1~3Q16 earnings miss

Yongtai Technology announced its 1~3Q16 results:

revenue up 17.6% YoY to Rmb1.3bn and net profit attributableto shareholders down 5% YoY to Rmb123mn or Rmb0.15/share.

In 3Q16, revenue dropped 3% YoY & 26.7% QoQ to Rmb377mn,while net profit fell 36% YoY & 84% QoQ to Rmb12mn.

Trends to watch

Revenue growth dragged by pesticide chems. Amid theglobal downside in agrochemicals, Yongtai’s revenue frompesticide chemicals fell 34% YoY in 1H16, dropped further in3Q16 and will likely fall >30% YoY in 2016. Due to 3Q16production, sales volumes of medical & liquid crystal productsmissed. We expect earnings to turn around in 4Q16.

Steady progress in external expansion to acceleratevalue chain deployment. By acquiring 100% of ZhejiangChiral and 90% of Foshan Soin, Yongtai ventured into bulk drugs,chemical agents and TCM, thus accelerating the verticalintegration of medical intermediates, bulk drugs andpreparations. Its JV, Yongtai High-Tech plans to enter lithiumbattery via fluorine-containing electrolytes such as lithiumphosphate and will likely start trial operation in 1Q17.

Plan to reduce shareholding in Fushine Pharmaceuticalto visibly drive up investment return. Yongtai holds a17.75% stake in Fushine at an initial capital cost of Rmb64.22mn.

As of October 17, Fushine’s market cap totaled Rmb8.785bn andYongtai’s shareholding implies a market cap of Rmb1.56bn. Thecompany plans to reduce its shareholding 12 months fromDecember 22, visibly driving up its investment returnEarnings forecast

Considering the continued sluggishness of pesticide chemicalsbusiness, we lower our 2016/17 earnings forecasts by26%/22% from Rmb0.31/0.46 to Rmb0.23/0.36.

Valuation and recommendation

The stock is trading at 74/47x 2016/17e P/E. We are upbeat onthe ramp-up of liquid crystal products and photoresists.

Maintain BUY rating, but cut target price by 21.15% toRmb20.50, implying 21.81% upside from its current price.

Risks: fall in orders for traditional business; M&A disappoints.