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Yingde Gases (OTC: YINGY)

Consistently Negative Free Cash Flow Business Earning Low Returns Relative to Cost of Capital and
Deceptive Bargain Valuation with 50%+ Downside

Investment Idea Submission for 2015 UChicago Seeking Alpha Case Competition
Research Analysts: Lavine K. Hemlani, Vincent Lo
Key Statistics* (as of April 24, 2015) in Hong Kong $, unless otherwise specified (FY December year-end)
Ticker
OTC: YINGY
~30% Price Appreciation
Share Price
US$8.84
13
in April Without Any
Change in Underlying
Market Capitalization
$12,625.7 mm
12
Business Value
Cash & ST Investments
$758.1 mm
11
Total Debt
$12,689.3 mm
10
Total Enterprise Value
$24,701.7 mm
EV/(EBITDA LTM Capex) 49.5x
9
Net Debt/EBITDA
3.7x
8
Steel Industry Exposure** 70.1%
7
Free Cash Flow
Negative for last
6
(CFO Capex)
8 out of 9 years
Cost of Borrow
~50 bps
5
52 Week High / Low
$12.25/ $6.23
4
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Dividend Yield
3.6%
Source: CapitalIQ, Company filings, Bloomberg. Financial year end as of December 31.
Note: Figures reported in RMB millions on company filings. 1 RMB = HK$ 1.25 and 1 RMB = US$ 6.21 as of April 26, 2015.
* All key statistics (e.g. Market Cap, EV, Debt, comps) throughout refer to Yingdes primary listing on the Hong Kong stock market (Ticker:2168)
in HK$ except for the stock price in US$ that relates to the secondary listing on the OTC markets.
**As of December 31 2014, small-to-medium sized steel mills accounted for 70.1% of total installed oxygen capacity under long-term contracts
from existing facilities. Guidance projects steel exposure to remain at 70%+ going forward.

Summary of Investment Thesis


11. Low Return on Capital Business Model Heavily Exposed to Stressed Steel Industry
22. Highly Leveraged Balance Sheet Accentuated by Eight Years of Consistently Negative Free Cash Flows
33. Stock Rose ~30% in Two days for no Fundamental Reason even as Yingde Has Structurally Weakened
44. At 11x Trailing P/E, Yingdes Bargain Valuation is Misleading
Disclaimers:
1. This write-up is submitted solely for the 2015 UChicago Seeking Alpha Undergraduate Case Competition
2. This write-up is only for information purposes and does not constitute an offer or recommendation of a security of any type at any time
3. The author does not hold a position and disclaims any obligation to notify the market of any changes
4. The reader agrees not to invest based on this write-up submitted solely for an investment idea contest and to perform his or her own diligence and
research and form an independent view
5. The write-up is merely the opinion of the author based on publicly available filings and extensive industry research

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Low Return on Capital Business Model Heavily Exposed to Stressed Steel Industry
Yingdes primary customer base is the mid-sized steel mill. Yingde is not immune to customer credit risk as evidenced by
multiple major steel mills refusing to make payments and operating below capacity.

Yingde supplies industrial gases to small-to-medium sized Chinese steel, chemical and nonferrous metal manufacturing clients. The
business relies on substantial leverage to fund upfront heavy capital expenditures to construct Air Separation Units (ASUs) near a
clients factory. ASUs separate air into more useful gas compounds (see Appendix, Exhibit 1 for full distillation process), which are
directly pipelined to the clients factory (Appendix A, Exhibit 2). Today, Yingde operates 64 facilities across China with an additional
27 already under-development (Appendix A, Exhibit 3). Yingdes massive upfront investment is compensated by long-term (~15 to 30
years) minimum-take-or-pay contracts (see Appendix A, Exhibit 4 for sample take-or-pay contract cash flows) that act, in some ways,
as a form of off-balance sheet financing for customers. These contracts dictate pre-determined prices and minimum purchase
commitments (typically at 80% of operational volume 1), and include price adjustment clauses to pass on inflationary pressure and
electricity cost volatility to end-users. Theoretically, such clauses should protect Yingde from margin pressure and volatile market
cycles. Additionally, Yingde sells any excess gas (not utilized by factories) to merchant clients (e.g. liquid gas distributors) on a spot
market basis. This side business is contingent on underlying market dynamics and free market price volatility.
Highly Exposed to Stressed Steel Sector
Yingdes steel clients2 account for a whopping 70.1% of sales. Given the recent excess capacity and inefficiency in the steel industry,
the government is attempting to structurally reform and consolidate steel mills. The shrinking market will most negatively impact
smaller3 steel mills, which are Yingdes primary customer base. Notably, steel mill profitability is already stressed with prices near a
20-year low (additional background on why the Chinese steel industry will increasingly slump in Appendix, Exhibit 4).
Channel checks indicate that two major steel customers (~57% of sales) have stopped making contractual payments, forcing Yingde
to file lawsuits. In fact, Moodys downgraded Yingdes bonds (January 2015) citing "its heavy exposure to the weak steel industry and
the outstanding litigation against a major customer 4. Despite bad debt provisions of RMB 233 million, the ongoing dispute has
caused overdue receivables to rise by RMB 460 million (Appendix A, Exhibit 6). Two additional customers (~5% of sales) have shut
down plants and stopped utilizing Yingdes gas. As a result, utilization levels have dropped to ~80% (~90% two years ago). Lower
capacity utilization coupled with high operating leverage has further deteriorated the capital-intensive firms profitability.
Yingde Generates Low Returns on Capital and Requires Major Upfront Capital Expenditures
By nature, Yingde operates in a low margin business where 80%+ of cost of sales is dominated by electricity and utility costs
(remaining costs include D&A and labor) of operating the ASUs (once built). As will be illustrated, managements incessant
deployment of capital expenditures (build, build, build mantra) to fund more upfront investments on ASU contracts has not
materialized into cash flows. Yingde generated 13.6% Return on Equity (ROE) in FY2014. What seems like a decent double-digit
figure for a terribly capital intensive business is actually being artificially bolstered by rapidly growing financial leverage. With ROE
dwindling down from 37.6%, leverage has also concealed Yingdes deteriorating underlying economics.
Using a DuPont analysis, we can deconstruct the elements driving the declining ROE. The companys net margins and asset turnover
have declined such that ROE without the impact of financial leverage (i.e. the equity multiplier) ratio (2.9x in FY2014) has been in the
~5% range since FY2012 (15.2% in FY2008) (Appendix, Exhibit 7). This single-digit return is significantly below the companys
presumed double-digit cost of capital (given the cost of debt itself on August 2014 issued 7.25% coupon high yield bonds maturing in
2020 is a staggering 14%+ yield5).

