In the water treatment pharmaceutical industry, the concentration has gradually increased: water treatment chemicals are widely used in electric power, iron and steel, petrochemical, light industry, textile and other industries, and are the most widely used products in industrial water, pollution treatment and water-saving reuse treatment. At present, China's water treatment pharmaceutical market is in a stage of rapid growth. The total size of China's water treatment pharmaceutical market was US $3.71 billion in 2017 and will reach US $5.549 billion by 2022, with a compound growth rate of 8.38%. In the past two years, with the stricter supervision and inspection of environmental protection, small and medium-sized water treatment agent production enterprises that do not have large-scale advantages and environmental protection standards have gradually withdrawn from the market. In the case of steady increase in market demand, market supply and demand shows a certain tight supply state. By the end of 2018, the total production capacity of the top four in the industry was about 540,000 tons / year, accounting for about 18% of the total production capacity of the water treatment agent industry.

The new production capacity of the fund-raising project is 180000 tons, and the company has strong cost control ability: the company is one of the largest manufacturers specializing in R & D services of water treatment agents in China, and gradually layout and improve the water treatment industry chain after listing. The company's performance maintained rapid growth, with a compound growth rate of 85% from 2015 to 2018. The company issues 490 million convertible bonds to raise funds for the expansion project with an annual output of 180000 tons of water treatment agents. after the implementation of the project, the company's leading position of organic phosphine water treatment agents in the industry will be consolidated, and the total production capacity will be increased from 90,000 tons to 270000 tons. The company has cost advantages and technical advantages: can produce raw material phosphorus trichloride to reduce cost, can produce derivative chloromethane to increase revenue, strong cost control ability, launch new products to bring incremental users. In addition, the company has a relatively obvious cost advantage in the market competition. We believe that after the company's new production capacity is put into production, the industry competition pattern is expected to be reshaped and the company's market share will be further increased.

The sharp rise in yellow phosphorus prices has led to a rise in product prices and a rise in gross profit margin: on July 3, CCTV exposed the problem of yellow phosphorus pollution in Yunnan and Guizhou, and the regulation of yellow phosphorus enterprises began. As of July 16, the domestic spot price of yellow phosphorus has risen from 15,000 yuan / ton to 23500 yuan / ton. The rising price of raw material yellow phosphorus supports the price of pharmaceuticals, and the company's gross profit margin increases. Assuming that the price of yellow phosphorus increases by 8000 yuan / ton in the second half of the year, and the price of HEDP increases by 2500 yuan / ton, the performance elasticity brought about by the price increase is 14.57%. The Ministry of Ecology and Environment said that it would take about two years to comprehensively solve the outstanding eco-environmental problems of the "three phosphorus". Compared with the impact of the central environmental protection inspectors on the price of calcium carbide in 2016, we expect the price of yellow phosphorus to rise for a certain period of time.

Investment suggestion

It is estimated that the operating income of the company from 2019 to 2021 is 2.064 billion, 2.598 billion and 3.117 billion yuan, and the return net profit is 297 million, 373 million and 442 million yuan, corresponding to 1.36,1.71,2.03 yuan per share, and the corresponding valuation is 9.4,7.5,6.3times. Give the company a 15-fold valuation in 2019, with a target price of 20.4 yuan, covering it for the first time and giving it a "buy" rating.

Risk

The risk of impairment of goodwill, the risk that the project schedule is not as expected, the risk that the implementation of environmental protection policy is not as expected, and the risk of lifting the ban on restricted shares.