Meihua Holdings Group

Transcription

1 Relative Value (%) Equity Research October 22, 2013 Meihua Holdings Group Both MSG and xanthan gum may turn around Initial Coverage Initiate with BUY Investment positives The consolidation of the monosodium glutamate (MSG) industry is nearing an end and earnings will likely double in 2014, driven by business turnaround. This round of industry consolidation began in 2011 and is nearing its end. Of China s 11 MSG producers, ~33% of total production capacity has been suffering losses for almost two years. We expect the ongoing industry consolidation to end soon amid tightening environmental standards; and a new cycle will likely kick off in As China s second-largest MSG producer, Meihua Holdings Group represents 20% of the country s total MSG capacity. We expect its earnings to surge 113% YoY to Rmb0.32/sh in 2014, with 50% coming from MSG operations. Earnings to rebound strongly, driven by growing sales and prices of amino acid as bird flu impact gradually fades. In 1H13, bird flu dealt a heavy blow to amino acid demand, with prices and profit margins of threonine and lysine sulfate hitting five-year lows. As this impact gradually fades, we expect the amino acid business to triple its net profit and contribute 20% of Meihua s 2014 earnings driven by capacity expansion, cost advantage and rising sales & prices. New products to further improve product mix; xanthan gum and pullulan to become earnings contributors. New high-margin products will likely boost earnings from Meihua has made a breakthrough in pullulan production technology; its 300t-facility has started trial production and will likely become a new earnings growth driver. Despite a possible price decline, xanthan gum will gradually start to post earnings thanks to its above-average profit margin. Financials Initiate with ACCUMULATE. We believe the MSG and amino acid markets are at cyclical bottoms and will likely turn around in We expect Meihua s 2013/14 EPS to be Rmb0.15/Rmb0.32, implying P/E ratios of 37x/18x. We initiate our coverage of Meihua Holdings Group with an ACCUMULATE rating and TP of Rmb6.4 considering that new products will likely further improve its product mix and the turnaround of its principal businesses will give a strong boost to earnings. Valuation and recommendation Weaker-than-expected demand growth; industry consolidation is slower-than-expected. Ticker Last close SH Rmb wk price range Rmb6.20~3.70 Market cap (bn) Rmb18 Daily value (mn) Rmb64.92 Shares outstanding (mn) 3,108 Free float (%) 23 Daily volume (mn sh) Business sector Chemicals SH CSI Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 ( mn) 2011A 2012A 2013E 2014E Revenue 6,866 7,470 8,207 9,316 (+/-) 36.9% 8.8% 9.9% 13.5% Net profit (+/-) -8.9% -15.5% -21.5% 107.3% EPS BPS DPS CPS P/E P/B EV/EBITDA Dividend yield 2.8% 0.0% 0.8% 1.6% ROAA 6.2% 3.9% 2.5% 4.6% ROAE 14.3% 11.4% 8.4% 16.1% Source: Bloomberg, company data, CICC Research Risks 风 Zheng 险 提 GAO 示 的 具 体 内 容 [email protected] SFC CE Ref: AZD599

2 Contents Company profile... 3 MSG industry consolidation nearing completion; new cycle about to start... 4 Introduction to Meihua s MSG business... 4 Stable low growth in demand for MSG industry... 4 Third round of MSG industry consolidation nears end... 5 Drivers of industry consolidation... 6 Strong earnings rebound driven by growing sales & prices of amino acids as bird flu s impact fades. 9 Threonine... 9 Lysine sulfate New products to further improve product mix and become earnings contributors in Xanthan gum Pullulan Initiate with ACCUMULATE Figures Figure 1: Shareholding structure of Meihua... 3 Figure 2: Operating revenue by segment (left); gross profit by segment (center); gross margin movement (right)... 3 Figure 3: Global MSG demand (left); China MSG demand (center); MSG demand structure, 2013 (right)... 4 Figure 4: Historical prices in MSG industry... 5 Figure 5: Distribution of domestic MSG production capacity... 6 Figure 6: Environmental policies and MSG industry consolidation policies over 2007~ Figure 7: Combined market share of top five MSG companies by production capacity... 7 Figure 8: Global MSG production capacity distribution (left) and MSG production cost breakdown (right)... 7 Figure 9: Cost curve of China s MSG industry... 8 Figure 10: Earnings sensitivity to MSG prices... 8 Figure 11: Distribution of Meihua s amino acid production capacity... 9 Figure 12: Gross margins of amino acid business (left); threonine price movements (center); lysine sulfate price movements (right)... 9 Figure 13: Global threonine production capacity by producer in 2013 (left); global lysine sulfate production capacity by producer in 2013 (right) Figure 14: Gross margin movements of xanthan gum business in 2013 (left); Xanthan gum demand by downstream sector (center); Xanthan gum price movements (right) Figure 15: Meihua s earnings sensitivity to product price changes Figure 16: Historical P/E and P/B bands Figure 17: Historical and forecasted financial data