Source: Company filings, CapitalIQ, public news articles, industry reports, channel checks, sell-side reports, management.
1 http://www.citics.com.hk/file%5Cresearch%5C2989_Yingde%20Gases%202168HK%20-%203%20Jul%2012%20ENG.pdf
2 Industrial gas is used by steel mills in blast furnaces given its ability to lower coke expense ratios, raise iron production levels and increase furnace temperatures.
3 These small-to-medium sized steel mills are not targeted by larger international competitors (e.g. Praxair, Linde, Air Liquide). Yingde cannot compete with
international customers on larger projects as it is inferior on the basis of 1) supply capacity 2) product quality and 3) financing capacity.
http://www.gasworld.com/hot-topic-gases-in-china-whats-really-happening/5243.article
4 https://www.moodys.com/research/Moodys-downgrades-Yingde-Gases-to-Ba3B1-outlook-negative--PR_317137
5
As of April 27, 2015, Yingdes 7.25% coupon bonds maturing in 2020 have a yield of 14.233%. http://finra-markets.morningstar.com/BondCenter/Results.jsp
2

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Yingdes capital intensive business model has thus been consistently destroying value for shareholders with returns on capital being
materially below than the cost of capital, while the scale of the compounded value destruction has been obscured by unsustainable
levels of financial leverage.
In aggressively chasing growth, management has deployed excessive capital (average Capex as a percentage of sales was ~50% since
FY2008) to fund upfront capital investments (Appendix, Exhibit 8). Yingde is artificially bolstering revenues at the expense of already
negative free cash flows, forcing the reoccurring need to come to market and raise debt to stay alive. Earnings quality has materially
deteriorated as capital expenditures have typically been double that of operating cash flows and many multiples of D&A as seen
below. Diligence indicates that most, if not all, capital expenditures have been growth related rather than for maintenance
purposes. We wonder when, if ever, management will apply the brakes and stop enamoring inorganic revenue and EPS growth
targets with inefficient capital expenditures (return on capital is materially below cost of capital) that are incapable of generating
cash flows or creating value.
Yingdes Best Times are Over: Intensifying Competition is Evaporating Returns on Capital Further
Our primary diligence indicates that Yingde achieves a 14%+ Internal Rate of Return (IRR) on contracts, relative to a previously
secured 30%+6. Yingde is thus suffering (and will continue to suffer) from a material decline on its already weak return on capital
profile by aggressively signing new long-term contracts. While lower IRRs can be partly attributed to the weaker Chinese
macroeconomic sentiment as well as the overcapacity in the stressed steel sector, management cited intensifying competition (10+
new entrants since 2008), as the primary reason for EBIT and net margin contraction since FY2008 (Appendix, Exhibit 9). Thus new
contracts are compounding value destruction for shareholders at a faster rate than before as their expected return on capital will
deviate even further from weighted average cost of capital.
In the past, Yingde would aggressively secure contracts through price competition (i.e. through offering low cost services as
domestic ASUs are ~30% cheaper than international units, albeit at a lower quality). Such an advantage is thus no longer a key
differentiating factor since ruthless domestic competition can offer similar prices for identical end products (i.e. hot air). Notably,
one of Yingdes major suppliers, Hangyang, has entered the ASU service market and now directly competes with Yingde on bidding
for new projects. Intensifying competition in such a capital-intensive industry could translate into even more non-value accretive
capital expenditures in defending market share and staying competitive. As we will see in section two, the ability to raise or
refinance debt to fund more capital expenditures at this juncture is waning.

Highly Leveraged Balance Sheet Accentuated by Eight Years of Consistently Negative


Free Cash Flows

Yingdes negative FCF and wafer-thin cash balance will be insufficient to meet Capex, interest expense and imprudent capital
allocation. Liquidity shortfall could cause Yingde to default. Such a de-rating catalyst is likely given suppressed steel mill
payments on top of a concentrated customer base and will cause long term investor base to capitulate.
Rather Than Self-Finance Capex, Management Has Issued an Irresponsible Amount of Debt
Even after 12 years of operation, Yingde strictly refrains from funding its cash-guzzling growth through mediocre self-generated cash
flows (as if the company is a fast growing, start-up operation). Yingdes balance sheet is extremely levered at 3.7x Net Debt/EBITDA
posing major liquidity and bankruptcy risks. Alarmingly, the companys EBITDA less capital expenditures to interest ratio is below 1x
(Appendix, Exhibit 10). In fact, Yingdes Capex adjusted interest coverage ratio has been negative for every year except FY2014!
Since FY2008, Yingdes total debt spiraled from RMB 934 million to RMB 9.8 billion (60%+ CAGR). Yingdes balance sheet will keep
weakening as management has to come to market to stay alive under the mounting pressures of cash-strapped customers choking

Source: Company filings, CapitalIQ, public news articles, industry reports, channel checks, sell-side reports, management.
6 Page 88 - Deutsche Bank China Chemicals Tour Industry Report (21 March 2014) discusses lower (relative to previous years) project IRR with Yingdes management.
http://www.wisburg.com/wp-content/uploads/2014/09/%E5%BE%B7%E6%84%8F%E5%BF%97%E9%93%B6%E8%A1%8C-China-Chemicals-Tour%EF%BC%9AThegrowth-enggine-is-modestly-returning.pdf
3

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

payments, intensifying domestic competition and an incessant focus on unnecessary, non-value accretive market share, installed
capacity and revenue growth targets (Appendix, Exhibit 11).
Amidst Yingdes accumulation of leverage and eight years of negative free cash flows, Moodys cut the corporate family rating for
Yingde in January 2015 from Ba2 to Ba3 7. Investors must recognize that the ratings cut can increase Yingdes borrowing costs and
make it increasingly difficult to raise future funds in the capital markets (reducing future refinancing capacity). Despite the January
2015 rating cut, Yingde has done little to improve the pressured cash flow situation prompting Moodys to reconsider another rating
cut in March 20158. Another rating cut (or a downgrade from other credit rating agencies) could act as major de-rating catalyst for
Yingdes long-term orientated mutual fund investor base to capitulate (see section four).
Despite its alarming leverage, management displays no intention of halting the accumulation of leverage to fund heavy capital
expenditures for new on-site customer contracts. Such imprudent capital stewardship has already led to previously breached debt
covenants. In fact, in FY2012, Yingde breached a covenant causing ~30% of debt to be paid immediately, creating massive strain on
its liquidity (Appendix, Exhibit 12). Ultimately, the covenant breach was only resolved when Yingdes lender later decided to alter the
agreement and waive the breach.
Potential to Default On Loans Given No Cash Flows and Poor Cash Collection from Weak Customers
Despite their inability to generate cash flow, Yingdes management has irresponsibly followed the build, build, build mantra to
aggressively book new contracts, which is burning through their finances. Yingdes inability to later collect payments from such
aggressively acquired customers, although masked by rising revenues, weighs heavily on cash flows. Whatever cash they do manage
to scramble, management immediately deploys on capacity expansion (or uses as pedestal to raise more debt), at the cost of
shareholder value creation, all for the sake of chasing bolstered top-line revenues and earnings growth targets.
The lack of cash flows is particularly concerning for Yingde because of its excessively accumulated debt. Not only do short-term
borrowings and current portion of long-term borrowings (RMB 1.7 billion) account for ~19% of the total borrowings (RMB 9.1
billion), but given their 520 million RMB finance cost recorded in FY2014, the liquidity outlook for Yingde is dire at best (Appendix,
Exhibit 13). With a Capex-adjusted interest coverage ratio of 0.9x and remaining cash balance of RMB 606.4 million, investors should
be weary of just how Yingde is going to cover its upcoming interest and operational expenses (including total accounts payable of
RMB 2.4 billion!).
To make matters worse, in attempting to protect its stock price, management has been raising Yingdes dividend payout (FY2014:
40%) and is engaging in a major share buybacks (RMB 240 million authorized October 2014). Comically, management has paid over
RMB 1.0 billion in dividends in the last four years and already expensed more than RMB 60 million of share buybacks in FY2014.
Such capital allocation decisions are alarming (and somewhat puzzling) given that the cumulative value of negative free cash flows
have already recorded a net deficit of over RMB 9.0 billion since FY2008. Imprudent capital stewardship is amplifying liquidity stress
to Yingdes already wafer-thin cash balance and will further wane access to capital markets.
Given its major customer and steel end market concentration risks outlined earlier, Yingde is at a key inflection point where only
one more customer payment problem could force the company to potentially default on its loans and/or go into bankruptcy. Such
a de-rating catalyst is especially more likely considering that the January 2015 Moodys credit downgrade will make refinancing
increasingly difficult. The company has not and cannot resort to raising equity to save the day from a potential liquidity shortfall (last
material equity issuance was during the IPO in FY2009). As such, it is unlikely that management will be able to continue to kick the
can down the road for much longer as Yingde begins to crush under its own weight.

