Investment positives

We initiate coverage with a BUY rating and a target price ofRmb32.00, or 27x 2017e P/E.

Why a BUY rating?

HTAC is SWET’s core technology; focusing on economicalefficiency. 1） HTAC calcium carbide process cuts cost ofproducing calcium carbide by >Rmb500/t （-24%）； 2） in thesecond process, making PE from acetylene helps save 29%project investment and 18% production cost.

Coal-chemical industry has promising outlook. Marketrevenue and net profit from improving HTAC calcium carbidemight reach Rmb67.5bn/10bn while net profit from producing PEwith acetylene may jump to Rmb267bn/40bn.

Ample orders; visible earnings. The firm has recorded 77%compound quarterly growth since 2014. In 2016, new EPC ordersamounted to Rmb10.8bn, 9x 2015 revenue. It has at least 10potential projects and potential orders may reach Rmb40bn.

How do we differ from the market? Given low interestrates and an asset shortage, we believe SWET’s projects, whichcan absorb large capital and have sound cash flow, are qualityassets and enjoy favorable financing conditions.

Potential catalysts: 1） The acetylene-based technique isgarnering new contracts. 2） The technique of making PE fromacetylene is still owned by Beijing Huafu Engineering, asubsidiary of the Shenwu Group. To cut related-partytransactions, this technique might be included into SWET.

Financials and valuation

EPS is expected to be Rmb0.71/1.18/1.63 in 2016/17/18e, aCAGR of51%. We expect 2016/17/18e net profit to rise298%/65%/38% to 720mn/1.19bn/1.65bn.

Risks

Progress of new projects and Wuhai project disappoints;international oil prices fall below US$30/bbl.