Investment suggestion
We downgraded the rating of Jiulian Development from "recommended" to "neutral". Mainly because: (1) the domestic economic growth has slowed down, the demand for explosive products has declined; (2) the price limit mechanism of civil explosive products with high gross margin has been changed to market-oriented pricing, and the gross profit margin has further downside risks; (3) the company has issued 184 million shares in private, greatly diluting its equity and EPS.
Reasons
Domestic economic growth is slowing down, and demand for explosive products is declining. It is expected that the economic growth rate during the 13th five-year Plan period will be slower than that of the 12th five-year Plan period, the growth rate of fixed asset investment in infrastructure projects will slow down accordingly, and the total demand for explosive products will decline. In addition, the original price-fixing mechanism of civil explosive products with high gross margin has been changed to market-oriented pricing. Due to the overall balance of supply and demand in Guizhou market and fierce market competition, product prices are likely to continue to decline in the future.
The integration of civil explosive assets continues to advance. Poly Group's acquisition of Panjiang Chemical is expected to be completed this year, promising to inject into the listed company within 24 months after the completion of the integration. Poly Group's three civil explosive assets will also be injected into listed companies before 2020, when the company's industrial explosive production capacity will reach 442500 tons, making it the largest civil explosive enterprise in the country. As the only civil explosion listing platform of Poly Group, the company is expected to further improve the concentration of domestic civil explosion industry with the help of Poly Group's resources, channels and other advantages.
The fixed increase is still in the verification stage of the CSRC, and no more than 3 billion yuan will be raised to repay interest-bearing liabilities and replenish working capital. Among them, the major shareholder Poly Jiulian Group and Poly promised to subscribe for 1 billion yuan.
Profit forecast and valuation
The company expects net profit attributable to the company to grow by-50% in 2015 compared with the same period last year. We maintain the company's 15-year EPS forecast of 0.53 yuan, lower the progress forecast of Poly Group's civil explosive asset injection, and lower the 16-year EPS forecast of 25% to 0.63 yuan (0.34 yuan / 0.40 yuan after dilution).
The current stock price corresponds to 53 times / 45 times of 15 pound in 16 years respectively. The target price will be maintained at 30 yuan for the time being, corresponding to 48 times of Pmax E in 16 years.
Risk
Poly Group asset injection process did not live up to expectations; demand and prices of civil explosive products fell further.