31. Stock Rose ~30% in Two days for no Fundamental Reason even as Yingde Has

Structurally Weakened
Between April 8th/10th, Yingdes primary HK stock listing appreciated ~30% from ~HK$5.9 to HK$7.5, without any changes to the
underlying value of the business, making Yingdes OTC a timely short opportunity
7
8

https://www.moodys.com/research/Moodys-downgrades-Yingde-Gases-to-Ba3B1-outlook-negative--PR_317137
https://www.moodys.com/research/Moodys-Yingde-Gases-ratings-pressured-by-weak-cash-flow-in--PR_321078
4

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Change in Regulation (not Intrinsic Value) Caused Influx of Hot Capital Driving HK Markets to 7 Year High
Yingdes stock experienced an unprecedented, abrupt upward appreciation between April 8th and April 10th creating a timely short
investment opportunity. We do not see this price action as a reflection of any paradigm shift in Yingdes existing business operations
or future growth potential. Instead, we attribute this ~30% share price increase to the ramping up of the Hong Kong StockConnect
program, which allows mainland investors to invest in Hong Kong shares, and Hong Kong investors to purchase Chinese shares.
While the program was originally launched in November 2014, many investors were hesitant to utilize the opportunities offered by
this program given regulatory risks and strict qualification requirements. As a result, the maximum (RMB 10.5 billion) daily quota
provided by the program was never fully utilized up until recently.
Early April saw a surge in southbound trading volume because Chinese regulators said money managers no longer need to be part
of the Qualified Domestic Institutional Investor program to invest in Hong Kong shares via the city's exchange link 9. This change in
regulation allowed China based mutual funds to finally access investment opportunities causing a rapid influx of new hot capital
flows into the Hong Kong stock market.
Chinese investors drove the Hang Seng Index to its highest level in seven years, and the Hang Seng China Enterprises Index (index of
mainland companies listed in Hong Kong) also rose to its highest level since 2011. Presumably, Yingde was a target for many mutual
funds (as a result of many perceived salient investment features masked by a deceptive bargain valuation and poor quality of
earnings, to be outlined further in section four), and therefore, its price was heavily affected by this tweak in regulation. Comparing
Yingde vs. the Hang Seng Indexs recent price action illustrates this point clearly (Appendix, Exhibit 14).
We can only assume that the over-hyped promise of exponentially rising booked revenues, installed production capacity, market
share and total number of facilities (Appendix A, Exhibit 7) can be thought to be what captured pent up Chinese mainland investor
appetite during the recent regulation change. In fact, such eagerly disclosed growth orientated factors were arguably driving the
hot capital inflows that caused Yingdes IPO book to be oversubscribed by an unbelievable 37.44x10 back in October 2009. To some
degree, investor over-excitement can be attributed to an unblemished history of promising statements from management such as:
Yingde will double its production capacity in six to 24 months and investors are expected to benefit from the growth of the company
in two years 11 - Yingdes CFO Xu E (mentioned during stock market IPO opening).
As already discussed, such exponential low return on capital growth has a track record of destroying rather than creating value for
shareholders. Evidently, management has prioritized growth-influenced metrics (like installed capacity, number of facilities, EPS
etc.,) over maximizing shareholder value realization and generating free cash flows. As a comical testament, the companys share
price today is equal to its IPO price (HK$7.0) on October 8, 2009! Observing the chart, Yingdes share price spike occurs at around the
exact same time that the Hang Seng Index takes off. The price action is also accompanied by a hike in volume. As such, we do not see
the share price increase as a reflection of any changes in Yingdes fundamentals. We believe that the increase in Yingdes share price
is entirely unjustified, especially in light of its structurally weakening business and deteriorating balance sheet. Given the recent
January 2015 Moodys downgrade amidst such worsening business and customer economics, equity markets are evidently defying
the logic of debt capital markets.

At 11x Trailing P/E, Yingdes Bargain Valuation is Misleading


At HK$7.0, we believe Yingde presents at least 50% downside, realized over a 12 month horizon as customer payments
increasingly falter amidst unrealistic consensus estimates on a weak balance sheet

P/E is Deceptive Given Grossly Inflated Accounting Earnings Relative to Economic Realism
What investor would not find a utility-type company offering predictable and stable long-term contracts, trading at 11x P/E ratio
and 3.6% dividend yield highly attractive? Investors are attracted to the company as it seemingly operates (at a significant discount)
analogous long-term minimum-take-or-pay contracts that other established global industrial gas companies (e.g. Praxair, Linde, Air
Liquide) offer. Such a business model is considered attractive due to the usual salient investment characteristics like high switching
9

http://www.bloomberg.com/news/articles/2015-03-30/china-stock-index-futures-rise-on-pboc-easing-signal-silk-road
http://www.asiape.com/apergc/apergc_issues/apergc0911.html
11
http://www.chinaknowledge.com/Newswires/News_Detail.aspx?type=1&NewsID=27729
10

