occurrences

Proposed repurchase of shares to implement an employee share option plan

The company announced that it intends to repurchase no more than 200 million shares of the company at no more than HK$800 million, and will implement the “Employee Share Options” scheme; during the plan period, specific employees of the company will be granted share purchase rights to allow them to purchase the company's shares at the repurchase price.

Brief review

The major repurchase plan shows management confidence and is expected to fully incentivize the company's employees to repurchase no more than 800 million Hong Kong dollars and no more than 200 million shares of the company's current total share capital, accounting for about 9.47% of the company's current total share capital. Large-scale repurchases and employee equity incentive plans have been carried out at the same time, demonstrating management's strong confidence in the company's future development.

Furthermore, the company is currently in a critical period of capacity expansion. Employee shareholding also helps bind core employees and stimulate employees' enthusiasm for work.

Raw material prices are strong, and the fluorine chemical supply and demand pattern is improving. The company can still expect to continue to benefit mainly due to the shutdown of some production capacity in winter. Recently, fluorite prices have been strong, supporting product prices in the fluorine chemical industry chain. Judging from the company's main middle and downstream business, the overall supply and demand pattern is also improving.

On the supply side of refrigerants, production of second-generation agents, mainly R22, has now been frozen, and industry supply is rigidly restricted; third-generation agents have a certain technical threshold, and newly launched production capacity is mainly concentrated on enterprises within the industry. On the demand side, overseas production capacity for second-generation agents has basically been cleared, third-generation agent production capacity has been withdrawn at an accelerated pace, and demand is strong; after 10-11 years of “home appliances going to the countryside” and “trade-in” production peaks, the domestic air conditioning industry has also begun to gradually enter a replacement cycle this year. In terms of price, the average price of R22 for the four quarters of 2018 was 17133/18291/20565/ 23024 yuan; R134a was 30161/ 32769/ 31696/33171 yuan; R32 was 28744/ 22780/ 22043/2243/22256 yuan; and R125 was 53600/ 43385/30435/ 29000 yuan respectively.

In terms of fluorinated polymer materials, the company is the largest PTFE production base in China, and PTFE, with R22 as the core raw material, also faces tight supply problems, and product prices are expected to remain relatively high. The average price of PTFE for the four quarters of 2018 was 78767/88451/64467/68110 yuan, respectively.

The price of silicone has stopped falling and stabilized, and there is still a stable profit margin

Looking back at silicone price trends in recent years, DMC prices were relatively stable before 2016; starting in 2016, along with a sharp increase in downstream demand, the supply side was at the bottom of the production capacity cycle, compounded by rising downstream prices. At the same time, downstream price transmission was smooth. DMC prices were rising all the way. In June 2018, high-end prices rose to a historic high of 35,000 yuan; since August, due to severe shrinking profits of downstream terminal products, poor market sentiment in Sino-US trade, rapid pace of alternative development, and weakness in the real estate market, etc. Once Down; up to now, the DMC price has stabilized at around 20,000 yuan, and mainstream manufacturers in the industry still have stable profit margins.

Fluorosilicon business continues to expand, laying out high value-added products

The company plans to invest 5 billion yuan over the next 3 years to develop production expansion plans in the fluorine chemical and silicone sectors, and use early technology accumulation to target high-barrier and high-value-added products downstream of the industrial chain. In terms of fluorine chemicals, there is still plenty of room for domestic substitution for high-end fluorinated polymer materials and will become the company's future development focus; in terms of silicone, the company plans to add 300,000 tons of monomer production capacity and further further process them into higher-end downstream products such as high-temperature adhesives, electronic grade, and medical grade adhesives.

The silicone subsidiary is about to be spun off and listed, or the company that has raised its valuation level and diversified financing channels has officially submitted an application to the Securities Regulatory Commission on November 6. It plans to split the subsidiary “Dongyue Silicone”, which mainly produces and sells silicone, and list it on the A-share Venture Market. The spin-off listing plans to issue no more than 300 million shares and raise no more than 4.5 billion yuan. The silicone subsidiary is listed on A-shares, which can not only raise sufficient capital for the company's new construction projects, but also raise valuation levels and enrich financing channels in the future.

The layout of high-end membrane materials is expected to become a pioneer in fuel cell industrialization

In July 2018, the company's subsidiary Future Hydrogen Energy (holding 40% of the shares), began construction of a hydrogen energy R&D center with an investment of 2 billion yuan and a thousand square meter hydrogen energy membrane material project. At present, the company's chlor-alkali ion membranes and fuel cell membranes have sold some products, leading the way among domestic companies. Fuel cells are also battery technology supported by national policies. The potential market space is considerable. The company's pioneering industrialization in the field of fuel cell membranes is expected to give the company a head start.

Profit prediction

It is expected to achieve net profit of 21.60 billion yuan or 2,248 million yuan in 2018, corresponding to EPS 1.02 and 1.36 yuan, corresponding to PE 3.95 and 3.8 times, and maintain the purchase rating.