Main points of investment:

Company announcement: on October 12, 2018, the company received the relevant government departments "notice of the county government on organizing the resumption of production of Hua'er Chemical Industry and other enterprises". It is confirmed that Jiangsu Wal Chemical Co., Ltd., Jiangsu Yabang Dye Co., Ltd. Lianyungang Co., Ltd., Lianyungang Acid Co., Ltd., three enterprises have the conditions for resumption of production, agreed to resume production, and require enterprises to do a good job of safety, environmental protection, fire prevention and preparation before resumption of production. Together, the operating income of the above three companies accounted for 62.97% of the company's 2017 operating income, and the combined net profit accounted for 96.44% of the company's 2017 net profit. Other enterprises of the company are actively promoting the rectification work according to the enterprise rectification standards of the coastal chemical park in Jiangsu Province, and strive to complete the rectification work as soon as possible, submit an application for resumption of production to the government department, and resume production as soon as possible. At the same time, in accordance with the laws and regulations such as the Stock listing rules of the Shanghai Stock Exchange, the company will verify that the company applies to the Shanghai Stock Exchange for the revocation of the "other risk warning" if it complies with the relevant rules.

The main business is finally ready to resume production, and the most difficult period has passed. Due to media exposure of Guannan and Guanyun chemical parks in Lianyungang due to illegal discharge, the government demanded centralized rectification and reform of the two parks at the end of April, and all enterprises in the park stopped production. A total of 8 sub-companies are located in Guannan Duigou Port Chemical Park, accounting for 82.85% of the total operating income in 2017. due to the violation of Article 13.3.1 of the rules governing the listing of stocks on the Shanghai Stock Exchange, the Shanghai Stock Exchange has implemented "other risk warnings" on the company's stocks since August 14, 2018. Because the company is a domestic anthraquinone dye oligarch, the subdivision category accounts for the highest market share of about 60% in the country, and the company's suspension of production has led to a sharp rise in product prices. According to the operating data disclosed by the company, the price of disperse dyes and vat dyes rose 20-30% in the second quarter compared with the same period last year. Solvent dyes rose 40% year-on-year, and intermediates rose 69% year-on-year. As an industry oligarch, the company has stopped production for half a year, and the current inventory level in the industry is very low. Lianyungang Branch and Hua'er Chemical Co., Ltd. are the main anthraquinone dyestuff and intermediate manufacturers. After resuming production, the operating rate needs to be gradually increased, and the product price will remain high. It is expected that the company's performance will be low in the third quarter due to a sharp decline in sales and an increase in shutdown costs. The most difficult period for the company has passed, and the other five sub-companies will resume production one after another after rectification, and their performance will gradually improve.

The proposed acquisition of Xuzhou Kaida to further enhance the status of the vat dye industry, the acquisition of Ningxia Yadong extension of the pesticide industry chain, and is expected to achieve part of the production capacity transfer, spread the risk. The company signed a "letter of intent" with Xuzhou Kaida Chemical on September 6, reaching a preliminary intention on the company's proposed acquisition of Keda Chemical. Kaida Chemical is mainly engaged in the production, operation and export of vat dyes and dye intermediates, with an annual production capacity of 10000 tons, and is also a key supplier of military camouflage dyes in China. The company's acquisition of Keda Chemical will further enhance its industry dominance in the field of vat dyes and enhance its profitability. The company completed the acquisition of Henglong crops, the pesticide asset of the group at the beginning of the year. Under normal production and operation, Henglong crop performance is more than 90 million, and there are a number of reserve varieties waiting for construction, with long-term growth. At the same time, Henglong crops plans to buy 100% equity in Ningxia Yadong for 132 million yuan, Ningxia Yadong mainly produces herbicide intermediates, at the same time, many products are important raw materials for Henglong crops, and the industrial chain extends upstream after the acquisition. Ningxia Yadong's audited net profits in 2019,2020 and 2021 will be no less than 21 million yuan, 18 million yuan and 18 million yuan, respectively. The cumulative net profit realized in the past three years is 57 million yuan. In addition, the company's original production base is concentrated in Guannan Chemical Park, and after the acquisition of Xuzhou Kaida and Yadong in Ningxia, the company's main business production capacity of dyes and pesticides is expected to be partially transferred, which is conducive to risk diversification.

The circular economy of the park is expected to reflect in the future and cut into the pigment market in the future. The company has built its own sulfuric acid and cogeneration project to create a circular economy system in the park. After the park is fully restored, the economic effect is expected to be fully reflected. In addition, the company signed an "investment contract" with the management committee of Lianyungang Chemical Park, and four phases of the project will be built on 1000 mu of land. except for the first phase of the project, the other three phases are pigment projects, which will become another new growth point for the company's development in the future.

Investment suggestion: due to the suspension of production for half a year due to the comprehensive rectification of the park, the short-term performance has been greatly affected, which has been reduced by 18 and 19 years, and the profit forecast for 2018-20 has been added. It is estimated that the net profit for 2018-20 is 4.41,6.15,1.37 yuan, corresponding to PE 12x, 8x and 7x. The company's historical average valuation is about 14x, and as capacity recovers, performance will gradually improve and "other risk warnings" will be withdrawn, leaving room for upward repair and maintaining an "overweight" rating.

Risk hint: the resumption of production of other subsidiaries is less than expected, product prices fall, and acquisitions fall short of expectations.