万华化学(600309)

FY17 net profit +c.200% YoY, beating expectations

WHC released prelim FY17 profit guidance with net profit growth of c.200% YoY.This beat DBe/ consensus estimates by 26% / 11%. The strong results were drivenby: 1) a stronger PU performance in both ASP and volume; 2) higher non-recurringprofit from government subsidies. Looking ahead, we expect strong 1Q18E on aYoY basis with: 1) a robust MDI spread due to tight supply-demand dynamics andhigh entry barriers; 2) strong performances from petrochemical and functionalmaterials. Therefore, we reiterate our Buy rating on the strong outlook ahead. Thebiggest risks would relate to potential restructuring / M&A with parentco assets.The stock is under suspension pending a restructuring announcement.

Strong PU / Functional material outlook

The robust MDI spread was driven by a domestic environmental scrutiny ledWHC polymeric MDI ASP rise of 92% yoy in 2017 to RMB26,717/ton. Lookinginto 2018, we expect MDI average margin will continue to grow yoy due to alow base in 1H17; conversely, we expect the global supply demand balance willbe flat as the Sandra plant started operation in 3Q17 to offset strong demandgrowth globally. For the polycarbonate (PC) segment, where China relies heavilyon imports, the outlook remains strong; WHC's new PC plant phase 1 with 70ktpacapacity started on January 23, making WHC the no#2 PC producer in China witha total capacity of 200ktpa. We continue to expect functional material segment(including PC) revenue to achieve a 39% CAGR in 2018-20E.

Valuation and risks

We base our RMB47.5 target price on 8.0x EV/EBITDA by using a GordonGrowth Model, which is at a 15% discount to its historical average of 9.4x.Before suspension, the stock was at 6.1x forward EV/EBITDA, representing a 35%discount to the historical average. Key risks: 1) unexpected corporate actions,including restructuring and M&A; 2) unplanned maintenance turnarounds; 3)fluctuations in oil and chemical product prices; and 3) lower-than-expected GDPgrowth impacting demand growth.