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

costs, high barriers to entry, amicable oligopolistic industry and low risk of business obsolescence. However, Yingdes
bargain valuation is deceptive given no cash flows, excess leverage and ballooning receivables.
However, investors should be cautious to value the company based on its rear-view mirror. As it has been demonstrated in above
sections, we expect Yingdes future earnings to be drastically different from its past earnings due to rising steel mill counterparty
risk, waning financing and refinancing capacities (that are inordinately required for future expansion) and unfavorable market
dynamics. Yingdes poor operating economic reality has materially diverged from its reported accounting earnings, which are
inherently subject to the whims of managements over-hyped growth promises. Thus, we note that $1 of reported accounting
earnings is not necessarily $1 of true economic earnings (i.e. more like 50 cents per dollar).
Yingdes Quality of Earnings is Rapidly Deteriorating for Several Reasons
Earnings quality is poor due to the following reasons: 1) negative free cash flows are materially deviated from reported net
income; 2) accounts receivables have risen twice as fast as sales; 3) aggressive revenue recognition (bill and hold) policies mask
customer credit risk; and 4) consistently massive outpacing between capital expenditures and D&A by many multiples (as outlined
in section one).
Notably, Cash Flow from Operations has stayed relatively stagnant at ~RMB 900 million between FY2011 and FY2014 while EBITDA
almost doubled during this period (Appendix, Exhibit 15). EBITDA does not take into consideration the rising working capital
requirements of greater number of facilities as well as ballooning interest expense. This earnings quality discrepancy was already
cited by Moodys negative ratings outlook12.
Moreover, Yingdes capital-intensive nature has caused free cash flows to be consistently negative for the last 8 out of 9 years
(Appendix, Exhibit 16). Primary diligence indicates that Yingde continues to expand capacity with expected FY2015 capital
expenditures of ~RMB 2.0 billion, particularly into steel projects, even amidst the sectors obvious overcapacity. As such, FCF is very
likely to remain negative while managements enamored top-line revenue and EPS accounting growth (that do not create value for
shareholders) will persist until they can no longer kick the can down the road through debt refinancing.
Finally, as a typical warning sign for investors, accounts receivable has grown significantly faster relative to top-line revenues.
Between FY2008 and FY2014, accounts receivable grew at 68.0% CAGR from RMB 127 million to RMB 2.8 billion whereas top-line
revenues grew at 32.7% CAGR from RMB 1.4 billion in FY2008 to RMB7.7 billion in FY2014 (Appendix, Exhibit 17).
Clearly, Yingde has extended credit too easily to certain on-site stressed steel customers in an effort to juice up business results and
pad short-term financial metrics (particularly top-line revenue growth). Accounting earnings are thus being distorted by a bill and
hold aggressive revenue recognition policy that masks the difficulties in collection of cash payments. In fact, in the last four years,
Days Sales Outstanding (Appendix, Exhibit 6) has risen from 29 to 72 days indicating the rising difficulty of collecting cash payments.
Further, the company is filing a lawsuit against a major steel mill customer (as outlined in section one) for RMB 406 million+ of
overdue receivables and has stopped receiving payments from other major steel mill customers, further choking cash flows relative
to inorganically booked revenues (from higher debt-fueled facility count).
Yingde Should be Valued on the Basis of Normalized Free Cash Flows Rather than Accounting Earnings
Instead of looking at reported earnings, which can be manipulated in a whole host of ways through Yingdes aggressive accounting, a
more accurate yardstick would be using Yingdes cash flows. Ultimately, cash is what allows Yingde to continue to operate, pay off its
debt, and create value for shareholders (or at least a facade of creating value). Not surprisingly, valuing Yingde on a normalized cash
flow basis actually makes it seem overvalued as will be discussed.
In order to better reflect the returns available to shareholders, we believe that the EV/Normalized FCF multiple is much more
indicative of Yingdes true valuation. Unfortunately, in Yingdes case, since they have not turned positive FCFs for the last 8 years, an
EV/FCF multiple is not meaningful.
Instead, we turn to the EV/LTM Operating Free Cash Flow multiple, where we adjust EBITDA for LTM capital expenditures (Appendix,
Exhibit 18). Using this multiple, we find that Yingde trades at 49.5x, compared to a peer median of 24.5x! Thus, on a more
12

https://www.moodys.com/research/Moodys-downgrades-Yingde-Gases-to-Ba3B1-outlook-negative--PR_317137
6

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

comparable scale, despite being in a worse financial and operating position compared to its multinational competitors, Yingde still
manages to trade at a valuation of more than twice that of its peers. The stock appears to be grossly overvalued (compared to
peers) when factoring in capital expenditures.
Moreover, at a 3.7x Net Debt/EBITDA Yingde is the most levered gas provider amongst its peers by a wide margin (median multiple
of 2.2x). Competitor capital intensity (Appendix, Exhibit 19) is materially lower than that of Yingde without the significant risks of
steel mill counterparty risk and customer credit exposure. Furthermore, Yingdes competitors have a diversified revenue stream, are
generating positive free cash flows, conduct more efficient and sizable global operations and utilize multiple modalities of gas
transmission (e.g. on-site, cylinder, pipeline see Appendix, Exhibit 2). Yingde does not even deserve to trade even with its
competitors, let alone maintain a large premium.
50%+ Implied De-Rating as Investors Capitulate to Faltering Customers and Unsustainable Debt Burden
We estimate that for a terribly capital intensive business generating no cash flows, artificially boosting reported earnings through
aggressive accounting and yielding sub-par single digit returns on capital materially below cost of capital (after stripping out FY2014
financial leverage ratio of 2.9x and considering reported earnings are inflated), investors should be willing to pay no more than a
normalized (stripping out non-recurring items) P/E of between 5 6x, implying at least a ~40% downside to the near 52-week high
stock price of USD $8.65 (Appendix, Exhibit 20). Given that the business has been losing money across cycles, we are confident
about this valuation, especially considering that we have not even accounted for the possibility that Yingde could very well end up
defaulting on its loans, leaving us with a stock price near USD $0. Several de-rating catalysts exist (lost lawsuit over overdue
receivables, further downgrades, potential default) to realize the implied 50%+ downside over a 12-month horizon (See Appendix,
Exhibit 20 for a detailed discussion of the viability of such catalysts).
At HK$7.0 investors are grossly over-paying 49.5x EV/(EBITDA Capex) for a leveraged business struggling with cash-strapped
steel mill customers, ballooning overdue receivables, poor quality of earnings, intensifying competition headwinds, several
tangible de-rating catalysts and consistently FCF negative for the last 8 years

Risks to Investment Thesis:


Share Buyback: On October 30, 2014, Yingdes management announced that they intended to buy back shares as they believed had
been trading at a level which significantly undervalues the Companys performance and underlying value. Under Yingdes
repurchase mandate, the Board is authorized to spend up to HK$300 million to repurchase shares up to 10% of the total shares
outstanding. The share buyback on an already leveraged balance sheet may act as a defensive hurdle against a short position in the
company.
Merger or Acquisition Target: The Chinese gas industry is dominated by large MNCs (e.g. Air Liquide, Linde, Air Products etc.,) sitting
on cash piles. Given its current market position and mid-sized market cap, Yingde could become a potential acquisition for one of
the larger multinationals looking to increase their foothold in China. For example, Linde acquired BOC for US$14 billion in 2006
allowing for rapid Chinese market share gains 13. In such an event, Yingde could be acquired at a sizeable premium to current share
prices. However, any company looking to acquire Yingde would also have to take on its substantial debt balance, low return on
capital (relative to cost of capital) profile and stressed primary customer base. Such considerations dampen the probability of an
acquisition.
Merchant Sales are a Swing Factor in Overall Profitability: Our channel checks indicate that merchant market sales (11.8% of
FY2014 sales) generate substantially higher margins relative to on-site contracts. A way to think of why merchant margins are higher
is analogous to the "cigar butt" approach touted by Warren Buffett where any excess capacity not used by customers essentially
represents a "free puff" that can be sold to other customers. Recently , the volume of merchant gas sold as % of total gas sold has
been on the decline. Merchant revenues also suffered at the expense of lower merchant prices (particularly argon as seen in
Appendix, Exhibit 22). However, if merchant gas prices recover significantly, Yingdes operating profits could unexpectedly
experience an unpredictable, sizeable upswing that would allow the company to surprise earnings targets (Appendix, Exhibit 23).
Source: Company filings, CapitalIQ, public news articles, industry reports, channel checks, sell-side reports, management.
13
http://www.bloomberg.com/news/articles/2015-03-30/china-stock-index-futures-rise-on-pboc-easing-signal-silk-road
7

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Appendix
Exhibit 1: Air Separation Process
Yingde Uses Cryogenic (Low Temperature Distillation) Process for Air Separation

Source: Yingde Global Offering Prospectus (2009).

