1~3Q12 results review
In 1~3Q12, operating revenue and operating profit totaled Rmb758mn and Rmb72mn, and net profit attributable to shareholders were Rmb123mn or Rmb0.16/sh, largely in line with our expectations.
3Q results improved significantly, with operating revenue up 18.7% QoQ to Rmb323mn and gross margin as high as29.1%. Excluding special items, the company largely broke even. Its Tongliao Jinmei project would have recordedlucrative profits excluding acetic anhydride losses.
The company is now in good shape. MEG prices are rising, having increased 21% since the beginning of July. Danhua’s capacity utilization rate has climbed to 85% after production suspension for maintenance in September. On top of MEG mass production, its two subsidiaries in Tongliao and Henan are working hard to address the transmittance problem, andhave made good progress. Its project in Xinxiang Henan is progressing well and transmittance there has also increased, but product quality after a lengthy run warrants attention. Facilities in Tongliao could also b e improved to raise product quality based on the experiences of the Henan project after its long-term stable performance.
Of five production bases in Henan, Xinxiang and Puyang’s coal-to-MEG projects have made progress in trial production; their capacity utilization rate has reached ~50% and should continue to rise. For coal-to-MEG projects in Anyang and Yongcheng, facility tests are under way and production could be gin by year end. The company’s Luoyang subsidiary also started to build coal-to-MEG facilities. We believe MEG w ill bring lucrative profits to Danhua once more projects in Henan make good progress.
Danhua will likely improve its C-1 industry chain to reduce operating costs through producing byproducts, as well as pushing stable operation of existing facilities and higher utilization rates. Valuation and recommendation We reiterate our 2012/13 EPS estimate of Rmb0.23/0.60. The stock is trading at 55x/21x 2012/13e EPS. Maintain BUY. Risks Setbacks in coal-to-MEG project; slower than expected progress in Henan projects; broader market’s valuation de-rating.