3 Company profile Meihua Holdings Group Co., Ltd is principally engaged in the manufacture and distribution of biologically fermented products. These products are primarily food additives, pharmaceutical intermediates, feed additives and seasonings, which are distributed in over 50 countries and regions. Meihua has established strategic cooperative relationships with a number of renowned domestic and international food, feed and pharmaceutical companies. Meihua was listed on the Shanghai Stock Exchange in 2010, although is currently still controlled by natural persons. Together with persons acting in concert, Meng Qingshan, the largest shareholder with 25.48% equity, holds a 35.41% equity stake in Meihua. Figure 1: Shareholding structure of Meihua Meng Qinshan and other person acting in oncert 35.41% Meihua Holding Group Longliao Meihua Biological Technology Co.,Ltd Tongliao Lvnong Bio-Chemical Co.,Ltd Langfang Lvnong Bio-Chemical Co.,Ltd 100% Langfang Meihua Biological Technology Co.,Ltd Xinjiang Meihua Amino Acid Co.,Ltd Langfang Meihua Compound Seasoning Co.,Ltd Meihua International trading (Hong kong) Meihua Amino Acid (Hulunbeier) In 1H13, Meihua reported sales revenue of Rmb3.896bn, Rmb1.86bn of which was from the MSG segment (48% of total; 16% gross margin) and Rmb1.1bn from the amino acid segment (28%). The gross margin of amino acid business dropped from 25% in 2012 to 18% in 1H13 due to the negative impact from bird flu. Figure 2: Operating revenue by segment (left); gross profit by segment (center); gross margin movement (right) Gross Margin E 0.4 Revenue E 2,500 MSG Amino acid Others 10,000 8,000 2, ,000 4,000 2,000 Others Amino acid MSG 1,500 1, Others Amino acid MSG H E 2014E 3

4 E 2014E 50% CICC Research: October 22, 2013 Food Service MSG industry consolidation 30% nearing completion; new cycle about to start Introduction to Meihua s MSG business With a production capacity of 520,000t, Meihua is the world s second largest MSG producer, behind only Fufeng Group. Meihua exports 100,000~150,000t of MSG p.a., representing ~50% of the MSG industry s total. At present, Meihua has a 420,000t capacity production facility in Tongliao and 100,000t in Xinjiang. As corn and coal are the key raw resources, Meihua s Tongliao production facility enjoys cost advantages thanks to the lower corn and coal prices in Inner Mongolia. Stable low growth in demand for MSG industry MSG is a common flavor enhancer. Ajinomoto estimates global MSG demand totals 2.93mt and China s demand reaches 1.55mt. At present 50% of MSG is sold to food processing companies for the production of food flavoring agents, 30% is used by restaurants, with the remaining 20% going to households and supermarkets. MSG demand is relatively unaffected by the economy s cyclical fluctuations. MSG demand has shown a steady growth trend along with the development of the food processing and restaurant industries. Global MSG demand grew at a CAGR of 9% over 2001~10 and is expected to grow at a CAGR of 5% over 2011~14. Publicly available data shows that China s MSG production began to take off in the 1980s and the country became the world s largest MSG producer in China s MSG demand grew at a CAGR of 7% over 2001~10 and is expected to grow at a CAGR of 5% over 2011~14 as the industry is likely to maintain a growth rate of 8~10% driven by economic development and seasoning upgrading. Our preliminary estimates show that the domestic market for flavor enhancers reaches >Rmb30bn, accounting for nearly 25% of the seasoning industry. The MSG market reaches ~Rmb21bn or 70% of the flavor enhancer market. MSG remains one of the most important flavor enhancers in the Chinese mainland. Figure 3: Global MSG demand (left); China MSG demand (center); MSG demand structure, 2013 (right) 4,000 3,200 2,400 1, Global MSG demand (k tonnes) Global YoY 11-14Y CAGR=5% Before 11Y CAGR=9% 30% 20% 10% 0% 2,000 1,600 1, China's MSG demand (k tonnes) China 30% Before 11Y CAGR=7% 11-14Y CAGR=5.% 20% 10% 0% Microsales 20% Food Service 30% Food Processing 50% Source: Ajinomoto, China Fermentation Industry Association, CICC Research 4