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 2: Yingde Supply Chain Mix


Yingde Offers Customers Industrial Gases Through Various Supply Modes (Pipeline, compressed, liquid)
On-Site Gas Supply is
primary mode of gas
transport by
situating ASU near
facility and
pipelining over the
supply.

Any excess gas


is sold in
merchant
market on
spot market
basis

Source: Company filings.

Exhibit 3: MTOP Contracts Cash Flow Analysis


MTOP Business Model Achieves Cash Flow Stability ~3 years After Intensive Upfront Capex
Channel Checks
indicate that Yingde
incurs RMB 200
300 million for every
onsite customer
with average lead
time (construction
phase) of 12 months

Year -1

Year 0

Year 1

Construction
commences

Upfront Capital Investment

Year 2

Year 3

Year 30

Supply
Commences

Profit/Loss

Revenue Inflow = Volume x Unit Price

Contracts produce an
annuity-like stream of
payments that cover
start-up/relevant
costs to provide
incremental return.
Excess capacity is
sold to merchant
market 2 -3 years
after on-site
commencement

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 4: Additional Background Information on China Steel


Chinas crude-steel production is set to declineWhy? Two reasons; consumption that has passed the
peak and exports cannot maintain high increases. Im sure steel production will decrease.
Deputy General of China Iron & Steel Association (CISA)
Volatile Steel Industry Suffers from Overcapacity and is Undergoing Multi-Year Structural Consolidation
Chinas steel industry had previously boomed (15% CAGR between 2000 and 2013 14) given the massive
industrialization investments in infrastructure and real estate. The golden boom period in addition to the
slowing economic growth (which relied heavily on steel manufacturing) has recently created an
unprecedented imbalance between demand supply and demand.
Global steel overcapacity is estimated at 300 to 600 million tones, of which over half is attributed to Chinese
steel manufacturing15. Notably, such a level of overcapacity will take years (if not decades) to completely
unwind, particularly as the majority (~50%) of steel is produced by Chinese Stated Owned Enterprises
(SOEs). The industry is expected to grow by a meager 0.8% (1.0% in 2014)16, if at all.
Chinese steel mill profitability has already been hard hit with prices near a 20 year low17. The government has
drafted several exit mechanism incentives for many loss-making, poorly-regulated mills with huge sunk costs
as it attempts to slash capacity and raise efficiency.
Industry-wide consolidation will induce additional headwinds, especially on tier 2 & 3 clients, who are already
facing deteriorating capacity utilization. Exacerbating the issue of overcapacity is the inaccuracy of official
figures from the Chinese National Bureau of Statistics. In fact, one estimate illustrates that Chinese steel
capacity was under-quoted by 40 million tones18 (approximately equivalent to Germanys annual production).

Source: Company filings, CapitalIQ, public news articles, industry reports, channel checks, sell-side reports, management.
14 http://www.ft.com/cms/s/0/ea7af92e-b1e9-11e4-8396-00144feab7de.html#axzz3Y0A71no6
15 http://marketrealist.com/2015/01/massive-overcapacity-plague-steel-industry-2015/
16 Yingde Global Offering Prospectus (2009..
17 http://www.cnbc.com/id/102525697
18 The China Iron and Steel Association (CISA) said in August that crude steel output stood at 822 million tonnes last year, more than 40 million tonnes higher than
official figures from the National Bureau of Statistics http://www.scmp.com/business/commodities/article/1667650/china-steel-data-masks-scale-overcapacity
10

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 5: Production Facility Network (As of December 31, 2014)


Yingde Operates 64 Facilities (61 Of Which Were On-Site) And Has Plans For Developing Another 27 Facilities

Source: Company filings.

Exhibit 6: Overdue Accounts Receivables Rising & Days Sales Outstanding Doubling
Accounts Receivable Past Due and Days Sales Outstanding Rising Exponentially
1,000

800
600
400
200

29
0

Past due accounts receivable


have risen from negligible in
2008 to RMB 837 million in
2014 as customers struggle
to make payments on time.
During the same period, the
average cash collection
period has more than
46
36 from 29 to 62
doubled
days.
101
57

72
837

80
70
60

52
54
49

50
329

40

210
111

30

20
2008

2009

2010
AR Past due

2011

2012
Collection Period

2013

2014

Source: Company filings

11

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 7: Declining ROE & DuPont Analysis


ROE has Materially Declined Since FY2008, Even After Being Artificially Boosted by Rising Financial Leverage
Net Income

2008

2009

2010

2011

2012

2013

2014

426.0

571.0

577.2

831.0

770.0

908.0

904.0

34.0%

1.1%

44.0%

(7.3%)

17.9%

(0.4%)

1,133.1

3,775.5

4,352.8

4,991.3

5,486.0

6,124.7

6,635.6

233.2%

15.3%

14.7%

9.9%

11.6%

8.3%

15.1%

13.3%

16.6%

14.0%

14.8%

13.6%

Growth Over Prior Year


Shareholders Equity
Growth Over Prior Year
Return on Equity

37.6%

DuPont Deconstruction Shows Returns With and Without Impact from Financial Leverage

Rising Leverage Pads Returns


Net Income
Sales
Net Profit Margin %
Total Assets
Asset Turnover (Sales/Assets)
Shareholders Equity
Returns W/o Financial Leverage
Financial Leverage (Assets/Equity)
Return on Equity
Total Debt/EBITDA

Source: Company filings.

