The investment proposal raised CNOOC Petrochemical's rating from “neutral” to “recommended.” The target price was raised by 78% to HK$3.2, corresponding to the expected price-earnings ratio of 16 times in 2017 and the net price ratio of 1 times. Here's why: The worst is over. The company issued a profit warning. Due to reasons such as the partial shutdown of the Hainan urea production line and declining product prices, the company's net loss in 2016 may reach 200 million to 250 million yuan (net profit in 2015 was 8.3 billion yuan). Between 2012 and 2014, the company has experienced a cumulative asset impairment of about 1.5 billion yuan. Despite the downturn in the industry and a significant decline in urea prices, the company maintained a positive operating cash flow in the first half of 2016, while capital expenditure decreased 80% to 78 million yuan over the same period last year. As of the end of the first half of 2016, the company had net cash on hand of about 4 billion yuan, which is almost the same as at the end of 2015. Capacity utilization is expected to pick up, and gas costs have a downward advantage. We estimate that in 2016, the company's urea production capacity utilization rate may drop to around 86% from 106% in 2015, mainly due to the phased shutdown of the Hainan urea plant due to sudden failures and planned upgrades. We expect this year's urea capacity utilization rate to increase to over 94%. Starting in the fourth quarter of 2018, CNOOC's DF13-2 gas field will supply natural gas to the company's Hainan production base as a new supplementary gas source. The cost of natural gas may be further reduced. Prices of urea and phosphate fertilizer are expected to continue to rise. Since strict control of excessive fertilization has recently become the focus of government supervision, excess urea production capacity may be permanently shut down. Production discipline in the phosphate fertilizer industry has been strengthened, and various manufacturers have exchanged employees to monitor production limits. The downward trend in domestic diamine phosphate production is likely to continue. What is our biggest difference from the market? We believe CNOOC may achieve a sharp rise in volume and price in the next two years. Potential catalysts: rising product prices; special dividends, etc. Profit forecasts and valuations raised expectations of earnings per share in 2017 by 82% to $0.18. Introducing the 2018 earnings per share forecast of $0.22. Weak risk demand; new production capacity exceeding expectations; sudden shutdown of production; shortage of natural gas, etc.