5 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 CICC Research: October 22, 2013 Third round of MSG industry consolidation nears end Since 2003, the MSG industry has experienced three rounds of consolidation: 2003~04; 2007~09; and, 2011 to date. The first round of industry consolidation took place in 2003~04: It saw most of the MSG plants in the Pearl River basin go out of business, while companies in the Yangtze River basin, Henan and Shandong all grew bigger. This round of industry consolidation saw the total number of MSG companies drop from >100 to 65. The second round of industry consolidation ran from 2H07~2009: In 2007, the State Council issued the Comprehensive Work Plan for Energy Saving & Emission Reduction as part of its bid to eliminate obsolete production capacity. According to the Plan, MSG companies with annual output of <30,000t would be eliminated. The NDRC and SEPA then proposed eliminating 200,000t of obsolete MSG production capacity during the 11 th FYP period. In 2009, the State Council issued the Light Industry Restructuring & Revitalization Plan, proposing again to eliminate MSG companies with annual output of <30,000t and eliminate 120,000t of obsolete MSG production capacity. In this context, a large number of small and medium MSG producers especially low-margin, high-polluting companies that relied on purchased glutamate for production quickly went out of business. This round of industry consolidation saw the number of MSG companies fall from 65 to ~35 with 30~40% of total MSG production capacity eliminated. The third round of industry consolidation began in 2011 and is currently nearing completion. Since 2011, the MSG industry has been facing overcapacity problems, rising raw material prices and diminishing profits. Some high-polluting, high-cost small and medium enterprises were forced out of business. At present there are only 11 MSG producers left in China and ~33% of their total production capacity has been in the red for almost two years. Figure 4: Historical prices in MSG industry 10,000 9,000 8,000 Second condolidation Second from 2007 consolidation ~2009 (2007~2009) Third consolidation Began in 2011 and nearing completion 7,000 6,000 5,000 4,000 The current distribution of domestic MSG production capacity is shown in the figure below. Fufeng Group leads the industry with annual production capacity of 1.05mt, followed by Meihua Holdings Group with 500,000t. Excess capacity and thin profit have left many small and medium enterprises operating at <30% of capacity or even suspending production. 5

