Overview

EcoGreen is engaged in research and development, production and sale of fine chemical products. EcoGreen's fine chemical products can be categorized into three main product groups, aroma chemicals, chiral pharmaceuticals raw materials and pharmaceutical intermediates and natural pharmaceutical raw materials. These fine chemical products are principally derived from botanic essential oils.

EcoGreen's Aroma chemicals are broadly used as ingredients in flavour and fragrance products, which are applied in a wide range of personal care and household products. Chiral pharmaceuticals raw materials and pharmaceutical intermediates are principally used in the production of chiral pharmaceuticals. Natural pharmaceutical raw materials are used as functional ingredients in the production of healthcare products.

For the year ended 31 December 2010, EcoGreen recorded a turnover of CNY 908 million, a 25% YoY increase. Excluding contributions from the supplementary trading and resource management business, core growth for our three major products reached 26%. Profit attributable to shareholders increased to CNY130 million by 21% from the previous year. Basic earnings per share reached CNY28.0 cents with a 21% YoY increase.

Since listing in 2000, EcoGreen exhibits a solid growth trend. Sales turnover increased from CNY75 million to CNY908 million in 2010, representing a CAGR of 27.8%. We are optimistic to EcoGreen's future growth due to the new technology and expansion plan. However, we are concerned about the increase in gearing would become a major risk factor in future.We forecast the 12-months target price of EcoGreen to be HK$2.9 and a “HOLD” rating, implying a 13% upside potential.

Take Away from the Investor Presentation

“Super Jet” system

EcoGreen introduced the new production technology "Super Jet" system in the seminar. The "Super jet" system was developed by EcoGreen together with a well-known universities in China. EcoGreen has already obtained the patent of this technology. The first industrial reactor using this technology has been built and will begin trial operations in March 2011. It will then be launched officially and begin contributing to the EcoGreen's revenue in 2011.EcoGreen expected that the new reactor could speed up the chemical reaction and reduce energy consumption. The existing 9 production lines will be gradually upgraded to the new reactor in 2011 and the total costs are about CNY 28 million. EcoGreen's production capacity of aroma chemicals can increase as much as 100% upon completion.

Changtai Factory

EcoGreen has completed the construction and installation work for the first phase of the Changtai expansion. A trial run has been conducted in April 2011. Phase I of the Changtai Plant and production will soon begin. Changtai Factory is mainly engage in the production of special chemicals including pharmaceutical intermediates, agrochemical and other functional chemicals. EcoGreen expected a captial expenture of CNY 57 million for completion of the first phase of Changtai Factory. The first phase of Changtai Factory will contribute CNY 300 – 500 million revenue to the group upon full operation. However, due to quantity output increased, the gross margins of pharmaceutical intermediates will be under pressure and drop from the current 48.9% to 45%.

Cost Control

In 2011, the market price of gum turpentine hovered at historic highs. This added considerable pressure to EcoGreen's operations in the areas of raw material procurement, inventory management, production costs and working capital. In order to control production costs, EcoGreen changed from annual contract basis to quarter contract basis, and maintained three months raw materials inventories. This will help EcoGreen to transfer part of the costs to customers and maintain a stable margin.

Decrease in Operating Cash Flow

In 2010 EcoGreen's net profit increased 20.7% YoY, but operating cash flow decreased 62.3% YoY. There were two major reasons. First, it was due to the increase in percentage of revenue from major customers contributed to EcoGreen` overall sales. EcoGreen generally provides to its` major customers a 90-day period account receivables, thus reducing the operating cash flow. Second, it was due to the increase in raw material and the implementation of cost management. EcoGreen invested more cash in raw material inventory, resulting in a decline in operating cash flow.

Rising Gearing and Interest Expense

EcoGreen completed a new three-year syndicated loan of US$31 million in 2010, and such financing will be reflected in the 2011 financial statements. Due to the considerable size of the loan, EcoGreen will experience a substantial increase in gearing and interest expense. We believe this will be the major risk of EcoGreen in near future. The proceeds of the loan will be invested EcoGreen's CNY 150 million capital expenditures in 2011, including cooperative projects, which costs CNY 50 million in total.

Valuation

Since listing in 2000, EcoGreen exhibits a solid growth trend. Sales turnover increased from CNY75 million to CNY908 million in 2010, representing a CAGR of 27.8%. We are optimistic to EcoGreen's future growth due to the new technology and expansion plan. However, we are concerned about the increase in gearing would become a major risk factor in future.

We forecast the 12-months target price of EcoGreen to be HK$2.9 and a “HOLD” rating, implying a 13% upside potential.

Financial Data

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