1~3Q results missed expectation

In 1~3Q, operating revenue rose 16.78% YoY to Rmb452mn, operating profit plunged 130.19% YoY to –Rmb11.9081mn, and net profit attributable to shareholders fell 120.46% YoY to –Rmb9.4202mn or –Rmb0.03/sh, missing our expectations.

The loss was mainly due to increased financial expenses and impairment loss on finished goods inventory. Financial expenses surged 1,244.84% YoY to Rmb17.4963mn in 1~3Q as the company borrowed more loans to fund new projects. Meanwhile, the company recognized Rmb7.28mn in impairment losses for its foam material finished goods, which also undermined its results.

Trends to watch

The company’s production and business operations have begun to recover slowly. Foam product sales increased further by 6% QoQ in 3Q, structural foam sales even hit a new high in July, and p rices of PVC foam, foam plastics and rubber have stabilized.

PVC: It is still the company’s largest earnings contributor, and we expect full-year sales in 2013 to be 6,500 tonnes. New installed capacity at wind power plants may rise 15% YoY to 15GW in 2013. The company has re tained market share via price cuts, and we believe prices will rebound going forward. Meanwh ile, increasing cooperation with 3A should further strengthen the company’s position in the domestic PVC hard foam market.

PET: The company will adopt new sales practices, take into account the needs of end-users, and reduce funding pressure ondealers. PET should become a st rong earnings growth driver.

PP, PMI and PI: Technological upgrades are underway and will be launched in due course.

Soft foam materials: Apart from continuing to adjust product mix, the company will in crease revenue contribution fro m processed and finished goods. The company will continue to expand its market share in electron optics and auto parts.

Valuation and recommendation

We believe the worst is already over, and increased cooperation with 3A should enhance the profitability of the company’s PVC structural foam business. The company is not in a hurry to launch new products and instead has opted to change its sales practices to increase customer loyalty. In add ition, after the soft foam product mix is adjusted, the company has a clear development direction. We trim our 2013/14 EPS estimates to Rmb0.05 and Rmb0.09, implying 129x and 72x P/Erespectively. We downgrade our rating on Tiansheng New Materials to ACCUMULATE.

Risks

Slow growth of downstream wind power plants; weaker-than-expected performance of new products.