Yantai Wanhua: The Future Growth Is Much More Extensive And Wide Space For Growth.

Leading enterprises in China's MDI market.

MDI (two phenyl methylene diisocyanate) is one of the main raw materials of polyurethane. Polyurethane is widely used in all walks of life in the form of foam plastics, elastomers, paints, adhesives, fibers, synthetic leather and waterproof materials.

MDI production has high technical barriers. At present, only BASF, Bayer, Dow, Huntsman, Yantai Wanhua, Japan polyurethane and a few other enterprises have mastered the core manufacturing technology.

In 2007, Yantai Wanhua MDI sold 337 thousand and 400 tons, accounting for 33.6% of the domestic market share and steadily expanding the international market.

Relying on continuous technological innovation and independent research and development, the company won the first prize of national science and technology progress in 2007.

Short term demand: slow growth of pure MDI and rapid growth of aggregated MDI.

MDI products include pure MDI and polymerized MDI.

Pure MDI is mainly used in slurry, soles, spandex and other fields. As textile, footwear and other downstream industries face operational pressure under the impact of RMB appreciation, foreign anti-dumping and export tax rebate reduction, domestic demand for pure MDI market has slowed down for 08 years.

But Wanhua's customer positioning is more high-end. There is no problem in the sale of pure MDI products. The price is only slightly restricted. Polymerization MDI is mainly used in fridge freezers, roofs, cold storage, heating pipe insulation and other fields, and has continued to grow rapidly, and the market prospect is optimistic.

Long term demand: building energy efficiency is expected to boost MDI demand.

In the global market, building insulation materials occupy 50% of the MDI demand. In China, the application of MDI in building insulation is still a blank.

99% of the existing buildings in China are high energy consuming buildings. The energy consumption per unit area of newly built buildings is more than 3 times that of the developed countries. Under the background of high energy prices, it is necessary to vigorously promote building energy efficiency.

At present, the state has promulgated the relevant laws and policies and regulations, such as the energy conservation law, the comprehensive work plan for energy conservation and emission reduction, and the specifications of the Ministry of construction's "polyurethane wall construction guidelines", but there is no mandatory and encouraging policy on building wall insulation.

Once a substantial mandatory or incentive policy is introduced, the MDI industry will start a new round of high-speed growth.

In addition, the application of MDI in the field of eco adhesives is also a potential growth point in the future.

Domestic MDI capacity expansion does not change orderly industry competition pattern.

Inspired by the long term growth prospects of the market, the domestic MDI capacity has expanded rapidly in recent years. In the 07 years, the 240 thousand tons MDI unit of the joint venture of BASF, Huntsman and Shanghai Huayi has been put into operation. At present, the quality of products has gradually become normal; Wanhua itself is expected to expand to 500 thousand tons by the end of 08; the 08 year trial production of Bayer 350 thousand tons project in Shanghai is expected to be formally put into operation in 09 years; the joint venture project of BASF Chongqing 400 thousand tons is being actively prepared, and it is expected to be put into operation in 2011.

In addition, Japanese polyurethane (NPU) 200 thousand tons of equipment sales are also mainly for China.

Although the expansion of MDI capacity is faster, we do not think the industry will be in disorder competition.

First of all, MDI is an oligopoly industry. By controlling output and maintaining high gross profit margin, it is the basic competitive strategy of enterprises. The core technology of MDI manufacturing has never been pferred to other countries, which indicates that several pnational giants are optimistic about the profit margins of the industry. Secondly, it is estimated that the compound annual growth of MDI demand in China will be over 15% in the next few years. If the potential market in the field of building insulation is taken into consideration, the space will be larger, so the growth of demand can be greatly improved.

The increase in raw material prices has limited impact on gross margins.

Recently, the price of raw materials such as aniline and other MDI has risen by 30%, while the MDI price has dropped slightly. The market is worried that the profit margins of MDI will be greatly reduced.

We believe that although the price of raw materials has a certain impact on the gross margin of Wanhua MDI in the short term, relying on the bargaining power brought by large-scale procurement, Wanhua's raw material pricing system is more stable than the market price.

And if the price of raw materials increases for a long time, Wanhua and its competitors have the ability to raise the price of MDI accordingly, so the impact of raw material prices on Wanhua's long-term gross profit is limited.

Future growth is a lot of attention.

(1) expansion of MDI capacity.

MDI is the core area of Wanhua growth.

In mid June, the MDI unit of Yantai will undergo 1 and a half months of maintenance and technical pformation. After completion, the MDI capacity of Yantai will expand from 13-14 tons to 200 thousand tons. At the end of this year, Ningbo Wanhua's capacity will also be expanded from 240 thousand tons to 300 thousand tons through technical pformation.

Ningbo Wanhua two phase of the additional 300 thousand tons project is expected to be completed and put into operation in 2010; (2) to extend the industrial chain to enhance business stability.

It includes the acquisition of Donggang electrification to realize chlorine self-sufficiency, and Ningbo Wanhua two phase aniline self-sufficiency, etc. (3) to provide a wider range of products and services for the downstream.

The TPU and polyol business of Wanhua new material, and the dual component supply of black and white materials (polymerized MDI and polyether polyols) of Roewe Wanhua, Guangdong holding stock company, provide users with a more convenient choice, thereby increasing the added value of the products and services of the company. (4) expand the overseas market.

In 2007, Yantai Wanhua's export revenue was 1 billion 500 million yuan, an increase of 86.6% over the same period last year.

At present, Wanhua products have successfully entered the core market of Europe and the United States, and in addition, the market position of rapidly growing countries such as UAE and Russia is also increasing.

(5) new products are potential growth points.

PC (polycarbonate) is an engineering plastics with strong market growth in recent years, and domestic consumption almost entirely relies on imports.

The production of PC, like MDI, needs to undergo phosgene reaction, so it has certain technical interconnectivity.

Wanhua's PC small test has been successful and the pilot plant is expected to be completed by the end of this year.

In terms of aliphatic isocyanates such as ADI, HDI and IPDI, Wanhua also has abundant reserves of technology and products.

Give "recommended" rating.

Yantai Wanhua is a typical enterprise that achieves endogenous growth through independent innovation.

Relying on independent intellectual property rights MDI core manufacturing technology, excellent corporate culture, incentive mechanism and management capabilities, the company has strong competitive strength in the oligopoly MDI market.

Although the capacity expansion of the main MDI enterprises and the pressure of some downstream industries are facing operational pressure, the industry profits will temporarily grow steadily from the sustained high growth. However, the measures to enhance competitiveness of the Wanhua company are still proceeding in an orderly way, with the growth point being actively nurtured, and the application space of MDI is far from being saturated.

We expect Yantai Wanhua to enjoy the 15% income tax rate of hi-tech enterprises from 2008. Under this premise, we initially predict that the EPS of 08-10 will be 1.31, 1.55 and 1.95 yuan respectively.

Taking into account the company's excellent competitiveness and the long-term growth prospects of the polyurethane industry, it gives "recommended" investment rating.