1. Incident On October 25, Shanxi Sanwei Co., Ltd. announced results for the third quarter of 2010: Net profit attributable to owners of the parent company from January to September 2010 was -5.452 million yuan, with basic earnings per share -0.012 yuan, a year-on-year decrease of 92.03%. Net profit attributable to owners of the parent company from July to September 2010 was 298.724 million yuan, with basic earnings per share of 0.064 yuan, an increase of 146.19% over the previous year. 2. Our analysis and judgment (1). The company's earnings per share in July-September reached 0.064 yuan. We should be optimistic about future performance in January-September. Although the company's net profit for January-September was -5.452 million yuan, the actual net profit for July-September was 298.724 million yuan, and since PVA remained basically flat, the profit achieved in July-September mainly came from BDO and was achieved at an average BDO price of 17,000-18,000 yuan. Since the current BDO price has reached 22,250 yuan/ Tons. The company's future performance should be promising. (2) Foreign olefin-based BDOs drive up the price of BDO due to rising costs. The benefits of maleic anhydride and calcium carbide BDO are obvious as shown in Figure 2. BDO production has three main process routes, namely from naphtha, ethylene, and butadiene to 1-4 butylene glycol (BDO); from coal, crude benzene, and maleic anhydride to 1-4 butylene glycol (BDO), and calcium carbide. World BDO production is mainly concentrated in the US, Germany, China, South Korea, Russia, and Saudi Arabia. Affected by environmental protection factors, most international countries restrict calcium carbide method BDO, so the BDO production process routes of foreign companies are very different from China. Foreign countries mainly use olefin method BDO with naphtha ethylene and small amounts of maleic anhydride method BDO, while China mainly uses calcium carbide BDO and small amounts of maleic anhydride method BDO. Since maleic anhydride method BDO is a new process, the number of installations is relatively small. Since 2010, especially recently, international ethylene prices have increased significantly, leading to a marked increase in BDO production costs under the international olefin law, driving up BDO prices. Since there are relatively few price increases for calcium carbide and maleic anhydride, especially maleic anhydride comes from crude benzene, and the prices of crude benzene and maleic anhydride are relatively low due to excessive aromatics, maleic anhydride BDO and calcium carbide BDO benefit from international olefin method BDO costs to drive up BDO prices. Since there are relatively many olefin method BDOs around the world, the cost increase has a strong sustainability in driving BDO prices. In particular, the big rise cycle of olefins has just begun, so we judge that BDO prices will continue to rise. (3) The company's main profit comes from BDO. The newly built 75,000-ton maleic anhydride BDO began operation in October of this year, as shown in the figure above. Although PVA (polyvinyl alcohol) still accounts for 40% of the company's sales revenue, due to intense PVA competition, profits have always been low, and the company's focus is mainly on BDO (1,4-butanediol). At present, three sets of BDO plants with a total production capacity of 150,000 tons in Shanxi have started normally. Among them, the 45,000 tons and 30,000 tons of old power plants are operating at full capacity, and the new 75,000 ton maleic anhydride method BDO has also started operation in October this year, and is already capable of producing qualified products. Since maleic anhydride is affected by global aromatics surplus, its price cannot rise with the rise in international oil prices. Currently, the domestic price of maleic anhydride is only 9,500-9600 yuan/ton, and the company's newly built 75,000-ton maleic anhydride BDO uses 1.2-1.3 tons of maleic anhydride to synthesize 1 ton of BDO. The 75,000-ton maleic anhydride BDO produced by the company in early October will bring significant performance growth to the fourth quarter. In addition, the prices of PTMEG (polytetrahydrofuran) and GBL (gamma-butyrolactone) products, which are derivatives of BDO, are also rising. The company's 75,000 tons of maleic anhydride BDO will not sell 45,000 tons, and the rest will produce 20,000 tons of PTMEG and 10,000 tons of GBL, extending the industrial chain and further increasing the company's profits. (4) The BDO market is picking up, and there is still plenty of room for product prices to rise. Recently, there has been a rise in the domestic BDO market. The supply of scattered water from manufacturers has generally risen. The market supply is slightly tight. There is a shortage of imported goods in the market, and the supply of domestic goods is tight. Many manufacturers are mainly suppliers, and their export sales volume is low. The recovery in the downstream market is the main reason for the recent rise in BDO prices. The decline in supply is a secondary reason. On the supply side, some factories are under low load due to factors such as weather or local power restrictions, and some have even stopped production. At the end of August, Yunwei started a car, and there was an increase in market supply. However, the price of BDO products did not fall. The main reason is that due to the arrival of the peak downstream demand season, the market is generally optimistic about the future market, and there has been a marked increase in the number of merchants who intend to prepare goods. This week, BDO's domestic sprinkler supply manufacturers mostly sold tanks between 21,000 and 22,250 yuan/ton. In terms of import sources: Currently, there are few imported supplies in the market. Affected by domestic price increases, there is also a trend of rising prices. From the manufacturer's point of view, Yunnan Yunwei's shipments are stable. The Nanjing Blue Star 55,000 tons/year BDO/THF plant started construction at full capacity. The main supplier of the product was to the customer, and a small amount was exported. Construction of the three BDO plants in Sanwei in Shanxi started normally. Among them, the 45,000-ton and 30,000 ton old installations of the power plant's stone method are operating at full capacity. The newly built 