1-3Q17 results beat expectations

Hongda Xingye announced its 1–3Q17 results: revenue was up 34%YoY to Rmb4.82bn and net profit attributable to shareholders was up64% YoY to Rmb856mn or Rmb0.33/sh, beating expectations. In3Q17, revenue rose 28.7% YoY to Rmb1.75bn and attributable netprofit grew 43.1% YoY to Rmb352mn. The company guided thatattributable net profit might rise 34.5%–46.7% in full year 2017.

Earnings beat expectations thanks to upside surprises in PVC andcaustic soda prices in 3Q17. Its gross profit margin expanded 6.1pptYoY to 37.4%.

Trends to watch

Improving supply-demand balance boosted prices of PVC andcaustic soda in 3Q17. The tightening environmental campaignweighed on supply, while downstream demand was strong. As aresult, average sales price of PVC and caustic soda flake rose 22% and5% QoQ in 3Q17. The company has 700,000t production capacity forboth PVC and caustic soda. Rising product prices drove rapid earningsgrowth in 3Q17. Inventory of caustic soda is low at present, and tightsupply will likely continue considering the tough environmentalcampaign; the price of caustic soda may thus rise further.

Soil remediation business will likely maintain rapid growth. Chinasaid that 10mn mu （6,667km2） of polluted arable land should beremediated by 2020. Demand is rising and the company’s soilremediation business enjoys a rosy outlook. It has productioncapacity for 1.2mn tonnes of soil conditioner and nationwidepromotion is being carried out through demonstration projects. Weexpect the revenue contribution of PVC, caustic soda and soilremediation businesses to reach 50%, 23% and 6% in 2017.

The company leads the industry in profitability thanks to itsintegrated value chain. The company has built an integrated valuechain. It enjoys significant cost advantages and leading profitability.

Valuation and recommendation

Considering upside earnings surprise, we raise our 2017/18 EPSforecasts by 7%/5% to Rmb0.46/0.55. The stock is trading at 17x/14x2017/18e P/E. Maintain BUY and target price of Rmb10 （22x/18x2017/18e P/E）， implying 27.7% upside room. Risks: disappointingpromotion of soil remediation business; disappointing prices of PVCand caustic soda.