6 Figure 5: Distribution of domestic MSG production capacity Company Location Production Capacity (k tonnes) Output (k tonnes) Operating Rate Fufeng Group Inner Mongolia 1, % Meihua Group Inner Mongolia % Ningxia Eppen Ningxia % Shandong Shenghua Haerbin,Ningxia % Linghua Shandong % Lotus Henan % China Agri Heilingjiang' % Xinle Shandong % Sanjiu Shandong % Fujian Wuyi Fujian % Qilu Xuehua Shandong % Total 2,620 1,570 60% Drivers of industry consolidation The three rounds of industry consolidation were driven by environmental policies, environmental pressures, and cost differences. Environmental policies: The government introduced policies to eliminate obsolete production capacity in 2007 and These measures prompted a large number of small and medium MSG producers especially low-margin, high-polluting ones that relied on purchased glutamate for production to quickly go out of business and the total number of MSG producers declined rapidly from >100 to >20. The 2009 policy to restrict companies with annual production capacity of <100,000t and close small plants led to a shortage of glutamate and caused large companies to reduce glutamate supply, dealing a heavy blow to small and medium companies. In 2013, the MIIT plans to eliminate 285,000t of obsolete MSG production capacity, doubling the 2012 figure of 143,000t. Figure 6: Environmental policies and MSG industry consolidation policies over 2007~2013 Year Policy for environmental Issuer Policy for MSG industry Meaning protection "Comprehensive w orking plan for Reinforce the elimination of outdated industrial production capacity, Eliminate outdated production capacity, adjust industry, protect the energy conservation and emissions The State Council eliminate MSG manufacturers w ith less than 30,000 tonnes of environment and public health reduction" production capacity In the MSG industry, eliminate the MSG companies w ith less than National Development and 30,000 tonnes of production capacity (in accordance w ith GB "Announcement about eliminating Promote the industry structure adjustments, promote industry Reform Commission; 2004 "Emission standards for industrial w aste in the MSG outdated production of paper, upgrading, reduce environmental pollution, realize emission reduction State Environmental Protection industry"); During the 11th five-year plan period, eliminate 200,000 alcohol, MSG and citric acid" goals Administration tonnes of outdated MSG production capacity, realize the elimination of 100,000 tonnes COD "Announcement about printing and distributing guidance for promoting the healthy development of the corn deep processing industry" "Plan for adjustment and revitalization of light industry" National Development and Reform Commission The State Council "Issuing the task of eliminating The Ministry of Industry and outdated production capacity of 18 Information industries in 2010" "Issuing the task of eliminating The Ministry of Industry and outdated production capacity of 18 Information industries in 2011" "Issuing the task of eliminating The Ministry of Industry and outdated production capacity of 19 Information industries in 2012" "Issuing the task of eliminating outdated production capacity of 19 industries in 2013" The Ministry of Industry and Information Control the development of products w ith domestically balanced supply and demand and products w ith more supply than demand, publish technical indicators such as MSG energy consumption, w ater consumption, main pollutant emissions, etc. In the food industry, eliminate MSG production and equipment for manufactureres w ith less than 30,000 tonnes output Eliminate 189,000 tonnes of outdated production capacity in the MSG industry Eliminate 83,800 tonnes of outdated production capacity in the MSG industry Eliminate 143,000 tonnes of outdated production capacity in the MSG industry Eliminate 285,000 tonnes of outdated production capacity in the MSG industry Reduce resource consumption and pollutant emissions Speed up structural adjustments, promote industrial upgrading Source: CICC Research 6

7 Environmental pressures: The MSG industry value chain consists of corn processing to produce corn starch; corn starch processing to produce starch sugar; starch sugar fermentation to produce glutamate; and, glutamate conversion to produce MSG. Corn processing to produce glutamate uses fermentation technology and the fermentation process produces large quantities of waste water and gas, which requires environmental investment. Treatment of 100,000t of waste water requires Rmb50~60mn of investment, which represents 15% of total production costs. High environmental expenditure constitutes a barrier to entry. Thus small plants directly purchase glutamate from other companies to produce MSG. The top five companies in the MSG industry account for 60% of total production capacity. Past experience suggests that when the top five companies account for 30~60% of total production capacity and the total number of companies is ~100, leading companies with good environmental performance are likely to benefit from the shutdown of small plants. Figure 7: Combined market share of top five MSG companies by production capacity Architectural coating 5% Soda 15% Pigment 15% Urea 19% Polyester 25% Rayon 31% PVC 31% Printing ink 33% Titanium dioxide 33% Phosphatic fertilizer 35% Spandex 44% Glyphosate 45% MSG 60% Dye 60% Epoxy propane 65% Adipic acid 67% DMF 72% BDO 76% TDI 94% MDI 100% Cost differences. Glutamate is the main raw material for production of MSG. Producing 1t of MSG needs 0.8t of glutamate, 2.0~2.5t of coal and 400kg of synthetic ammonia. Producing 1t of glutamate needs 2.9~3.0t of corn; and producing 1t of synthetic ammonia needs 1.53t of coal. Therefore, producing 1t of MSG needs to consume 2.4t of corn and 2.6~3.1t of coal. China is at a cost advantage in MSG production by leveraging on the country s large corn and coal production capacity. China accounts for 77% of global MSG production capacity, followed by Vietnam, which accounts for 9%. With commodity prices rising in recent years, Ajinomoto has moved production to Indonesia and Vedan International has moved production to Vietnam. Companies have also begun to shift to the higher margin compound seasoning. Figure 8: Global MSG production capacity distribution (left) and MSG production cost breakdown (right) Brazil 4% Thailand 3% Japan 4% Vietnam 9% Indonesia 2% Others 1% China 77% Depreciation 1% Employee benefit 4% Water 2% Sulphuric acid 2% Environment 20% Coal 16% Others 1% Corn Kernels 54% 7

