2017 performance in line with expectations

Liyuan refined announced its 2017 results: the operating income was 3.03 billion yuan, an increase of 18.5% over the same period last year; the net profit belonging to the parent company was 520 million yuan, down 5% from the same period last year, corresponding to 0.43 yuan per share, which was basically in line with the performance forecast. The net profit after deducting non-return is 500 million yuan, an increase of 2% over the same period last year.

Comments: 1) the output has increased. In 2017, the company's output and sales of aluminum profiles were both 127000 tons, an increase of ~ 8% over the same period last year. 2) in 2017, the company's comprehensive gross profit margin decreased by 3.9ppt to 33% compared with the same period last year, and the increase in operating costs was mainly due to the rise in the price of raw materials (the average domestic aluminum price rose by about 16% in 2017). From a sub-sector point of view, the gross profit margin of industrial / deep processing / decoration and construction materials decreased respectively compared with the same period last year (3.6ppt/3.5ppt/5.0ppt). 3) fixed assets increased by 124% compared with the end of 2017, mainly due to the gradual availability of plant and equipment of Shenyang subsidiary and the transfer of projects under construction.

The company also announced 1Q18 results, with operating revenue of 590 million yuan, down 8.5% from the same period last year, and the comprehensive gross profit margin increased by 5.2ppt to 38% compared with the same period last year. 1Q18's parent net profit was 105 million yuan, a slight increase of 0.5% over the same period last year, corresponding to a profit of 0.09 yuan per share. The net profit after deducting non-return was 105 million yuan, an increase of 5.7% over the same period last year.

Trend of development

The Shenyang project has been further promoted. In 2017, the construction of Shenyang subsidiary plant was gradually promoted, and the aluminum profile intensive processing workshop was put into production one after another. With the Shenyang subsidiary gradually put into production, the rail transit equipment business will provide the company with growth potential in the future.

The industrial structure has been optimized. The gross profit margin of all sectors of the company decreased slightly in 2017 compared with the same period last year, but the gross profit margin of the deep processing wood sector was 36 per cent, which was higher than that of industrial materials (33 per cent) and decoration and construction materials (31 per cent), while the proportion of the company's deep processing sector business rose sharply to 28 per cent in 2017 compared with the same period last year, reflecting the optimization of product structure. In the future, Shenyang subsidiary deep processing production line and rail vehicle project will further improve the added value of the company's products.

Profit forecast

We maintain the company's earnings forecast of 0.60 yuan per share in 2018 and introduce a profit forecast of 0.71 yuan per share in 2019.

Valuation and suggestion

The company's current price corresponds to 13.4 x 2018 Ppace E, and we maintain the recommended rating. Considering that it will take time for the project to reach production and the schedule is uncertain, we lower our target price by 25% to 12 yuan, corresponding to 48% rising space, corresponding to 20 x 2018 Pmax E.

Risk

The progress of the project is not as expected, and the price fluctuation of raw materials is higher than expected.