Leading enterprise in domestic TFT liquid crystal material market

13 December Research Report Company Research Mid and Small Cap Yantai Valiant Fine Chemicals (002643) New Issuance Pricing Report Leading enterprise in domestic TFT liquid crystal material market Initial Coverage Offering price: Rmb 25 Fair valuation range: Rmb28~30 Highlights Leading enterprise in domestic liquid crystal material market. The company s main products are the liquid crystal intermediates used for synthesis of liquid crystal monomer, and the liquid crystal monomer used for producing mixed liquid crystal. The company is the only supplier in China who provides TFT liquid crystal materials in long term simultaneously to the three major global TFT mixed liquid crystal producers, namely Merck, Chisso and DIC. In 2010, the company s sales volume of TFT liquid crystal monomer accounted for around 17 of the whole global market. Downstram TFT-LCD industry enters the stable growth period. According to the research report from DisplaySearch, the global production volume (calculated by the shipment area) of TFT-LCD will enter the stable growth period in -2014, with a CAGR of around 10. As the production of LCD panel maintains a positive relationship with the consumption of liquid crystal monomer, we expect that the global demand for liquid crystal monomer in the next three years will maintain stable growth as well, but lack of potentials for exponential growth. If 10,000 m 2 LCD panel consume around 5 tonnes of liquid crystal monomer, the global demand for liquid crystal monomer in 2014 will come in at around 800 tonnes, representing a market size of almost Rmb5bn, with a CAGR of almost 10 in 2010-2014. Profits remain stable. The gross margin of the liquid crystal material industry is relatively high among the industrial chain of liquid crystal module. Altough the raw material costs account for more than 80 of the production costs, the company is able to pass on the rise of upstream raw material prices to the downstream customers, given that its gross margin remains stable at above 30. Capacity will double thanks to the projects financed by proceeds. The company planned to raise Rmb360mn for the investment on the Phase I (400 tonnes) of the capacity expansion project of liquid crystal material (annual capacity: 600 tonnes). The company s annual capacity of liquid crystal monomer and liquid crystal intermediates will increase from 90 tonnes and 120 tonnes by 100 tonnes and 300 tonnes, respectively, after the projects financed with proceeds are put into fully operation. Based on our estimations, the two projects financed with proceeds will contribute Rmb146mn to the net after they are put into fully operation, equivalent to an PS of Rmb1.06. CITIC Securities Research Chuan Tang, CFA Tel: 021-68765291 mail: tc@citics.com Practicing license no: S1010510120062 Contact: Guanzhong Wang Tel: 021-68768241 mail: wgz@citics.com Offering data Shares to be offered (mn 34.46 shares) Shares after issuance (mn 137.82 shares) Offering price (rmb/share) 25 Offering P (10 diluted) 35 Source: CITIC Securities Quantitative Analysis System quity structure after offering S.N. Shareholders 1 Shandong CCP Shares held (10k shares): 4080 Shareholding (): 29.6 2 Luyin Shares held (10k shares): 2040 Shareholding (): 14.8 Yantai Supply and Marketing 3 Cooperative Shares held (10k shares): 1033.6 Shareholding (): 7.5 4 Luyin Technology Shares held (10k shares): 707.2 Shareholding (): 5.13 Henan Beyond Huiying Venture 5 Shares held (10k shares): 312.8 Shareholding (): 2.27 Source: Company s prospectus Please read the disclaimer at the end of the report

Potential risks: Slow recovery of global economy; fluctuation of Rmb exchange rate; customers are overly concentrated. arning forecast and valuation range. The company s 2010 PS came in at Rmb0.72, and we predict the company s -13 PS at Rmb0.92/1.25/1.45 (CAGR 26.1). According to Wind, the listed companies related to electronics chemical goods will likely post a 24X P. Given that the company s downstream TFT-LCD industry has entered the stable growth period, we adopted relative valuation method and apply a fair valuation range of Rmb28-30 based on 22X-24X P. Item/Year 2009 2010 Turnover (Rmb mn) 404.9 731.7 8 1079.4 1263.0 Growth rate YoY -36.7 80.7 11.4 32.4 17.0 Net (Rmb mn) 63.4 99.8 126.3 172.0 200.0 Growth rate YoY -32.3 57.4 26.5 36.2 16.2 Item/Year 0.46 0.72 0.92 1.25 1.45 Consensus PS(RMB) -- -- 0.87 1.13 1.45 Gross margin 38.5 31.8 34.2 33.1 32.5 RO 24.6 33.9 15.9 12.9 13.5 P (x) 54.3 34.5 27.3 20.0 17.2 PB (x) 9.5 10.9 2.7 2.5 2.2 V/BITDA 23.6 17.4 16.0 11.4 8.9 Source: CITIC Securities Quantitative Analysis System Note: Stock price is as the offering price. Please read the disclaimer at the end of the report 13 December