8 Figure 9: Cost curve of China s MSG industry 10,000 RMB/tonne 2014 China MSG Demand Meihua Hebei Qilu Xinle Xuehua China Agri 8,000 6,000 Fufeng Inner Mongolia Fufeng Northeast Meihua Tongliao Fufeng Shanxi NIngxia Eppen Shenhua Wuyi Sanjiu Linhua 4, Lotus Accumulated Production Capacity (k tonnes) An Rmb100/t increase of MSG prices will enhance Meihua s EPS by Rmb0.01/sh. Figure 10: Earnings sensitivity to MSG prices 2014e MSG ASP (Rmb/tonne including tax) Meihua Group EPS (Rmb) P/E 8, , , , , , ,

9 Strong earnings rebound driven by growing sales & prices of amino acids as bird flu s impact fades Meihua principally manufactures threonine, lysine sulfate, nucleotide, I+G and other types of amino acids. In 1H13, bird flu dealt a heavy blow to amino acid demand, with the prices and profit margins of feed additives, threonine and lysine sulfate, all hitting five-year lows. As this impact gradually fades, we expect the amino acid business to triple its net profit and contribute 25% of Meihua s total 2014 earnings, driven by capacity expansion, cost advantages, and rising sales and prices. Figure 11: Distribution of Meihua s amino acid production capacity Product Capacity (K tonnes) Capacity description MSG 520 MSG capacity is 520,000 tonnes, less than Fufeng Group; 420,000 tonnes of capacity are located in Tongliao, 100,000 tonnes of capacity are located in Xinjiang. Xanthan gum 10 Trial production of Xanthan gum began in May Threonine 80 Both the capacities of threonine and ajinomoto rank first globally; capacity w ill reach 150,000 tonnes as fund-raising projects start production this year. Lysine 260 Trial production of a fund-raising project and 200,000 tonnes of self-financed projects began operations in January I+G 13 Capacity at Tongliao is 3,000 tonnes, capacity in Xinjiang is 10,000 tonnes. Tryptophan The fund-raising project has on-going capacity of 5,000 tonnes. Proline The fund-raising project has on-going capacity of 1,000 tonnes. Glutamine 6 The original capacity w as 1,000 tonnes; a fund-raising project w ith 5,000 tonnes capacity has already began operations. Nucleotide 13 Trial production of a fund-raising project w ith 10,000 tonnes has already began. Isoleucine The fund-raising project w ith 1,000 tonnes of capacity is in progress. Figure 12: Gross margins of amino acid business (left); threonine price movements (center); lysine sulfate price movements (right) 40% 30% 20% 10% 0% Amino acid GPM H E 2014E China Threoine historical price k Rmb/tonne China lysine (98.5%) historical price k Rmb/tonne Threonine Threonine is a widely-used feed additive that also has applications in the pharmaceutical, cosmetics and health care product industries. Company data indicates that 70% of global threonine products are sold to Europe. In 2012, China produced 174,000t of threonine, of which it exported 90,000t, while domestic demand was 75,000t (+15% YoY). We expect domestic demand to expand to 130,000t in 2015, while China s exports will also continue to increase. Over the coming 5~10 years, threonine demand is likely to grow at a CAGR of >20%, and global demand will likely expand from 300,000t to 500,000~600,000t p.a. over the next three years. 9

10 Global threonine production capacity currently stands at 340,000t, with Meihua and Ajinomoto tied for first place, each with 80,000t capacity. Meihua has a 30% share of the global market (the second largest), and almost 50% in China. It will expand its production capacity from 80,000t to 150,000t (the world s largest) after non-public offering-funded projects reach their design capacity. Lysine sulfate Lysine sulfate is mainly used as a feed additive. In 2011, the global lysine sulfate demand totaled 1.5mt, and this figure is expected to reach 2.5mt by In 2012, China s lysine sulfate demand increased 15% YoY to 600,000t, with domestic production estimated at 976,000t, imports at 11,000t and exports at 226,100t. We expect China s lysine sulfate demand to grow at a CAGR of 8.5% over the next five years, and total demand to reach 550,000t as of Global lysine sulfate production capacity currently stands at 1.7~1.8mt. Dacheng Group is the largest producer with capacity of 600,000t; Meihua plans to expand its lysine sulfate production capacity from 60,000t to 260,000t after non-public offering-funded projects reach their design capacity. Figure 13: Global threonine production capacity by producer in 2013 (left); global lysine sulfate production capacity by producer in 2013 (right) Company Capacity(K tonnes) Note Meihua 80 Will reach 150 K tonnes in the end of 2013 Ajinomoto 80 Eppen 50 Xijie 50 Fufeng 40 Xinghu 30 Overhaul Others 10 Total 340 Company Capacity(K tonnes) Dacheng 600 Total Xijie 320 Meihua 260 Eppen 250 Others 270~ ~180 10

