Investment Highlights:

Widening oil-gas price gap boosted recovery of the cylinder salesvolume. The cost performance ratio of LNG was enhanced by therebounding oil price. Based on the latest diesel price, we believe theLNG-powered heavy-duty trucks （HDT） have become economical againin around 80% of the sales markets, as evidenced by the growingcylinder sales volume after 4Q16. According to our survey, manycylinder manufacturers are gearing up for making up the supplyshortage by increasing working hours or building new production lines.

Buoyant HDT sales. In Jan-Feb 2017, China’s HDT sales volumescaled a new record high since 2012 with a 100%-plus growth, thanksto the government’s efforts on cracking down upon overloading as wellas the recovering infrastructure investment.

Gas price downside bodes well for LNG-powered HDTs in the longrun. Based on the government’s scheme, China is expected to open upthe gas facility construction market and continue regulating gasdistribution as part of its natural gas marketization efforts in 2017.

Taking into account the supply-demand profile, the room of arbitrage aswell as the loss-bearing capacity of upstream companies, our oil andpetrochemical research team believes that there’s still Rmb0.2-0.3/m downside for the gate gas prices. The downside for end users could beeven larger given the potential cost saving during the gas transportationprocedure.

Huge earnings elasticity. In the baseline scenario that the HDT salesvolume grows by 15% and the penetration rate for LNG powered HDTsis 5%, the Company’s cylinder sales revenue is projected to reachRmb1bn, which will lift the Company’s annual turnover/net profit toRmb1.85bn/Rmb115mn, respectively. If we keep the HDT sales volumegrowth rate at 15% but raise the penetration rate of LNG powered HDTsto 7% （best level in history）/9%, the cylinder sales revenue is projectedto reach Rmb1.38bn/Rmb1.77bn respectively, lifting the Company’sannual turnover to Rmb2.23bn/Rmb2.62bn （assuming income fromother business stays stable at Rmb0.85bn）。 This implies huge earningselasticity.

Divestment of the stake in hydrogen energy business helps toimprove balance sheet. In Dec 2016, the Company sold 51% of itssubsidiary, Jiangsu Qingyang Energy, to Hubei Sanning Chemical forRmb36mn. This is expected to reduce the Company’s future investmentin the subsidiary, ease its cash flow pressure and improve its balancesheet. Going ahead, the Company will focus on manufacturing of thehigh-pressure hydrogen cylinders, hydrogen refueling stations etc.

Risks: Falling oil price, intensifying market competition, disappointingnew business expansion.

Earnings forecast, valuation and investment rating: The domestic HDT market is expected tomaintain upbeat business climate as the rebound in oil prices underscores the economic benefits of LNGpowered HDTs. Moreover, the scale-back of NEV subsidies will also push up demand for LNG-poweredbuses. Given the notable recovery of the Company’s LNG vehicle cylinder business, we revise up its2016-18E EPS forecast to Rmb-0.99/0.40/0.53 from Rmb-1.00/0.29/0.38. Reiterate the target price ofRmb18.40 and BUY rating.