Investment Highlights
The leader in the China on-site industrial gas supply sector. Yingde Gases (YG) mainly produces industrial gas such as oxygen, nitrogen and argon. Its downstream customers range from traditional steel mills to newly expanded chemicals and non-ferr ous metals industries. In 2011, on-site gas supply and retail gas supply accounted for 80% and 20% of YG’s top line, respectively. The Company tops the China on-site indus-trial gas supply market with a share of 36.9%.
Abundant growth potential for China’s industrial gas market. China’s outsourcing proportion of industrial gas rose from 41% to 45% in 2007-2010 and is forecast to hit 55% by 2015E. SAI estimates industrial gas output in China will swell to US$10.7bn in 2016E from US$6.5bn in 2011. Currently, the market is dominated by foreign industrial gas giants, while homegrown companies such as YG are also growing rapidly.
Defensive business model with strong profitability. Industrial gas is mainly divided into gas cylinder, liquid retail and on-site gas supply. Among them, on-site gas supply business is the most stable and profit-able due to long-term contracts (usually for 15-25 years) with a guaran-tee of minimum gas supply volume (generally at 80% of normal opera-tional volume). Compared to its compet itors, YG has the highest contri-bution from on-site gas supply business at 80%, which bring it relatively high margin and ROE.
Rich project pipeline. YG currently has 36 and 23 gas generation facilities which are operational and under construction, respectively. The Company’s Oxygen installed capacity will reach 1,600kNm3/hr by 2014E from 940.4kNm3/hr in 2011. YG has also been actively developing cus-tomers from other industries, which would help to reinforce its market position.
Risks. Weaker-than-expected investment trend in China; risk of high gearing arising from high CAPEX.
Reasonable growth with undemanding valuation, Overweight. We estimate YG’s 2012-14E EPS to be Rmb0.47/0.63/0.72, representing a CAGR of 16.2%. With reference to comparables and its own historical PE band, we derive the target pric e of HK$8.53 based on 15x 2012E PE, and initiate coverage with a BUY rating.