2008

2009

2010

2011

2012

2013

2014

426.0

571.0

577.2

831.0

770.0

908.0

904.0

1,413.1

2,067.0

3,007.2

4,251.1

4,976.2

6,904.6

7,743.2

30.1%

27.6%

19.2%

19.5%

15.5%

13.2%

11.7%

2,809.8

5,674.2

7,634.7

9,824.8

14,793.1

16,551.8

19,250.8

0.50x

0.36x

0.39x

0.43x

0.34x

0.42x

0.40x

1,133.1

3,775.5

4,352.8

4,991.3

5,486.0

6,124.7

6,635.6

15.2%

10.1%

7.6%

8.5%

5.2%

5.5%

4.7%

2.48x

1.50x

1.75x

1.97x

2.70x

2.70x

2.90x

37.6%

15.1%

13.3%

16.6%

14.0%

14.8%

13.6%

1.60x

1.70x

1.70x

2.40x

4.60x

3.90x

4.00x

The faster Yingde deploys debt-funded Capex with returns on capital < cost of capital, the faster it
destroys shareholder value (even if revenue and accounting EPS growth meet expectations treadmill)

Exhibit 8: Cash Flows vs. Revenues vs. D&A


At the Expense of Free Cash Flows, Yingde has Deployed Heavy Capex to Bolster Top-Line Revenues & EPS
Capex to Fund New ASUs

2008

2009

2010

2011

2012

2013

2014

670.0

888.0

1,930.0

2,178.0

3,782.0

2,691.0

2,013.0

32.5%

117.3%

12.8%

73.6%

(28.8%)

(25.2%)

1,411.7

2,065.7

3,004.9

4,240.3

4,955.9

6,865.5

7,716.2

47.5%

43.0%

64.2%

51.4%

76.3%

39.2%

26.1%

Growth Over Prior Year


Total Operating Revenues
Capex as % of Revenues
Cash From Operations

514.0

478.0

732.0

975.0

919.0

954.8

925.0

130.4%

185.8%

263.7%

223.4%

411.5%

281.8%

217.6%

Depreciation & Amortization

76.9

114.7

159.0

279.4

357.6

516.9

695.1

Capex as multiple of D&A

8.7x

7.7x

12.1x

7.8x

10.6x

5.2x

2.9x

Capex as % of CFO

Source: Company filings.

Declining earnings quality as


Capex has outpaced D&A for
last 9 consecutive years

8 Year Average

49.7%

244.9%

7.9x

CapEx as % of sales has widely fluctuated from 26.0% to 76.0%

12

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 9: EBIT & Net Margins


Yingdes Net and EBIT Margins have Materially Dwindled Since FY2008
34.7%
35.0%

30.0%

25.0%

15.0%

5.0%

26.2%

30.2%

25.7%

Take or pay contracts with cost


passing clauses do not protect against
company-wide declining EBIT and net
margins
22.2%

27.6%

19.2%
Intensifying competition has
deteriorated margins and returns
as changing landscape offers
lower IRRs than previously signed
contracts
2008
2009
2010
EBIT Margin %

22.2%

23.3%

19.6%
15.5%
13.2%

2011
2012
Net Profit Margin %

2013

11.7%
2014

Source: Company filings.

Exhibit 10: CAPEX adjusted Interest Coverage


FY2014 Interest Coverage is Positive for the First Time Since FY2008
Cumulative (EBITDA Capex) of negative RMB 4.4 billion since FY2008
EBITDA
Finance Costs
Capex to Fund New ASUs
EBITDA - Capex
(EBITDA - Capex)/Interest Coverage

2008

2009

2010

2011

2012

2013

2014

567.0

736.0

1,124.0

1,367.0

1,450.0

2,024.0

2,480.0

58.5

61.2

128.2

126.7

209.8

381.6

520.0

670.0

888.0

1,930.0

2,178.0

3,782.0

2,691.0

2,013.0

(103.0)

(152.0)

(806.0)

(811.0)

(2,332.0)

(667.0)

467.0

-1.8x

-2.5x

-6.3x

-6.4x

-11.1x

-1.7x

0.9x

Source: Company filings


Yingde has barely generated enough EBITDA, let alone free cash flow, to cover Capex

13

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 11: Misleading Results of Excessive Growth Capital Expenditures


On the Surface, Heavy Capital Expenditures Have Resulted In Dramatic Revenue, Market Share, Capacity
and Facilities Between 2009 and 2014
Yingdes proudly
markets its
unprecedented
~3 fold growth
in revenue on its
2014 Investor
Presentation

Revenue (RMB mln)


10000

7716

6866
5000

3005

4956

4240

0
2010

2011

2012

2013

Capacity and Existing Facilties

2000

2014

1749

1566
1500
1000
500

940
693

55

57

1042

45
35

41
36

21

28

2010

2011

25

15
2012

Capacity ('000 Nm/3 hr)

Proudly markets
its on-site gas
market share
gains based on
tonnage through
aggressively
signing new
contracts

2013

2014

Existing Facilities

Installed oxygen
capacity grew
from 0.4 million
Nm3/ hr to 1.75
million Nm3/ hr
(322% growth
rate). installed
oxygen capacity
grew from 0.4
million Nm3/ hr
to 1.75 million
Nm3/ hr (322%
growth rate).

On-Site Market Share by Revenue

60%

46%
40%

65

36%

40%

42%

30%

20%

0%
2010
Yingde

2011
Linde-BOC

2012
Air Liquide

2013
Praxiar

2014
APCI

Despite a decline in the industrial gas market growth rate from 2012 to 2014, Yingde has managed to outperform the China
industrial gas market average. Trevor Strutt, COO
Source: Company filings.
Note: Nm3/ hr refers to normal cubic meter per hour, a flow rate metric describing the level of flow under standard conditions of
zero degrees Celsius and 1 atmospheric pressure.
14

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 12: Debt/EBITDA Covenant Levels


Yingde has Previously Breached Covenants and Total Debt19/EBITDA has Spiraled
Domestic Debt
Covenant: 4.5x
Debt/EBITDA
International Debt
Covenant: 4.75
Debt/EBITDA

5.0

4.6

4.0
3.0
2.0

3.9

4.0

2013

2014

2.4
1.6

1.7

1.7

2008

2009

2010

Breached debt
covenants in 2012
(later removed)
that required 30%
of outstanding
debt to be paid

1.0
0.0
Debt/EBITDA

2011

Domestic Covenant

2012

International Covenant

Source: Company filings.

Exhibit 13: Borrowing Breakdown


Relative to RMB606 Million Wafer-Thin Cash Balance, Yingde has Major Long-Term Borrowings Upcoming
Investors must wonder how Yingde
will pay for short-term and upcoming
debt (and RMB 2.4 billion payables)
when EBITDA adjusted Capex interest
coverage is not even 1x.

Long-term
borrowings have
grown at 62.5%
CAGR between
FY2008 and
FY2014
(FY2008: RMB
400.4 million)

Source: Company filings.

Source: Company filings, CapitalIQ, public news articles, industry reports, channel checks, sell-side reports, management.
19
Total Debt = Total Borrowings + Current Portion of Long Term Borrowings + Obligations under Finance Leases.
15

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 14: Yingde Share Price vs. HSI


Yingdes Stock Price Appreciated From HK Connect Program and Not Improvement in Fundamentals

Yingde Gases vs. HSI


(Feb 2015 - )
30000

10
~30% Price Appreciation
Between April 8th /10th
Without Any Change in
Fundamentals

28000

9
8

26000

24000

6
5

22000

20000

Volume (Yingde)

Volume (HSI)

HSI

Yingde

YINGY

Exhibit 15: EBITDA vs. Cash Flows from Operations


Despite Robust Revenue & Accounting Earnings Growth, EBITDA And CFO Has Been Increasingly Divergent
EBITDA
EBITDA Margin %
CFO
CFO as % of EBITDA

Source: Company filings.

