Guotai Haitong: China's refining and petrochemical sector is at an inflection point in the capacity cycle; recommends leading domestic refiners poised to follow the development path of US-listed refining and petrochemical companies.

Guotai Haitong released a research report stating that since 2020, the stock prices of the five leading independent refining and petrochemical companies listed in the USMarathon Petroleum, Valero, Phillips 66, PBF Energy, and HF Sinclairhave entered a six-year long prosperity cycle. This rally is essentially a structural shortage of global refining capacity, not a short-cycle rebound. China's refining capacity surpassed that of the US in 2024 to rank first globally, but just as the US entered a adjustment period after 40 years of rapid development, China's refining and petrochemical sector is standing at an inflection point in the capacity cycle. Guotai Haitong's main views are as follows: Since 2020, the stock prices of the five leading independent refining and petrochemical companies listed in the USMarathon Petroleum, Valero, Phillips 66, PBF Energy, and HF Sinclairhave entered a six-year long prosperity cycle, with their September 2026 highs up 2770%, 1299%, 595%, 1483%, and 587% respectively from their 2020 lows. Core conclusion one: This rally is essentially a structural shortage of global refining capacity, not a short-cycle rebound. (1) Since 1977, no new greenfield refinery has been built in the US; three-tier federal/state/local approval, a 7-10 year construction cycle, over US$10 billion in investment, and long-term demand uncertainty have kept new entrants away, with capacity growth relying entirely on expansions and upgrades of existing facilities; (2) since 1990, the number of US refineries has fallen from 205 to 130, with the pandemic accelerating the exit of old marginal capacity, with 4.5% retired in 2020 alone; California, under the combined effect of the LCFS carbon standard, the highest gasoline tax in the US, and the 2035 zero-emission policy, has formed a "shutdown-gap-high prices-tighter regulation" exit spiral; (3) Europe has shut down about 35% of its refining capacity from peak and Japan 42.6%, with faster clearing; the Russia-Ukraine conflict and the US-Iran conflict have also caused about 10% of global refining capacity to be actually taken offline. As the only marginal supplier able to increase output, the US utilization rate has risen to 93.6%, and the diesel crack spread broke US$102/barrel for the first time in August, setting a historical extreme. Core conclusion two: A long-cycle review reveals the patterns of the refining and petrochemical industrythe "golden age" occurs during capacity contraction + stable demand, not during high demand growth. After US refining capacity peaked in 1981 (324 refineries, 18.62 million barrels/day), EPAA price controls had artificially subsidized small refineries, creating "institutional oversupply"; after deregulation, combined with Volcker's tightening, 106 refineries were cleared within five years. During the 1995-2005 super merger wave, the Majors sold assets on a large scale due to low refining profitability and FTC-mandated divestitures, and independent refiners rose to prominence, forming the industrial foundation of the five independent refining targets. Surviving companies, relying on the NCI complexity advantage (US Gulf average above 12, dual-high coking + FCC, the world's only full deep-processing coverage) and their positioning as internal-external dual-circulation hubs that "take in heavy oil and put out light products," achieved both profit and valuation expansion during the capacity contraction period. Core conclusion three: Implications for China's refining and petrochemical sectorfrom "scale expansion" to "cash cow revaluation." China's refining capacity surpassed that of the US in 2024 to rank first globally, but just as the US entered an adjustment period after 40 years of rapid development, China's refining and petrochemical sector is standing at an inflection point in the capacity cycle. Three lessons are worth learning: (1) use market-based mergers and reorganizations to promote survival of the fittest, with the exit criterion being sustained profitability rather than plant scale; (2) concentrate capacity in large-scale coastal refining and petrochemical integrated bases, with "reducing oil and increasing chemicals" enhancing cyclical resilience; (3) Valero currently trades at a PE of about 7.7x and PB of about 3.8x; Marathon Petroleum at a PE of about 7.6x and PB of about 5.1x, with relatively higher valuations. The high valuations are essentially the market pricing in the "capital discipline + shareholder returns" paradigm: Valero has returned a cumulative US$42.4 billion to shareholders since 2021 and committed to a minimum payout ratio of 40-50% of operating cash flow, while Marathon pursues 100% excess cash buybacks and cancellationthis is precisely the fundamental source of the upward shift in the valuation center. Investment recommendations: (1) US-listed refining and petrochemical related targets benefiting from geopolitical conflicts and global refining capacity clearing; (2) domestic refining and petrochemical leaders expected to follow the development path of US-listed refining and petrochemical companies. Risk warnings: large fluctuations in crude oil prices, changes in macro policies, demand falling short of expectations, etc.