11 New products to further improve product mix and become earnings contributors in 2014 High-margin new products likely to boost earnings starting from Meihua has made a breakthrough in pullulan production technology; its 300t-facility has started trial production and will likely become a new earnings growth driver. In spite of a possible price decline, xanthan gum will gradually start to post earnings thanks to its above-average profit margin. Xanthan gum Xanthan gum is a polysaccharide widely used in the oilfield services, food and cosmetics sectors. At present, 50% of xanthan gum is sold to the oil & shale gas exploration industry 40% to food companies with the remaining 10% is used in the pharmaceutical and cosmetics sectors. Global xanthan gum demand has expanded over the past few years; but its supply tightened in 2012 as overseas oil & gas developers demand for polymeric additives exploded. Meihua has 10,000t of xanthan gum production capacity, with an ASP of Rmb23,000/t. The market is worried about possible declines in xanthan gum prices and new entrants. In our opinion, in spite of any possible price declines, xanthan gum is still likely to serve as a new earnings contributor thanks to its capacity expansion and above-average profit margin. Figure 14: Gross margin movements of xanthan gum business in 2013 (left); Xanthan gum demand by downstream sector (center); Xanthan gum price movements (right) Company Production Capacity (k tonnes) Fufeng 74 Zhongxuan 40 Cpkelco 30 Others 16 Total 160 Food 41% Pharma & Cosmetic s 8% Oil 51% 30,000 25,000 20,000 15,000 10,000 5,000 0 Xanthan Gum ASP (RMB/tonne) 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 Pullulan Pullulan is a polysaccharide polymer consisting of maltotriose units, and is widely used across the pharmaceutical, food, light industry, chemical and petroleum sectors. In the food industry, pullulan is used as a food packaging material, low calorie viscosity enhancer, binder and quality improver. In the pharmaceutical industry, pullulan is also widely used as an encapsulating agent for capsules. Meihua announced that it has made a breakthrough in pullulan production technology. The company invested Rmb101.6mn to build a 1,000t-pullulan production facility and 1.5bn-pullulan vegetable capsule production line. So far, a 300t p.a. pullulan production line has started trial production. After reaching design capacity, this project can enhance net profit by Rmb100mn a year, with a payback period of one year and annual return on investment of ~100%. 11

12 Initiate with ACCUMULATE We believe that the MSG and amino acid markets are at cyclical bottoms and likely to turn around in We expect Meihua s 2013/14 EPS to be Rmb0.15/Rmb0.32, implying P/E ratios of 37x/18x. We initiate our coverage of Meihua Holdings Group with an ACCUMULATE rating and a target price of Rmb6.4, considering new products will likely further improve its product mix and the turnaround of its principal businesses will give a strong boost to earnings. Our target price of Rmb6.4 implies 20x 2014e EPS. An Rmb100/t increase in MSG prices will enhance Meihua s EPS by Rmb0.01/sh. Figure 15: Meihua s earnings sensitivity to product price changes 2014e MSG ASP (Rmb/tonne) including tax Source: CICC Research MSG EPS(Rmb) Xanthan gum EPS(Rmb) Meihua Group Others EPS(Rmb) EPS(Rmb) 8, , , , , , , P/E Figure 16: Historical P/E and P/B bands Oct-10 Oct-11 Oct-12 Oct-13 Oct-10 Oct-11 Oct-12 Oct-13 Px_Last 10X 15X 20X 25X Px_Last 1X 2X 3X 4X Source: Wind, Company data, CICC Research 12

