FY12 results review

FY12 operating revenue grew 98% YoY to Rmb1.102bn; net profit attributable to shareholders was Rmb28mn or Rmb0.04/sh.

Though the company ceased to incur loss and began to make profit, its pe rformance still missed market and our expectations.

4Q12 loss mainly due to one-off item. The Rmb95mn loss in 4Q12 was mainly due to the ~Rmb50mn income tax paidfor the returned Rmb200mn that was misappropriated by the previous actual controller.

Emerging profitability of Tongliao MEG project. The company produced 0.1011mt of MEG and 0.0496mt of oxalicacid in 2012, with average GM of 15% (20% in 2H12), su ggesting the company has already achieved actual profitabilityin these businesses. The company plans to complete the project and acquire the NDRC’s quality approval as soon aspossible. Moreover, 2013 technical upgrades and capacity expansion at Tongliao Jinmei will increase MEG production capacity by ~0.1mt, hence notably raising the coal conversion rate and reducing costs.

Henan base a bright spot in 2013. Among the five projects in Henan, the Xinxiang and Puyang projects are already in trial production, and their capacity loading ratio has reache d 50% while transmittance is stably improving; the Anyang project is also poised to begin operation. We expect the MEG business to gradually generate earnings as follow-on projects in Henan steadily progress, thus contributing great investment gains.

Acetic anhydride project likely to be stripped out. The company’s acetic anhydride project incurred an Rmb78mn loss in 2012. It currently has largely been suspended and is subject to industrial adjustment by the Danyang government, and we expect the company to finally strip this project out in 2013 and concentrate on other promising projects like coal-to-MEG.

Valuation and recommendation

We expect the company’s 2013/14 EPS to be Rmb0.31 and Rmb0.49. The stock is trading at 40x 2013e P/E and 25x 2014eP/E. As the company has made substantive breakthroughs in coal-to-MEG, we maintain our BUY rating.

Risks

Setbacks in coal-to-MEG project; slower-than-expected progr ess in Henan projects; broader market’s valuation de-rating.