2008

2009

2010

2011

2012

2013

2014

567.0

736.0

1,124.0

1,367.0

1,450.0

2,024.0

2,480.0

40.1%

35.6%

37.4%

32.2%

29.1%

29.3%

32.0%

514.0

479.0

732.0

974.0

919.0

955.0

925.0

90.7%

65.1%

65.1%

71.3%

63.4%

47.2%

37.3%

Earnings quality is increasingly deteriorated with wider & wider discrepancy

16

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 16: Free Cash Flows


Yingdes Business Model has Realized Increasingly Negative Free Cash Flows for 8 out of last 9 Years
FY2006 was the only FCF
positive year (barely)
426
199
155

2000

831

577

571

908

770

904

Earnings
quality
deterioration
with markedly
different
negative FCF
to net income

0
91
(483)

(156)

(410)
(1198)

-2000

(1088)

(1203)

(1736)

Capex to fund ASUs are


typically twice that of cash
flow from operations and
distort the reliability of
accounting earnings

-4000

(2863)

Since 2008, the accumulation


of negative FCF has burnt a
hole of over RMB 9.0 billion!

-6000
2006
2007
2008
Cash From Operations

2009
CapEx

2010

2011
2012
Free Cash Flow

2013
2014
Net Income

Source: Company filings.

Exhibit 17: Receivables


Aggressively Recorded Receivables Grew More than 2x as Fast as Booked Revenues Since FY2008
Trade & Other Receivables

2008

2009

2010

2011

2012

2013

2014

126.7

371.6

748.9

1029.2

1319.7

1792.4

2844.6

193.3%

101.5%

37.4%

28.2%

35.8%

58.7%

2065.7

3004.9

4240.3

4955.9

6865.5

7716.2

46.3%

45.5%

41.1%

16.9%

38.5%

12.4%

Growth Over Prior Year


Total Operating Revenues

1411.7

Growth Over Prior Year

08' - 14' CAGR


68.0%

32.7%

Source: Company filings.

Exhibit 18: Adjusted EV/EBITDA vs. Competitors


Comparable Companies Analysis: Discounted P/E and EV/EBITDA are Highly Misleading

Company Name
Yingde

Share Price
(Trading
Currency)

Price-toEarnings

Enterprise
Value
(US$)

LTM
EBITDA
(US$)

EV/LTM
EBITDA

LTM
Capex
(US$)

LTM
Implied
EBITDAUnlevered
LTM
LTM
EV/(EBITDANet
Free Cash
FCF
Capex LTM Capex) Debt/EBITDA Flow (US$) Yield

HK$7.00

11.3x

3,199.2

389.6

8.2x

325.0

64.6

49.5x

3.7x

(171.7)

NM

Linde

EUR 180.13

30.5x

46,236.8

4,031.5

11.5x

2,125.4

1,906.1

24.3x

2.2x

1251.8

2.7%

L'Air Liquide SA

EUR 119.30

24.7x

51,776.1

4,177.1

12.4x

2,065.4

2,111.7

24.5x

1.7x

994.8

1.9%

Praxair

US$122.46

21.4x

45,038.4

3,885.0

11.6x

1,689.0

2,196.0

20.5x

2.4x

1315.8

2.9%

Air Products

US$150.06

31.6x

38,450.4

2,662.1

14.4x

1,739.6

922.5

41.7x

2.2x

36.8

0.1%

Median

24.7x

11.6x

24.5x

2.2x

(Discount)/Premium to Peers

-54%

-29.2%

102.0%

68.2%

Source: CapitalIQ as of April 25, 2015.


17

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 19: Yingde vs. Competitors (Capital Expenditures as a % of Revenue)


Yingdes Capex has been Aggressively Growth Driven and as a Percentage of Sales Outrivals Peers
100%
Yingdes capital intensity is
more volatile and much
greater relative to
international competitors

80%

60%

40%

20%

0%
2007

2008
Yingde

2009
2010
2011
Air Liquide
Linde-BOC

2012
APCI

2013
Praxair

2014

Source: Company filings

Exhibit 20: Implied Share Price


Several De-rating catalysts Could Cause Yingde to Drop at Least 50% in the Next 12 Months
HKD

RMB

FY 2015 Capital Expentitures

2500

2000

Assumed from Management Guidance

FY 2014 EBITDA

3100

2480

Corporate filings

FY2015 EBITDA

3255

2604

Conservative 5% assumption

FY2015 EBITDA - Capex


Net Debt

755

604

12076

9661

Shares Oustanding
Implied EV (24.5x Median Multiple)

1.82 billion

Assumptions:

As of FY2014
Corporate filings

18512

14809

3.54

2.83

Implied Downside to Current Price

-49.5%

-49.5%

Currently trading @ HK$7.0 / RMB 5.6

Implied EV (20x Multiple)

15100

12080

Still a very generous multiple

1.66

1.33

-76.3%

-76.3%

Implied Share Price

Implied Share Price


Implied Downside to Current Price

Currently trading @ HK$7.0 / RMB 5.6

Source: Company filings, CapitalIQ.


Note: Figures reported in RMB millions on company filings. 1 RMB = HK$ 1.25 as of April 26, 2015.

18

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

De-rating Catalysts for 50% Implied Downside

20

1.

Most noticeably, if Yingde loses its lawsuit against the state owned enterprise steel mill, they will be unable to recover the
RMB 406 million of receivables that they are currently owed and record material impairment losses. Not only will this affect
managements ability to continue coming to market, but it could quite easily negatively spillover into Yingdes remaining
Chinese customers who could be more inclined to breach their contract.

2.

Yingdes future profitability and meager cash flows can continue to be choked if customers keep refusing payments or in
the event of early termination of contracts (if customers shut down, go bankrupt or are acquired as part of the
Governments steel industry consolidation process). A complete loss of a customer due to bankruptcy or failing operations
will hit Yingdes top line, and thus cash flows, hard (especially as consensus has turned a blind eye towards this issue
causing investors to capitulate). Notably, Yingde has already recorded impairment losses previously on customer
receivables due to their respective financial difficulties 20. If the effects of customer strain are substantial enough to create a
liquidity shortfall (EBITDA adjusted Capex interest coverage of below 1x in FY2014), Yingde could file for bankruptcy and
thus evaporate all shareholder value.

3.

Yingde could also lose customers due to the political instability in China, as evidenced by their loss of the China Coal
contract (a large state owned chemical enterprise that was supposed to help Yingde diversify away from steel).

4.

The consolidation of smaller steel players will make larger steel facilities the new norm. Yingde risks market share losses as
ongoing industry consolidation will require larger projects, heavier upfront financing and more extensive technological
capabilities going forward. Such projects will be increasingly difficult to win as Yingde would have to bid against
international peers (e.g. Praxair, Linde as seen below) with lower product quality, inferior ASU capacity and a waning
access to financing that is already evaporating returns on capital (Appendix, Exhibit 21).

5.

