The profit bottomed out and the performance was in line with expectations: the company achieved a profit of 10.044 billion yuan (RMB, the same below) in 2020, down 22.49% from the same period last year; and the gross profit margin fell from 26.6% to 22.3%. The net profit attributable to shareholders is 772 million yuan, down 47.23% from the same period last year, which is in line with our previous expectations; the basic profit per share is 0.37 yuan, the proposed final dividend is HK $0.14, and the annual dividend yield is about 34%.

The profitability of the three major businesses is under pressure, and profitability is expected to improve in an all-round way: during the year, the company's polymer business revenue was 3.192 billion, down 7% from the same period last year; operating profit margin was 13.67%, compared with 13.41% in the same period. Silicone revenue was 2.454 billion, down 9 per cent from a year earlier, and operating margins were 11.47 per cent, compared with 18.89 per cent over the same period. Refrigerant revenue was 2.066 billion, down 23% from the same period last year; operating profit margin was 9.17%, compared with 13.27% in the same period. Production and sales of the three core products began to improve after the fourth quarter, bottomed out and rebounded, sales in the first quarter increased greatly compared with the same period, prices recently have a better performance, inventory is low, in addition to refrigerant R22 prices hovering at 16000 yuan / ton, polymer PTFE prices have risen to about 58000 yuan / ton, there is a situation that supply exceeds demand. Although DMC rose to 33000 yuan / ton in the fourth quarter and then dropped somewhat, it continued to rise to 25400 yuan / ton after the Spring Festival. With the continuous recovery of downstream demand, we believe that the company's polymer and silicone profitability this year is expected to improve in an all-round way.

Continue to increase R & D efforts, and high-end production capacity continues to expand: the company has stepped up its R & D efforts in the past two years, and the R & D expenditure rate has increased from 2.5% in 19 years to 5.9% in 20 years, mainly focusing on the research and development of high-end products. In the future, the revenue share of high-end products will be increased from 12% to 20%, and the added value of products is expected to further increase. At the same time, the company continues to expand in high-end production capacity, mainly in the construction capacity of 5,000 tons of FEP,2 10,000 tons of high-performance PTFE, of which the first phase of 10,000 tons of production capacity will be put into production this year, when completed will become the world's largest PTFE manufacturer. In addition, the company will build a new 2 kiloton PFA project. As a higher-end PTFE material, PFA has stronger performance and plasticity, and its price is much higher than that of traditional PTFE. It will contribute considerable revenue increment for the company in the future.

The hydrogen business is expected, with a target price of HK $7.94, maintaining the buy rating: we expect the overall demand for the company's products to continue to recover this year and prices to improve steadily. The additional 300000 tons of silicone production capacity will be put into production as scheduled in the fourth quarter, contributing to a considerable profit increase in 2022. The spin-off of the hydrogen energy company is also in full swing, and the current order for battery membrane has increased greatly compared with the same period. In the long run, the proportion of high value-added products will continue to increase, the company's fuel cell membrane has the supporting advantages of the whole industry chain production, and the future market capacity can be expected. We value the company by segment valuation and give the three core businesses 10 times the PE valuation, corresponding to a market capitalization of HK $13.92 billion. The implied valuation of the split listing of the hydrogen energy company is HK $2.86 billion, with a total market capitalization of HK $16.77 billion, corresponding to the target price of HK $7.94.