Liquidity crisis is imminent: Hengding Industries released its annual report that the company turned a profit into a loss in 2012, with a net loss of 147 million yuan. What is more worrying is that the company's short-term debt is growing rapidly, with the company's current debt reaching 8.07 billion yuan, an increase of 170% over the same period last year. This is mainly because a total of 3.31 billion of convertible bonds and high-interest bills must be repaid within one year. The company's current assets are only 3.35 billion yuan and its cash is only 1.55 billion yuan. The corporate debt ratio rose from 51% to 61%, while the net debt ratio rose from 74% to 120%. We believe that unless the company finds sufficient liquidity through trust or other channels within this year, there will be a greater risk to the company's liquidity. The loss exceeded expectations: in 2012, the company made a net loss of 147 million yuan and revenue of 1.92 billion yuan, down 33% from the same period last year. There are two main reasons for the loss exceeding expectations: first, the company's distribution and administrative expenses are relatively rigid, which did not decline with the decline in revenue, reaching 647 million yuan, which is basically the same as the same period last year.

Secondly, due to the substantial increase in the company's interest-bearing liabilities from 6.09 billion to 9.18 billion, the interest expense reached 450 million yuan, much higher than our estimate of 350 million yuan. The situation of resumption of production in the mining area is lower than expected: the company recently announced the resumption of production in the suspended mining area. Only 6 of the 10 production mines in Guizhou and 9 in Fuyuan County, Yunnan Province are still waiting for re-production acceptance, and the company expects to resume production by the end of the month. Only one of the five mining areas in Panzhihua has returned to production, and the rest of the mining areas have not been expected to resume production. The company's raw coal production in the first quarter is likely to be significantly lower than market expectations. Maintain the "underweight" rating: although the share price has fallen 25% since we downgraded the company on January 9. Because (1) the company's resumption of production is lower than expected, (2) the company's interest-bearing liabilities are higher than expected, and (3) the liquidity risk is more prominent. We do not think the market has a very full understanding of the three major risks of the company. Continue to lower the company's 2013 profit forecast from 0.10 yuan to 0.01yuan. Maintain the "underweight" rating.

The main risk comes from the higher-than-expected rise in coking coal prices.