The Company announced that annual capacity of 0.20M tons of coal-to-ethylene–glycol (CTEG) products by GEM Chemical has completely reached the standard ofsuperior product grade. Due to formerly technological barrier that ultraviolettransmittance fails to reach the target (it should be bigger than 75%), so the Companyhas been able to smoothly reach the standard through adding purifying installation atrear, indicating the Company is the first one to achieve commercialization of CTEGtechnology.
The equipments of GEM Chemical are under well operation. Projects in Henan willgradually start operations in 2013. From October 2012, the operation was suspendedbecause of technological innovation, the production of its 0.20M annual capacityinstallation was stabilized at more than 85% designed capacity. In November, outputof ethylene glycol was 14000 tons in a single month of November (along withby-products of 5000 tons of oxalic acid), superior grade rate of ethylene glycol hasbeen stabilized above 90%. In time projection, it is expected to receive officialacceptance from the NDRC in April 2013. Since five sets of 0.20M annual capacityinstallation in Henan Province adopted different combined gas technology, it addeddifficulties for operations, so the progress of the project is slightly delayed. It isexpected to start operations gradually in 2013.
There are upside potential subsequently in profitability of CTEG. Since phase-I 0.20Mtons of GEM Chemical is the first-set large-scale industrial installation, which is stillexperimental in nature with long-term construction period, more technologicalinnovation and relatively large investment scale (fixed asset scale is expected to beRMB 3.5B), we calculate pre-tax full cost of 1 ton of ethylene glycol is around RMB5000, based on current price, the profit in a single month is about RMB 15M, in future,it is expected to continually lower costs through technological innovations. Besides, aspreviously its quality failed to reach the standard of superior grade, so its product saleprice has about 10% discount to the market price. In future, with improving productquality, market promotion and acceptance by the NDRC, the discount is expected tobe gradually abolished.
There are many paths available for its future development, an Outperform rating isinitially offered. It is expected that 2012-2013 EPS is RMB 0.16/share, RMB0.24/share and 69xPE and 46xPE corresponding to current share price. Ethyleneglycol demand in China still remains robust (China consumed 10.03M tons in 2011,72% was imported). CTEG technology has huge growth potential. As the firstcompany in the world completely achieving breakthroughs in CTEG industrialtechnology, it controlled the high position of industrial development and faces manypaths of future development, therefore, an Outperform rating is initially offered.