13 Figure 17: Historical and forecasted financial data Source: Wind, Company data, CICC Research 2010A 2011A 2012A 2013E 2014E P&L (RMB mn) Revenue 5,015 6,866 7,470 8,207 9,316 Gross profit 1,462 1,647 1,678 1,545 2,280 Selling expenses G&A Financial expenses Operating profit ,163 Tax Net income Cash Flow Operating Cashflow , ,294 Investing cashflow -1,806-3,290-3,149-2,000-2,000 Financing cashflow 1,418 3, , Cash and cash equivalents change , Balance Sheet Current Assets 3,357 5,279 3,308 5,518 5,832 Fixed Assets 5,233 7,574 12,387 13,754 15,121 Current liabilities 3,153 5,348 8,277 9,903 11,071 Long-term liabilities 1,320 3,349 3,340 4,940 4,740 Shareholder's equity 4,929 5,144 5,481 5,815 6,507 Total assets 9,402 13,841 17,098 20,657 22,318 Financial Ratio Gross margin 29.2% 24.0% 22.5% 18.8% 24.5% EBIT margin 18.0% 14.3% 13.6% 9.9% 15.6% Net margin 15.8% 10.5% 8.1% 5.8% 10.6% ROE 16.0% 14.0% 11.1% 8.2% 15.2% ROA 8.4% 5.2% 3.6% 2.3% 4.4% Debt ratio 47.6% 62.8% 67.9% 71.8% 70.8% Debt to equity 90.8% 169.1% 211.9% 255.2% 243.0% Current ratio Quick ratio AR turnover days Inventory turnover days Dividend payout ratio 63.8% 0.0% 95.7% 30.0% 30.0% 13

14 Important legal disclosures General Disclosures This report has been produced by China International Capital Corporation Hong Kong Securities Limited (CICCHKS). This report is based on information available to the public that we consider reliable, but CICCHKS and its associated company(ies)(collectively, hereinafter CICC ) do not represent that it is accurate or complete. The information and opinions contained herein are for investors reference only and do not take into account the particular investment objectives, financial situation, or needs of any client, and are not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Under no circumstances shall the information contained herein or the opinions expressed herein constitute a personal recommendation to anyone. Investors should make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this report. Neither CICC nor its related persons shall be liable in any manner whatsoever for any consequences of any reliance thereon or usage thereof. The performance information (including any expression of opinion or forecast) herein reflect the most up-to-date opinions, speculations and forecasts at the time of the report s production and publication. Such opinions, speculations and forecasts are subject to change and may be amended without any notification. Past performance is not a reliable indicator of future performance. At different periods, CICC may release reports which are inconsistent with the opinions, speculations and forecasts contained herein. CICC s salespeople, traders, and other professionals may provide oral or written market commentary or trading ideas that may be inconsistent with, and reach different conclusions from, the recommendations and opinions presented in this report. Such ideas or recommendations reflect the different assumptions, views and analytical methods of the persons who prepared them, and CICC is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report. CICC s asset management area, proprietary trading desks and other investing businesses may make investment decisions that are inconsistent with the recommendations or opinions expressed in this report. This report is distributed in Hong Kong by CICCHKS, which is regulated by the Securities and Futures Commission. Queries concerning CICC Research from readers in Hong Kong should be directed to our Hong Kong sales representatives. This report is distributed in Singapore only to accredited investors and/or institutional investors, as defined in the Securities and Futures Act and Financial Adviser Act of Singapore, by China International Capital Corporation (Singapore) Pte. Limited ( CICCSG ), which is regulated by the Monetary Authority of Singapore. By virtue of distribution by CICCSG to these categories of investors in Singapore, disclosure under Section 36 of the Financial Adviser Act (which relates to disclosure of a financial adviser s interest and/or its representative s interest in securities) is not required. Recipients of this report in Singapore should contact CICCSG in respect of any matter arising from or in connection with this report. This report is distributed in the United Kingdom by China International Capital Corporation (UK) Limited ( CICCUK ), which is authorised and regulated by the Financial Conduct Authority. The investments and services to which this report relates are only available to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order This report is not intended for retail clients. In other EEA countries, the report is issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. This report will be made available in other jurisdictions pursuant to the applicable laws and regulations in those particular jurisdictions. Special Disclosures CICC may have positions in, and may effect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for those companies. Investors should be aware that CICC and/or its associated persons may have a conflict of interest that could affect the objectivity of this report. Investors should not solely reply on the opinions contained in this research report when making any investment decision or other decisions. Distribution of ratings is available at Explanation of stock ratings: BUY indicates analyst perceives absolute return of 20% or more within 12 months; ACCUMULATE 10%~20%; HOLD -10%~10%; REDUCE -20%~-10%; SELL -20% and below. Copyright of this report belongs to CICC. Any form of unauthorized distribution, reproduction, publication, release or quotation is prohibited without CICC s written permission. 14

