FY17net profit +c.200% YoY, beating expectations WHC released prelim FY17profit guidance with net profit growth of c.200% YoY.This beat DBe/ consensus estimates by 26% / 11%. The strong results were drivenby: 1) a stronger PU performance in both ASP and volume; 2) higher non-recurringprofit from government subsidies. Looking ahead, we expect strong 1Q18E on aYoY basis with: 1) a robust MDI spread due to tight supply-demand dynamics andhigh entry barriers; 2) strong performances from petrochemical and functionalmaterials. Therefore, we reiterate our Buy rating on the strong outlook ahead. Thebiggest risks would relate to potential restructuring / M&A with parentco assets.The stock is under suspension pending a restructuring announcement. Strong PU / Functional material outlook The robust MDI spread was driven by a domestic environmental scrutiny ledWHC polymeric MDI ASP rise of 92% yoy in 2017to RMB26,717/ton. Lookinginto 2018, we expect MDI average margin will continue to grow yoy due to alow base in 1H17; conversely, we expect the global supply demand balance willbe flat as the Sandra plant started operation in 3Q17to offset strong demandgrowth globally. For the polycarbonate (PC) segment, where China relies heavilyon imports, the outlook remains strong; WHC's new PC plant phase 1with 70ktpacapacity started on January 23, making WHC the no#2PC producer in China witha total capacity of 200ktpa. We continue to expect functional material segment(including PC) revenue to achieve a 39% CAGR in 2018-20E. Valuation and risks We base our RMB47.5target price on 8.0x EV/EBITDA by using a GordonGrowth Model, which is at a 15% discount to its historical average of 9.4x.Before suspension, the stock was at 6.1x forward EV/EBITDA, representing a 35%discount to the historical average. Key risks: 1) unexpected corporate actions,including restructuring and M&A; 2) unplanned maintenance turnarounds; 3)fluctuations in oil and chemical product prices; and 3) lower-than-expected GDPgrowth impacting demand growth.

Buy on share price weakness after strong 3Q results; raising TP to RMB47.5. WHC posted strong 3Q17 results with EPS of RMB1.08, +30% QoQ/+145% YoY;meanwhile, 9M17 recorded EPS of RMB2.87, +212% YoY. We believe the strongset of results was driven by: 1) robust MDI spread surge due to tight supplysituation created by Hurricane Harvey, which took out capacity in Texas; and 2)healthy performances from petrochemical and functional materials. The resultsbeat expectations. Following the strong 3Q17 results, we lift our 2017E/18E EPSby 14.8%/14.0% and our target price by 14% to RM47.5, factoring in higher MDIspreads in 2017/18E (RMB17.5k /17.0k per ton); we reiterate our Buy rating. Bumpy near-term MDI prices while long-term prospects bright. Our channel check suggests that China MDI prices for Oct 12 fell by RMB1.5k-2k/ton (-4-5.5%), and the upcoming batch may sell at RMB33k/ton (a furtherRMb1.5k/ton drop). Given the tight supply-demand dynamics and high entrybarriers, we remain positive on the MDI cycle and believe near-term pressure onMDI prices in China could provide better entry point for Wanhua (WHC). Beat expectations: 3Q results backed by 46% QoQ rise in MDI spreads. MDI-Benzene spread picked up by 46% and averaged US$3,565 in 3Q17 (MDIBenzenespread rose 71% to US$4,467/ton as of Sep 30 from Jun 30). Thestrong MDI spreads performance was boosted by the tight supply situation asa result of:1) overseas capacity going into force majeure maintenance due toHurricane Harvey hitting Texas; and 2) China domestic environmental scrutiny. Also, strong downstream demand in China continues, from both white appliancesand construction materials, which has led to a short-term supply shortage in Chinawith WHC twice changing its indicated selling prices, in Aug and Sep. Valuation and risks. We base our RMB47.5 target price on 8.0x EV/EBITDA by using Gordon GrowthModel which is at an 16% discount to its historical average of 9.5x. Our targetprice implies 5.0x 2017-18E P/B; we believe the premium to global peers isjustified as its ROE averages 42.4% in 2017-18E, which is at a c.160% premiumover the MDI peers. At the current price, the share trades at 6.4x 12-monthforward EV/EBITDA, 3.8x 12-month forward P/B and 11x 12-month forwardP/E. The 6.4x forward EV/EBITDA represents a 33% discount to its historicalaverage. Key risks: 1) unplanned maintenance turnaround; 2) fluctuations in oil and chemical product prices; 3) lower-than-expected GDP growth; and 4)unexpected corporate actions with demanding valuations.

Raising polymeric MDI price to RMB29,000/ton。 On 22August Wanhua Chemical (WHC), announced it was raising its MDIprice, hiking its polymeric MDI distribution price by 21%, or +RMB5,000/ton, to RMB29,000/ton. In our view, the price surge has been driven by thetight supply situation on the back of: 1) a force majeure on MDI productionin BorsodChem; 2) low domestic inventory levels; 3) several plants undermaintenance period including Tosoh’s 200ktpa MDI plants starting on 10September; and 4) continuous environmental inspection. Hence, we believe thesefactors will continue to support the MDI price at a high level in the near term andtherefore reiterate our Buy rating on WHC, which is the largest MDI producer inthe world.。 Strong MDI price further expanded MDI spreads。 Given the high MDI price level while benzene / oil prices were relatively stable,current MDI-benzene spreads pushed up further to USD3,336/ton on 18August,+45% YTD compared to c.USD2,298/ton at the beginning of 2017. On ouranalysis, WHC’s share price has a 0.72correlation with MDI spreads, and theWHC spread could expand further thanks to the recently announced MDI pricehike.。 Valuation and risks; target price RMB42.0。 We base our RMB42.0target price on 8.0x EV/EBITDA, at an 18% discount to itshistorical average of 9.7x. Our target price implies 4.7x 2017-18E P/B; we believethe premium to global peers is justified as its ROE averages 38% in 2017-18E,which is at a 137% premium over the MDI peers. At the current price the sharetrades at 6.6x 12-month forward EV/EBITDA, 3.6x 12-month forward P/B and 12-month forward 11.3x P/E. The 6.6x forward EV/EBITDA and forward 11.3x P/Erepresent 31% and 20% discounts to historical averages, respectively. Key risks: 1) unplanned maintenance turnaround; 2) fluctuations in oil and chemical productprices; 3) lower-than-expected GDP growth; and 4) unexpected corporate actionswith a demanding valuation.。