Income Statement (Rmb mn) Balance sheet ( Rmb mn) revenue 405 732 815 1,079 1,263 Cash and cash equivalents 100 50 392 259 319 cost 249 499 537 722 852 Inventories 196 228 268 361 426 Gross 38.5 31.8 34.2 33.1 32.5 Account margin receivables 64 58 78 118 138 Business tax Other current 4 6 8 11 13 and surcharges 9 12 10 13 16 Current 6 10 16 22 25 Assets-Total 368 347 749 752 899 Property, plant and 1.6 1.4 2.0 2.0 2.0 equ 174 299 623 789 817 Administrative Long-term equity 49 81 100 125 139 investment 7 8 8 9 10 Administrative Financial Financial profit profit margin Non-operating Non-operating 12.1 11.1 12.3 11.6 11.0 15 13 8 0 1 3.7 1.8 1.0 0.0 0.1 Intangible asset 18 31 38 41 45 Other long-term Non-Current Assets- Total 3 6 22 24 23 203 344 691 863 895 1 2 1 1 1 Total Assets 571 691 1,440 1,615 1,794 82 125 147 201 234 20.2 17.0 18.0 18.7 18.5 0 0 2 1 1 7 11 0 0 0 Pre-tax profits 75 114 149 202 235 Income tax 11 14 22 30 35 Income tax rate Minority interests Net profit attributable to parent company's shareholders Net margin 15.2 12.4 Interest-bearing bank loans 70 138 46 60 65 Account payables 28 78 74 99 117 Other current Current liability-total Long-term Other non-current Non-current Total 44 57 50 55 60 143 272 170 214 242 157 100 0 0 0 0 3 0 0 0 157 103 0 0 0 0 0 0 0 0 Total Liabilities 299 375 170 214 242 63 100 126 172 200 Issued Capital 103 103 138 138 138 15.7 13.6 Cash flow statement (Rmb mn) 15.5 15.9 15.8 Reserves 168 213 1,132 1,263 1,415 Common quity 272 317 1,270 1,401 1,552 Minority interest 0 0 0 0 0 Total Liabilities &quities 571 691 1,440 1,615 1,794 Pre-tax profit 75 114 149 202 235 Key Income tax paid -11-14 -22-30 -35 Consolidated Gross Margin Depreciation & amortization 19 23 40 85 122 revenue -36.7 80.7 11.4 32.4 17.0 Changes in working capital 1 33-70 -106-65 -27.5 41.7 13.1 30.1 16.9 Others -1-2 -1-1 -1 Net -32.3 57.4 26.5 36.2 16.2 cash Income 83 155 95 150 257 flow margin() Capital expenditure -39-147 -363-250 -150 Gross margin() 38.5 31.8 34.2 33.1 32.5 1 1 1 0 0 BIT Margin 23.7 18.6 18.9 18.6 18.5 Please read the disclaimer at the end of the report 12 December

Disposal of 0 0 0 0 0 BITDA Margin 28.4 21.8 23.8 26.4 28.2 Others -2-17 -23-6 -4 Net margin 15.7 13.6 15.5 15.9 15.8 Cash flow from investments -40-163 -385-256 -154 Returns () quity issuance 0 0 861 0 0 RO 24.6 33.9 15.9 12.9 13.5 Changes in 47 11-191 14 5 ROA 12.0 15.8 11.9 11.3 11.7 Dividends payout 0 0-34 -41-48 Others() Other -36-52 -3 0 0 Liability asset ratio 52.4 54.2 11.8 13.3 13.5 Financing cash flow 11-41 633-27 -43 Income tax ratio 15.2 12.4 Net increase of Dividend payout cash and cash 54-50 342-133 60 ratio equivalent 0.0 0.0 27.3 24.0 24.1 Source: CITIC Securities Quantitative Analysis System Please read the disclaimer at the end of the report 12 December

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