15 Beijing Shanghai Hong Kong China International Capital Corporation Limited 28 th Floor, China World Office 2 1 Jianguomenwai Avenue Beijing , P.R. China Tel: (86-10) Fax: (86-10) China International Capital Corporation Limited Shanghai Branch 32 nd Floor Azia Center 1233 Lujiazui Ring Road Shanghai , P.R. China Tel: (86-21) Fax: (86-21) China International Capital Corporation (Hong Kong) Limited 29 th Floor, One International Finance Centre 1 Harbour View Street Central, Hong Kong Tel: (852) Fax: (852) Singapore China International Capital Corporation (Singapore) Pte. Limited #39-04, 6 Battery Road Singapore Tel: (65) Fax: (65) United Kingdom China International Capital Corporation (UK) Limited Level 25, 125 Old Broad Street London EC2N 1AR, United Kingdom Tel: (44-20) Fax: (44-20) Beijing Jianguomenwai Avenue Branch Shanghai Middle Huaihai Road Branch Shenzhen Fuhuayilu Branch 1 st Floor, Capital Tower 6A Jianguomenwai Avenue 398 Huaihai Road (M) Shanghai , P.R. China Rooms 107 & 201, Annex Building Shenzhen Duty Free Commercial Tower Beijing , P.R. China Tel: (86-21) Fuhua 1 st Road, Futian District Tel: (86-10) Fax: (86-21) Shenzhen , P.R. China Fax: (86-10) Tel: (86-755) Fax: (86-755) Hangzhou Jiaogong Road Branch Nanjing Zhongshan Road (North) Branch Guangzhou Tianhe Road Branch 1 st Floor, Euro American Center 18 Jiaogong Road Hangzhou , P.R. China 2 nd Floor, Greenland Plaza 1 Zhongshan Road (North) Nanjing , P.R. China 40 th Floor, Teemtower 208 Tianhe Road Guangzhou , P.R. China Tel: (86-571) Tel: (86-25) Tel: (86-20) Fax: (86-571) Fax: (86-25) Fax: (86-20) Chengdu Binjiang Road (East) Branch Xiamen Lianyue Road Branch Qingdao Middle Hongkong Road Branch 1 st & 16 th Floors, Shangri-La Center Block 9B, Binjiang Road (East) Chengdu , P.R. China 4 th Floor, Office Building, Paragon Center 1 Lianyue Road, Siming District Xiamen , P.R. China 11 th Floor, Shangri-La Center Block 9, Hongkong Road (M), South District Qingdao , P.R. China Tel: (86-28) Tel: (86-592) Tel: (86-532) Fax: (86-28) Fax: (86-592) Fax: (86-532) Wuhan Jiefang Road Branch Chongqing Honghu Road (West) Branch Changsha Chezhan Road (North) Branch 4 th Floor, New World Centre Tower 634 Jiefang Road, Qiaokou District Wuhan , P.R. China 1 st & 10 th Floors, Ourui Lanjue Center Block 9, Honghu Road (W), New North District Chongqing , P.R. China 3 rd Floor, Annex Building, Securities Tower 459 Chezhan Road (North), Furong District Changsha , P.R. China Tel: (86-27) Tel: (86-23) Tel: (86-731) Fax: (86-27) Fax: (86-23) Fax: (86-731) Foshan Jihua 5 th Road Branch Tianjin Nanjing Road Branch Dalian Jinma Road Branch 12 th Floor, Trend International Business Building 2 Jihua 5 th Road, Chancheng District Foshan , P.R. China 10 th Floor, Tianjin Global Trading Center 219 Nanjing Road, Heping District Tianjin , P.R. China 128B Jinma Road Economic-Technological Development Area Dalian , P.R. China Tel: (86-757) Tel: (86-22) Tel: (86-411) Fax: (86-757) Fax: (86-22) Fax: (86-411) Ningbo Yangfan Road Branch 11 th Floor, Building Five, 999 Yangfan Road Hi-tech Industrial Development Zone Ningbo , P.R. China Tel: (86-574) Fax: (86-574)