Events:

Huaxing Chemical (002018) issued a revised notice on the impact of the transfer of 51% equity interest in Anhui Huaxing Construction Investment Co., Ltd. on the company's performance and 2012 annual performance notice on January 17, 2013. it is announced that the transfer of 51% equity interest in Anhui Huaxing Construction Investment Co., Ltd. will affect the 2012 pre-tax profit of 105.1313 million yuan. At the same time, it is estimated that the company's 2012 net profit belonging to shareholders of the listed company is 109.9872 million yuan-111.9168 million yuan. An increase of 2750% over the same period last year, with a price of 2800%. On October 29th, 2012, the company estimated in its third quarterly report that the net profit belonging to shareholders of listed companies in 2012 would be 7.7184 million yuan to 9.648 million yuan.

Comments:

1. The main business continued to pick up sharply in the fourth quarter

According to the regulations, if the company enjoys a preferential tax rate for high-tech enterprises and the income tax rate is 15%, the net profit after tax on the transfer of Anhui Huaxing Construction Investment is 89.3616 million yuan. After deducting this effect, the net profit of the company belonging to the shareholders of the listed company in 2012 is about 20.6256 million yuan-22.5552 million yuan, of which 11.9539 million yuan-13.88 million yuan in the fourth quarter, and almost all of it is created by the main business. The corresponding operating profit is about 14.06 million-16.33 million, compared with a loss of 51.9 million yuan for the same period in 2011 and a loss of 2.43 million yuan for Q3 in 2012, which shows that the main business has rebounded strongly. In 2012, Q1-Q4, the company's operating profits were-4.3 million,-2.43 million, 4.52 million and 14.06 million-16.33 million respectively, experienced a process of loss reduction, turnround to profit and profit expansion, the trend of the recovery of the main business boom is very clear.

2. The continuous rise and high price of glyphosate is the main reason for the improvement of the main business.

The company has a glyphosate production capacity of about 15000 tons and accounts for about 50 per cent of revenue. Since 2012, the price of glyphosate has soared from 23500 yuan / ton at the beginning of the year to about 35000 yuan / ton now, an increase of nearly 50%. In the first half of the year, the company's glyphosate gross profit margin has risen to 10.26% from-1.75% in the first half of 2011. We estimate that by the fourth quarter, the glyphosate gross profit margin is likely to be more than 30%, contributing to a gross profit of about 33 million, which is the main reason for the sharp increase in operating profit in the fourth quarter. We expect the prosperity of glyphosate will be maintained, domestic small production capacity under environmental pressure to resume production power is insufficient, while foreign demand continues to be strong, glyphosate prices are expected to remain high in 2013.

3. The utilization efficiency of fund-raising is low, which will significantly dilute the company's performance.

In July 2012, the company announced a private additional offering plan to specific targets, which intends to issue no more than 452.2537 million shares to Huaxin at a price of 4.36 yuan per share. after the completion of the issue, Huaxin will hold 60.61% of shares and become the company's controlling shareholder. According to the plan, the fund raised this time is about 2 billion yuan, which is mainly used for 300000 tons of caustic soda, annual rich agricultural chain distribution centers, repayment of bank loans and supplementary working capital. In the fund-raising project, only 300000 tons of caustic soda and annual rich agricultural materials chain distribution centers can directly create benefits, the rest of the funds can only obtain a return equal to the interest of bank deposits, and the effective utilization rate of funds is only 50%, and because the issue price is low, the number of shares issued is large, if there is no profitable project or asset injection in the later stage, the dilution effect on the performance will be more serious.

4. The overall injection of Huaxin Oil is the greatest expectation of the market, but it should be moderately cautious.

Huaxin Petroleum is mainly engaged in domestic and foreign trade of petrochemical raw materials and additives, and its specific products are mainly aromatics, p-xylene and electrolytic copper. We believe that the main purpose of Huaxin Oil Company is to obtain the platform of listed companies to facilitate the implementation of capital operation, in order to achieve the purpose of listing its assets as a whole. The main reasons are as follows: first, Huaxin Petroleum is mainly engaged in the trade of petrochemical products and has no production experience in pesticide industry or chemical industry. Second, Huaxin Oil contacted Fujian Southern Paper in 2011-2012 to acquire a controlling stake in Fujian Southern Paper. The project did not fail until June 2012 due to the placement of workers, and the following month Huaxing Chemical announced that Huaxin Oil had joined the company. Almost at the same time approached the acquisition of two completely different industries and have nothing to do with their main business of listed companies, the intention is very obvious; third, Huaxing Chemical and Fujian Southern Paper were extremely poor performance companies at that time, the main business continued to lose money for many years. On the surface, Huaxin Oil does not care about the profitability of the acquisition target, but is more concerned about obtaining the listing platform at a lower cost. Fourth, Huaxing Chemical's latest announcement reveals Huaxin's business plan after it takes ownership, pointing out that Huaxin is optimistic about the recovery of the pesticide industry and will support listed companies to expand and strengthen their main pesticide industry. We believe that this matter is mainly due to the sharp improvement in the profits of listed companies in the third and fourth quarters with the soaring price of glyphosate, which does not show that Huaxin Oil has given up its desire to list its own assets. it's just that the way of asset restructuring in the future may be changed from asset replacement to asset injection. For Huaxin's valuation, the data show that in 2011, Huaxin's operating revenue was 12.69 billion and its net profit was 62.134 million. Due to the low gross profit margin and fluctuating performance of the petrochemical trade industry where Huaxin Oil is located, the market-to-sales ratio is generally used as the basis of valuation. With reference to the five A-share listed companies in the petrochemical trading industry, Longyu fuel and Taishan Oil are the closest to the size of the company, with a price-to-sales ratio of 0.3 and 0.6 times respectively. Huaxin should be valued at more than 4 billion yuan according to the lowest 0.3 times. Although we think that Huaxin is more likely to inject oil assets., And the injected asset value is high, but the specific plan has not yet been introduced, the relevant parties have not yet given a clear attitude, the risk of this matter is still very high, investors should also maintain moderate caution.

5. At present, the stock price fully reflects the expectation of asset injection and is given a "neutral rating".

We assume that the company completes the private placement within this year, and the fund-raising project will contribute to the performance from 2014 onwards. Based on 746 million of the equity after the IPO is completed, the company's EPS from 2012 to 2014 is expected to be 0.15,0.12 and 0.33 yuan respectively, corresponding to 67 times, 85 times and 31 times, respectively. It is obvious that the current valuation level cannot be supported by existing projects and fund-raising projects alone. Obviously, the expectation of the market for the injection of Huaxin oil assets has been fully reflected in the stock price. Although we believe that Huaxin oil assets injection probability is high, but its specific injection time and injection plan are very uncertain, in view of the above reasons, give the company a "neutral" rating, it is recommended to be cautious.