2013 results in line

2013 revenue was Rmb743mn, down 32.5% YoY, and the company booked a net loss attributable to shareholders of Rmb174mn, or Rmb0.22 a share, in line with the -Rmb0.23 we expected.

Trends to watch

Danhua faced multiple headwinds in 2013. Tongliao GEM Chemical only produced 89,500 tonnes of ethylene glycol and 39,300 tonnes of oxalic acid due to frequent equipment failures in 1H13, four bouts of maintenance and low capacity utilization of 54%. Although the ethylene glycol industry still has strong demand and prices remain elevated, the large fixed cost increase at Tongliao GEM Chemical will damage the profitability of ethylene glycol business. The ongoing Danyang Acetic Anhydride relocation compensation scheme also hurts profitability.

Danhua Acetic Anhydride has stopped production due to market sluggishness and relocation. We expect the plant to be closed and relocated by the end of 2014.

Tongliao GEM Chemical had planned to invest Rmb300mn to upgrade production facilities in order to expand ethylene glycol capacity by ~100,000 tonnes. The project is now expected to start this year. Upon completion, fixed production cost will be much lower, boosting profitability. Danhua is focusing on the review and approval of Phase I of the project and the relocation of Danhua Acetic Anhydride. Profitability is likely to recover as production technology becomes more sound and equipment stabilizes.

Earnings forecast revisions

We continue to expect an Rmb0.13 loss per share for 2014 and introduce 2015e EPS at –Rmb0.03 as we believe market volatility will hurt Danhua's profitability given its overreliance on ethylene glycol and oxalic acid.

Valuation and recommendation

Maintain HOLD and set a TP of Rmb6.10.

Risks

Test run of coal-to-glycol project suffers setbacks; Henan project progress disappoints; average valuation declines in the broader market.