Wanhua Chemical:Polymeric MDI distribution ASP hiked by 21%;reiterate Buy

Raising polymeric MDI price to RMB29,000/ton。

    On 22August Wanhua Chemical (WHC), announced it was raising its MDIprice, hiking its polymeric MDI distribution price by 21%, or +RMB5,000/ton, to RMB29,000/ton. In our view, the price surge has been driven by thetight supply situation on the back of: 1) a force majeure on MDI productionin BorsodChem; 2) low domestic inventory levels; 3) several plants undermaintenance period including Tosoh’s 200ktpa MDI plants starting on 10September; and 4) continuous environmental inspection. Hence, we believe thesefactors will continue to support the MDI price at a high level in the near term andtherefore reiterate our Buy rating on WHC, which is the largest MDI producer inthe world.。

    Strong MDI price further expanded MDI spreads。

    Given the high MDI price level while benzene / oil prices were relatively stable,current MDI-benzene spreads pushed up further to USD3,336/ton on 18August,+45% YTD compared to c.USD2,298/ton at the beginning of 2017. On ouranalysis, WHC’s share price has a 0.72correlation with MDI spreads, and theWHC spread could expand further thanks to the recently announced MDI pricehike.。

    Valuation and risks; target price RMB42.0。

    We base our RMB42.0target price on 8.0x EV/EBITDA, at an 18% discount to itshistorical average of 9.7x. Our target price implies 4.7x 2017-18E P/B; we believethe premium to global peers is justified as its ROE averages 38% in 2017-18E,which is at a 137% premium over the MDI peers. At the current price the sharetrades at 6.6x 12-month forward EV/EBITDA, 3.6x 12-month forward P/B and 12-month forward 11.3x P/E. The 6.6x forward EV/EBITDA and forward 11.3x P/Erepresent 31% and 20% discounts to historical averages, respectively. Key risks:

    1) unplanned maintenance turnaround; 2) fluctuations in oil and chemical productprices; 3) lower-than-expected GDP growth; and 4) unexpected corporate actionswith a demanding valuation.。