Incident: Recently, we once again investigated Huaxing Chemical, a key glyphosate company. We are still optimistic about the average price of glyphosate this year. There are optimistic predictions that the average price in 2010 will reach 30,000 yuan/ton, and we judge this price to be at least 25,000 yuan/ton. Furthermore, the cooperation between the company and UCPA is expected to achieve a new breakthrough in the second half of the year, thus further extending the company's main glyphosate business to the downstream industry chain. At the end of 2009, the company again acquired 123 acres of land, enhancing the profitability of the real estate business. Furthermore, the first phase of the company's 100,000 ton caustic soda project is expected to be put into operation ahead of schedule. Due to careful considerations, we are temporarily maintaining the company's earnings forecast for 2010-2011. The company's EPS for 2009-2011 is estimated to be 0.30 yuan, 0.71 yuan, and 1.29 yuan, respectively. Considering the company's technical advantages and position in the industry, we raised the company's 12-month target price to 19.35 yuan. Based on comprehensive considerations, we maintain our “buy” rating for Huaxing Chemical. 1. Glyphosate price trend analysis. The price of glyphosate has remained around 22,000 yuan/ton for the past month. There are optimistic predictions that the average price in 2010 will reach 30,000 yuan/ton, and we judge this price to be at least 25,000 yuan/ton. This is mainly considered in terms of demand, cost, and supply. Looking at demand, we judge that the steady rise in oil prices in 2010 is already a market consensus. Farmers in the Midwest of the United States will increase their willingness to grow as agricultural product prices pick up, and domestic market demand is still strong. In terms of costs, the cost of raw materials is gradually rising (phosphorus trichloride accounts for about 15% of the production cost of glyphosate, and the prices of other raw materials are also gradually rising). In terms of supply, due to the poor production process of small factories and the lack of integrated production, the cost is generally high. This year, the price of the original drug is around 25,000-30,000 yuan/ton, which is not enough to support most small factories to resume work. In the short term, the price of glyphosate will rise due to spring farming. Huaxing Chemical sells mainly formulations in China, and the corresponding sales price is more than 20% higher than that of the original drug. The company's export ratio is around 50%. We expect the company's average sales price of glyphosate to reach 30,000 yuan/ton this year, and if we are optimistic, it can reach 33,000 yuan/ton. When making a profit forecast, we calculate 30,000 yuan/ton. 2. The downstream integration process is expected to achieve a breakthrough within the year. In order to steadily increase the profitability of its main business, Huaxing is not only actively expanding upstream (such as phosphorus trichloride, etc.), but also continuously expanding into the downstream industrial chain (mainly in the production and sale of glyphosate preparations). The company's semi-annual report revealed that after review and approval by the general manager's office meeting held on April 2, 2009, and signed an “agreement” with the US Universal Crop Protection Alliance on April 4, 2009, the two parties jointly invested to establish Evergreen. The company has a registered capital of 500,000 US dollars. Huaxing Chemical holds 50% of its shares, is registered in Delaware, USA, and is mainly engaged in the sale of pesticide products. UCPA is an important distributor of Monsanto in North America. Currently, the production and marketing pattern of glyphosate in the world can be basically described as follows: developing countries (mainly China) produce the original drug of glyphosate and sell the original drug to Monsanto; in North America, Southeast Asia, India and other places, formulations made by Monsanto are distributed to local wholesalers through distributors, and finally to end users through retailers. Among these, the profit margin of the drug is far greater than that of the original drug. Earlier, after Monsanto cut the price of glyphosate preparations by 50%, there was still a strong gross profit margin. Precisely for this reason, how to achieve a breakthrough in formulation is an important step for glyphosate drug companies in dealing with the financial crisis and increasing profitability. Once Evergreen is officially put into operation, Huaxing Chemical will be able to directly sell formulations in North America and other places, which will not only help increase its market share in the North American market, but also greatly increase the gross profit margin of glyphosate products. In 2009, we determined that the sales amount of Huaxing Chemical in the North American market was equivalent to RMB 70-80 million. We believe that if Evergreen runs smoothly, it is to be anticipated that Huaxing Chemical's exports to North America will increase significantly on this basis. Judging from the current situation, this process is expected to break through in July-August in the second half of the year. 3. Increased sustainability of the real estate business. Previously, in order to pay compensation for Huaxing's relocation, the Hexian government, in addition to providing 1,500 acres of land for the company to build a new factory area, also granted the company a certain amount of land for real estate development. To this end, the company set up a wholly-owned subsidiary and County Huaxing Real Estate Development Co., Ltd. (later renamed Anhui Huaxing Construction Investment Co., Ltd.) to carry out real estate development. With this alone, Huaxing Chemical received 43.512 million yuan in net non-operating income in 2009. On November 6, 2009, the company once again announced that it would transfer 49% of the shares of Anhui Huaxing Construction Investment Co., Ltd. to Green Port Real Estate. On December 26, 2009, the company announced that Anhui Huaxing Construction Investment Co., Ltd., a 51% subsidiary of Huaxing Chemical Holdings, purchased a plot on the north side of Shibahe Road in Hexian Economic Development Zone for 99.69 million yuan. The plot covers an area of 82,000 square meters (about 123 acres) and is used for residential development. This plot is only adjacent to the original 150 acres of land. The acquisition of this plot of land lays the foundation for the sustainable development of the company's real estate business over the next few years. What needs to be clarified is that although the current market's expectations for policy regulation of the real estate market are increasing, as for Huaxing's real estate project in Chaohu, sales are expected to go quite smoothly due to strong purchasing demand. 4. The chlor-alkali project is expected to be put into production ahead of schedule. In order to further improve the industrial chain and achieve economies of scale, the company launched a 300,000 ton ion membrane caustic soda (caustic soda) project in 2009 (the first phase was 100,000 tons). On the one hand, the project focuses on its own production needs, and on the other hand serves local fine chemical bases. Originally, it was planned that the first phase of the 100,000 ton caustic soda project would be put into operation by the end of 2010. Currently, it is expected that it will be put into operation in mid-2010, and profits are expected to be generated in the fourth quarter. 5. Profit forecast and investment advice. Earlier, the company announced that due to poor glyphosate prices, the company's performance is expected to decline by 60-80% in 2009. We reduced the company's net profit attributable to the parent company in 2009 to 72.8504 million yuan, equivalent to 0.30 yuan in EPS. This research has once again deepened our understanding of Huaxing Chemical and others. Due to prudent considerations, we are not adjusting our performance forecast for 2010-2011 at this time. In other words, in 2010-2011, Huaxing Chemical's net profit attributable to the parent company was 174.2827 million yuan and 317.9615 million yuan. What needs to be clarified is that we still assume that all of the company's equity incentives will be exercised in 2010. Thus, starting in 2010, the company's total share capital will increase from 244.88 million shares to 24.06 million shares; furthermore, we have not considered the possible refinancing situation next year. Thus, the company's EPS for 2010-2011 was 0.71 yuan and 1.29 yuan, respectively. Considering the company's technical advantages and position in the industry, we raised the company's 12-month target price to 19.35 yuan. Based on comprehensive considerations, we maintain our “buy” rating for Huaxing Chemical. 6. Major Uncertainties. Changes in product prices and production and sales volume; implementation of additional distribution; implementation of equity incentives.