Investment positives

We initiate coverage of Elion Energy Company （600277） with aBUY rating and TP of Rmb8.50, implying 32x 2017e P/E.

Why BUY rating?

Product price rises to drive clear earningsimprovement in 2017. We expect Elion’s net profit to rise169% and58% YoY in 2016 and 2017 as a turnaround in thecoal-chemical business （PVC etc.） and coal prices shouldsignificantly boost the main business.

Clean coal utilization technology to drive long-termgrowth. We expect the clean energy business to contributeRmb1.939bn revenue and Rmb263mn net profit in 2018.

Disposing of non-core assets to focus on mainbusiness; major shareholders’ stake increasedisplaying confidence.

How do we differ from the marketElion’s earnings maybeat expectations, as China continues to tighten policies on coalsector’s supply-side reform and environmental regulations oncoal utilization.

Potential catalysts: Price rises for PVC and coal; upsidesurprise in materialization of clean energy projects.

Financials and valuation

EPS is expected to be Rmb0.17, Rmb0.28 and Rmb0.38 in2016~2018, a CAGR of50%. Elion is trading at 25x/18x2017/18e P/E. Initiate with BUY and set TP at Rmb8.50（32x/22x 2017/18e P/E）， implying 24% upside room.

Risks

Fluctuating product prices; safety in operation; disappointingpromotion of clean energy business.