The market of modified asphalt is growing steadily, and there is a broad space for the atmospheric treatment industry. In 2013, the investment in highway fixed assets in China was nearly 1.4 trillion yuan, an increase of 8 percent, and the output of petroleum asphalt reached 29.2 million tons, an increase of 11 percent. The demand for new construction, upgrading and maintenance of highways will promote the steady growth of modified asphalt demand in China in the next 5-10 years. At present, the situation of atmospheric governance in China is grim. Under the promotion of PM2.5 assessment, there is a huge market space for atmospheric governance, especially industrial flue gas control. It is estimated that the markets for dust removal, desulphurization and denitrification in thermal power plants from 2013 to 2017 are 482,608 and 55 billion yuan respectively, while the atmospheric control markets for cement and iron and steel are about 266,10.3 billion yuan, and the demand for coal-fired industrial boilers may reach 40 billion yuan.
The national layout of asphalt business has been completed, and the improvement of capacity utilization in the future is expected to significantly improve profitability. Since its listing, the company has successively completed the regional market layout, including Jiangsu, Shaanxi, Jilin, Hunan, Sichuan, Xinjiang and Tibet, and actively opened up the road construction materials market in North Africa, including Algeria, through cooperation with CITIC Construction, China Railway Construction and other companies. It is estimated that the company's existing production capacity is about 770000 tons, including 470000 tons of modified asphalt, 140000 tons of emulsified asphalt, 65000 tons of road petroleum asphalt, 96000 tons of high-strength structural asphalt and waste rubber modified asphalt. With the completion of the company's layout in the national market, the capital expenditure of asphalt production capacity will be significantly controlled in the future, while with the gradual improvement of capacity utilization, the company's revenue scale is expected to grow rapidly and profitability is expected to increase year by year.
Acquisition together with environmental protection to cut into the atmosphere control market, the target performance growth momentum is sufficient. The company announced that it intends to acquire 100% equity in environmental protection by issuing shares and combining cash payment, which has strong technical strength and certain market popularity in the field of industrial flue gas dust removal (especially its ESP electrostatic dust removal technology has good market feedback). In 2013, the revenue and profit were 182 million yuan and 22.99 million yuan respectively, and the purchase price corresponds to static PE14 times. The acquirer promises to protect the environment together with 2014 / 2015 / 2016 net profit of not less than 3000 / 3500 / 40 million yuan, with additional terms of reward and punishment. According to on-hand orders and the number of contracts that are in the contact stage and are likely to be signed, together Environmental Protection is expected to achieve sales revenue of about 320 million yuan in 2014.
The dual-main industry strategy is clear, and it is expected to extend to natural gas and upstream in the future. The company through this acquisition together with environmental protection, will open up a broad space in the environmental protection market. In addition to entering the field of atmospheric governance, the company will also actively seek to enter other environmental protection sub-areas, the future environmental protection business is expected to form a double main business with asphalt business, jointly drive the growth of the company. In addition, the company also announced that it plans to cooperate with Xi'an Huatong New Energy to carry out natural gas business and extend to the upstream of bitumen. With the advantages of national layout and market resources of asphalt, the company is expected to make positive progress in new fields.
Risk factors: the risk of unstable upstream supply; the risk that new market development is not up to expectation; the risk that the effect of acquisition integration is not as expected.
Profit forecasts, valuations and investment advice. The EPS of the forecast company in 2013, 2014 and 2015 is 0.17, 0.27 and 0.34 yuan respectively (having considered additional dilution, including 20 million yuan in net profit from mergers and acquisitions in 2014, which is about EPS0.035 yuan), and 28% of CAGR from 2013 to 2015. The current share price is 7.45 yuan, which corresponds to the 2015 PE of 2013 and 2014 respectively, which is as much as that of 44-28-22. Considering that the growth space for the company to enter the environmental protection market has been greatly opened up, and the company is currently actively exploring the upstream market of natural gas and asphalt, we believe that the company can enjoy a valuation of 35 times earnings in 2014 with a target price of 9.40 yuan. give a "buy" rating.