Wanhua Chemical:BorsodChem MDI Suspension Likely to Further Boost Market Sentiment;Positive for Wanhua

What's new: According to BorsodChem, due to an unforeseen technical problemat one critical raw material supplier, BorsodChem has been forced to haltproduction at its MDI plant in Kazincbarcika, Hungary. Chlorine/Caustic sodaproduction at the site is also affected. As a result, BorsodChem has suspendeddeliveries of all MDI products and Chlorine/Caustic Soda effective 14th August2017. BorsodChem is part of Wanhua Group and is a leading producer of MDI,TDI and other speciality chemicals in Central and Eastern Europe.

    Implication for Wanhua - potentially positive: We see positive impact onWanhua, as 1) BorsodChem is under Wanhua Group, but not the listed company,therefore, the production suspension won't have any negative impact on Wanhualisted arm; 2) the production suspension at BorsodChem is likely to intensifysupply tightness in the near term, which could further boost the MDI price. Asillustrated in Exhibit 1, Wanhua's profit is positively related to MDI price, andhigher MDI price would serve as a positive catalyst.