75,000-ton maleic anhydride method BDO also began operation in October this year, and is already able to produce qualified products. Recently, domestic and foreign BDO markets have risen. Increased demand, tight supply, and scarce import supplies are all important factors affecting price increases. Due to the rapid increase in the performance of spandex in the downstream industry in previous years, demand for BDO increased rapidly due to the expansion of production in many spandex factories, and the BDO price will rise further in the future. We expect it to rise to around 25,000-26,000 yuan/ton by the end of this year. (5) There is sufficient momentum for BDO demand growth. BDO is mainly used in the fields of THF/PTMEG, PBT, spandex, and PBT resins. According to industry data, PBT, GBL, THF, and PU consume 98% of BDO, of which THF/PTMEG is the most in demand, accounting for 40%, and has a significant impact on BDO consumption. In terms of domestic demand for BDO, THF/PTMEG is still the largest domestic BDO consumption downstream. PTMEG's production capacity increased significantly in 2009, reaching 115,000 tons/year. The PBT field and GBL field have developed rapidly in recent years. In 2009, Nantong Star added 60,000 tons/year of new PBT equipment and 30,000 tons/year of new PBT equipment in Hetun in Lanshan, Xinjiang, and added 10,000 tons/year GBL equipment to Anhui Haifeng, all of which are conducive to the digestion of BDO production capacity. Another major consumer sector of PU is the slurry industry. At the end of 2008, the total domestic production capacity reached 1.72 million tons/year. Although BDO is less used in slurry products, due to the huge domestic slurry production capacity, the total consumption of BDO is also quite impressive. It is expected that in the next few years, there will still be plenty of room for growth in various downstream areas of BDO. (6) The company is the largest BDO manufacturer in China and the third largest in the world. The main products are divided into three categories: polyvinyl alcohol (PVA), 1,4-butanediol (BDO), and adhesives, which belong to the fine chemical industry. Among them, PVA and BDO are the first in the country. The scale advantage is obvious, and the technical level is at the forefront of the industry. After the company built a 75,000 tons/year BDO production line in 2008, it became the third largest BDO manufacturer in the world after BASF and Lyondell. It currently has a BDO production capacity of 155,000 tons/year, and is the largest BDO manufacturer in China; the company is also one of the largest PVA and white latex adhesive production bases in China, with a PVA production capacity of 100,000 tons and a white latex production capacity of 35,000 tons, and has formed more than 40 varieties. With the commissioning of the company's 75,000 tons/year butylene glycol project in 2009 and the completion and commissioning of the 30,000 ton PTMEG plant in the future, the company's scale advantage is expected to be further demonstrated. In 2009, the company's main product output was as follows: 78,900 tons of PVA polyvinyl alcohol; 64,200 tons of 1,4-butanediol, 29,000 tons of tetrahydrofuran, 22,000 tons of PTMEG, and 10,000 tons of gamma-butyrolactone; the adhesive series was 19,600 tons of white latex and 13,000 tons of dry powder. (7) After the establishment of the holding subsidiary 3D Reed, the raw material advantage was obvious. The company recently announced that with the continuous expansion of the company's production scale, difficulties have arisen in the procurement, supply and comprehensive utilization of coke oven gas, which is the main raw material necessary for the company's production and operation, which not only seriously affects the company's normal production and operation, but even poses a serious threat to its next development. In order to solve the problem of insufficient and unstable supply of coke oven gas mentioned above, the company decided to enter the coking industry according to the needs of business development. Currently, the company plans to gradually resolve these existing problems by jointly investing with Shanxi Reed Coking Co., Ltd. to establish Shanxi 3D Reed Coking Co., Ltd. (approved by the Shanxi Administration for Industry and Commerce; hereinafter referred to as “3D Reed”). The registered capital of 3D Reed is RMB 200 million, of which the company invested RMB 102 million, accounting for 51% of 3D Reed's registered capital; Reed Coking invested 98 million yuan in real assets related to coking production and sales as confirmed by evaluation, accounting for 49% of 3D Reed's registered capital. Since the establishment of 3D Reed, it has mainly been engaged in the production and sale of coking and its products. After the establishment of the holding subsidiary, it will have a coking project with an annual output of 1.2 million tons/year. Among them, the first phase of the coking project of 600,000 tons/year has already been completed, the second phase of the coking project of 600,000 tons/year has already been set up and construction started, and it will be completed and put into operation by the end of July 2010. After the completion of the second phase of the project, 1.2 million tons of coke production capacity and supporting chemical products will be formed every year. It can produce 459.2793 million Nm3 of coke oven gas, excluding coke oven gas that can be supplied by private use, which is very beneficial to the company's future development. 3. Investment recommendations Due to the relatively rapid growth of THF/PTMEG, PBT and GBL devices, the BDO market is picking up, and product prices have a lot of upward momentum and room. The company is the largest BDO manufacturer in China and the third largest in the world. After the establishment of the holding subsidiary 3D Reed, the raw material advantage was obvious. Although profits from January to September of this year were still slightly lost, due to high product prices in the fourth quarter and the newly built 75,000 tons of maleic anhydride BDO was put into production in early October, we expect the company's 10-12 results to be 0.158 yuan, 0.706 yuan, and 0.855 yuan. Corresponding to the current PE stock price of 55.26 times, 12.36 times, and 10.21 times, the recommended investment rating is given.