万华化学(600309)

Buy on share price weakness after strong 3Q results; raising TP to RMB47.5

WHC posted strong 3Q17 results with EPS of RMB1.08, +30% QoQ/+145% YoY;meanwhile, 9M17 recorded EPS of RMB2.87, +212% YoY. We believe the strongset of results was driven by: 1) robust MDI spread surge due to tight supplysituation created by Hurricane Harvey, which took out capacity in Texas; and 2)healthy performances from petrochemical and functional materials. The resultsbeat expectations. Following the strong 3Q17 results, we lift our 2017E/18E EPSby 14.8%/14.0% and our target price by 14% to RM47.5, factoring in higher MDIspreads in 2017/18E (RMB17.5k /17.0k per ton); we reiterate our Buy rating.

Bumpy near-term MDI prices while long-term prospects bright

Our channel check suggests that China MDI prices for Oct 12 fell by RMB1.5k-2k/ton (-4-5.5%), and the upcoming batch may sell at RMB33k/ton (a furtherRMb1.5k/ton drop). Given the tight supply-demand dynamics and high entrybarriers, we remain positive on the MDI cycle and believe near-term pressure onMDI prices in China could provide better entry point for Wanhua (WHC).

Beat expectations: 3Q results backed by 46% QoQ rise in MDI spreads

MDI-Benzene spread picked up by 46% and averaged US$3,565 in 3Q17 (MDIBenzene spread rose 71% to US$4,467/ton as of Sep 30 from Jun 30). Thestrong MDI spreads performance was boosted by the tight supply situation asa result of:1) overseas capacity going into force majeure maintenance due toHurricane Harvey hitting Texas; and 2) China domestic environmental scrutiny.Also, strong downstream demand in China continues, from both white appliancesand construction materials, which has led to a short-term supply shortage in Chinawith WHC twice changing its indicated selling prices, in Aug and Sep.

Valuation and risks

We base our RMB47.5 target price on 8.0x EV/EBITDA by using Gordon GrowthModel which is at an 16% discount to its historical average of 9.5x. Our targetprice implies 5.0x 2017-18E P/B; we believe the premium to global peers isjustified as its ROE averages 42.4% in 2017-18E, which is at a c.160% premiumover the MDI peers. At the current price, the share trades at 6.4x 12-monthforward EV/EBITDA, 3.8x 12-month forward P/B and 11x 12-month forwardP/E. The 6.4x forward EV/EBITDA represents a 33% discount to its historicalaverage. Key risks: 1) unplanned maintenance turnaround; 2) fluctuations inoil and chemical product prices; 3) lower-than-expected GDP growth; and 4)unexpected corporate actions with demanding valuations.