 0.54%.