An update from the air separation industry, dated 20160817: Yingde Gas achieved very stable development in the first half of 2016

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Yingde Gas: It achieved stable development in the first half of 2016. The company is the largest independent industrial gas supplier in China that specializes in on-site gas supply. The group produces, supplies, and distributes a variety of industrial gas products to on-site gas supply customers and retail customers located in various regions of China. Its main gas products are oxygen, nitrogen, and argon. The group’s on-site gas supply customers refer to those customers for whom the group has installed its gas production facilities at or adjacent to its manufacturing plants, and supplies industrial gases directly to them. The group’s retail customers are generally liquid gas distributors that purchase industrial gases from the group from the spot market from time to time. 　　The company released its financial results for the first half of 2016, showing revenue of RMB 4.14 billion (the same unit is used throughout), a year-on-year increase of 9.0% ； Gross profit was 1.27 billion yuan, a 4.4% increase year-on-year, with an overall gross margin of 30.7% ； Profit attributable to shareholders was 390 million yuan, a decrease of approximately 7.0% on a year-on-year basis. Earnings per share were RMB 0.216, with an interim dividend of RMB 0.139 per share. The net present value of the company’s operating activities was 980 million yuan, representing a year-on-year increase of 80.0%. 　　SBI View: Despite the ongoing instability in market conditions, as a leader in China’s industrial gases industry, the company has built a solid foundation through years of consistent development and professional management. The group experienced stable development in the first half of 2016; during this period, it added a total of 20,000 standard cubic meters per hour of oxygen production capacity, laying the foundation for future growth. On the other hand, the group has 69 operational gas production facilities and 11 facilities under construction, with a total installed capacity of 1,962,300 standard cubic meters per hour, an increase of 8.3% on a year-on-year basis. In the first half of the year, the group sold a total of 1,2917 million standard cubic meters of industrial gases, representing a 12.4% increase compared to the previous year. The total sales volumes of oxygen, nitrogen, and argon gases were 5,612 million standard cubic meters, 4,914 million standard cubic meters, and 565 million standard cubic meters respectively. It is expected that all projects under construction will be completed by 2017, at which time the total installed capacity will exceed 2,100,000 standard cubic meters per hour. 　　On-site gas supply accounted for 83.7% of the company’s business revenue, amounting to 3.46 billion yuan, a 3.4% increase year-on-year; this revenue came primarily from customers in the steel, chemical, and non-ferrous metals industries. The group enters into long-term contracts with customers that include fixed-price terms and minimum gas supply commitments, in order to ensure stable revenue for the group. In the first half of the year, the group signed two new long-term on-site syngas supply contracts, as well as an operation service contract with China National Coal Energy Group Co., Ltd. 　　In the retail gas business, due to the ongoing downturn in the manufacturing sector, revenue from this segment amounted to RMB 400 million, representing a decline of around 1% on a year-on-year basis. Due to the downturn in the metal processing industry, the price per unit of oxygen dropped by 6.8% on a year-on-year basis; the prices of other gases, including nitrogen and argon, also declined as a result of the overall economic situation, falling by 3.2% and 2.3% respectively. 　　Financially, the group has a high level of debt; financial costs alone amounted to 440 million yuan in the first half of the year. With 1.05 billion in cash on hand, the group still carries debt of around 12 billion, meaning it faces considerable debt pressure, which imposes significant restrictions on the efficiency of its use of funds and on the development of new businesses. It is evident that the group’s capacity for further development faces relatively significant financial constraints. On the other hand, as an industry with severe overcapacity, the steel industry is seeing its business development decline due to shifting supply and demand dynamics. Gas production, particularly oxygen production, is an important raw material for the steel industry, and thus its business activities are also affected by the downturn in this industry. As an important industrial raw material, as the overall economic situation deteriorates and industrial development slows down, the demand for such raw materials will also decrease. Finding ways to achieve better development in this challenging environment for industrial growth is a major challenge that the group must address in the short term. 　　The company’s price-earnings ratio is currently 9.5 times, which is not high from a valuation perspective, and it is also at a historical low. In terms of risks, gas production is affected by the overall development of the industry; if industrial growth remains sluggish, it will have a certain impact on the group’s development. On the other hand, if the group’s debt level remains high, its pace of development will still need to be watched closely.