With their rising debt balance, challenging operating environment and interest expense, it is not inconceivable that either
Moodys will issue another ratings downgrade, or other rating agencies (Fitch, S&P) will issue a rating downgrade for
Yingde. In fact, on 19th March 2015, Moodys released another announcement Yingde Gases' ratings pressured by weak
cash flow in 2014. Moodys indicated that weak cash flow in 2014 continues to pressure its Ba3 corporate family rating
and the B1 senior unsecured rating on the bonds issued by Yingde Gasesthe ratings outlook is negative. Both scenarios
would impact Yingdes ability to borrow (need-induced), while also creating negative press and very likely accentuating the
probability of Yingde crushing on its own weight.

http://www.wsj.com/articles/why-chinese-steel-exports-are-stirring-protests-1426466068
19

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 21: Yingde Competitive Market Position


Yingde Cannot Compete with MNCs on the Basis of Supply Capacity, Product Quality & Financing

Source: Morgan Stanley, Industry Reports, Company Filings.

Exhibit 22: History of Merchant Prices (Argon, Nitrogen, Oxygen)


Merchant Market has Seen Stagnant/Declining Prices
Cost of Industrial Gases (RMB/Nm3)

5
4
3
2
1
0
2010

2011
Oxygen

2012
Nitrogen

2013

2014

Argon

Source: Company filings.

20

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Exhibit 23: Total and Merchant Gas Volumes Sold (Argon, Nitrogen, Oxygen)
Merchant Market is More Profitable (But Unpredictable) Relative to On-Site and Can Provide a Swing Factor
2009

2010

2011

2012

2013

2014

5,383,000.0

6,496,000.0

9,815,000.0

12,660,000.0

17,831,000

20,548,000.0

Oxygen

2,987,000

3,491,000

5,515,000

6,725,000

9,437,000

10,537,000

Nitrogen

2,312,000

2,899,000

4,194,000

5,808,000

8,211,000

9,800,000

84,000

106,000

106,000

127,000

183,000

211,000

NA

Merchant Gas Volumes Sold (NM3 '000)

Argon

Total Gas Volumes Sold (NM3 '000)

429,300

552,100

545,200

820,300

1,109,900

Oxygen

251,600

295,500

216,100

335,600

470,600

Nitrogen

100,400

186,200

251,900

376,500

515,300

77,300

70,400

77,200

108,200

124,000

6.6%

5.6%

4.3%

4.6%

5.4%

Oxygen

7.2%

5.4%

3.2%

3.6%

4.5%

Nitrogen

3.5%

4.4%

4.3%

4.6%

5.3%

72.9%

66.4%

60.8%

59.1%

58.8%

Argon

Merchant Gas/ Total Gas Sold

Argon

NA

Source: Company filings.

21

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

Company Financial Summary:


FY2014 (Dec-31-2014) Capital Structure Details
Principal Due

Coupon/Base

Description

Type

(CNY)

Rate

Maturity

Seniority

Secured

Convertible

Currency

Amount Due to a Joint Venture

Other Borrowings

93.5

NA

Dec-31-2015

Senior

No

No

CNY

Amount Due to an Associate

Other Borrowings

270.0

NA

Dec-31-2015

Senior

No

No

CNY

Bank Loans Secured


Bank Loans Unsecured
Convertible Notes and
Warrants Unsecured
Medium Term Notes
Unsecured
Obligations under Finance
Lease
Other Loans Unsecured
Senior Notes I
Senior Notes II

Term Loans
Term Loans
Bonds and Notes

1,588.1
2,258.3
142.0

NA
NA
8.000%

2015

Senior
Senior
Senior

Yes
No
No

No
No
Convertible

CNY
CNY
USD

Bonds and Notes

877.5

5.500%

Senior

No

No

CNY

Capital Lease

675.4

NA

Senior

Yes

No

CNY

Term Loans
Bonds and Notes
Bonds and Notes

148.5
2,635.9
1,550.5

NA
8.125%
7.250%

2018
2020

Senior
Senior
Senior

No
No
No

No
No
No

CNY
USD
USD

Repayment

Source: Company filing, CapitalIQ.

Yingde Financial Summary


FY2008 FY2014 Income Statement Summary
Total Operating Revenues

2008

2009

2010

2011

2012

2013

2014

1,411.7

2,065.7

3,004.9

4,240.3

4,955.9

6,865.5

7,716.2

46.3%

45.5%

41.1%

16.9%

38.5%

12.4%

828.2

1,290.5

1,840.8

2,789.4

3,382.8

4,734.7

5,237.3

Growth Over Prior Year


Cost of Sales
Gross Profit

583.6

775.2

1,164.1

1,450.9

1,573.1

2,130.8

2,478.9

41.3%

37.5%

38.7%

34.2%

31.7%

31.0%

32.1%

93.7

154.8

377.9

359.6

471.4

604.0

682.9

Selling expenses

15.1

18.6

57.7

131.8

181.3

225.5

243.8

Admin. Expenses

79.9

137.5

322.5

238.6

310.4

417.6

466.0

1.4

1.3

2.2

10.8

20.2

39.1

27.0

489.9

620.4

786.2

1,091.3

1,101.7

1,526.9

1,796.1

34.7%

30.0%

26.2%

25.7%

22.2%

22.2%

23.3%

36.5

6.4

10.4

17.1

19.0

78.1

28.0

(58.5)

(61.2)

(128.2)

(126.7)

(209.8)

(381.6)

(520.0)

Share of Results of Associates

(0.2)

(3.5)

(18.4)

(10.1)

Share of Results of Joint Ventures

(0.3)

(1.5)

(1.1)

467.9

565.5

668.4

981.4

907.1

1,203.6

1,292.8

Gross Margin %
Other Costs & Expenses

Other Revenue & Income


Operating Profit
Operating Profit Margin %
Finance Revenues
Finance Costs

Profit Before Tax


Income Tax Expense
Net Profit
Net Income (Attributable to Shareholders)
Net Profit Margin %

39.2

33.9

135.2

145.8

135.8

294.0

380.7

428.7

531.6

533.2

835.6

771.3

909.6

912.2

426.0

571.0

577.2

831.0

770.0

908.0

904.0

30.2%

27.6%

19.2%

19.6%

15.5%

13.2%

11.7%

Source: Company filings.

22

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

FY2008 FY2014 Balance Sheet Summary


Inventories
Trade & Other Receivables

2008

2009

2010

2011

2012

2013

2014

9.6

6.9

30.1

32.3

61.0

68.6

97.8

126.7

371.6

748.9

1,029.2

1,319.7

1,792.4

2,844.6

Receivables Under Finance Lease

1.9

2.1

2.1

2.1

2.1

2.1

2.1

Income Tax Recoverable

0.1

3.1

0.4

6.5

0.4

3.8

227.4

114.9

467.6

159.0

503.5

65.0

131.0

28.5

2,102.5

970.5

958.3

846.6

342.5

606.4

394.2

2,601.0

2,219.6

2,187.4

2,733.3

2,270.7

3,685.7

1,752.0

2,191.9

3,822.7

5,076.2

5,966.8

9,400.3

10,014.6

488.7

681.1

1,024.4

992.7

3,793.8

2,551.1

3,055.5

Lease Prepayments

17.2

16.9

65.0

126.2

311.3

317.6

348.9

Intangible Assets

10.2

9.6

12.9

61.6

59.3

56.5

51.8

Receivables Under Finance Lease

13.1

14.8

14.2

13.7

13.0

12.3

11.5

100.0

399.8

706.2

684.8

483.4

Pledged Bank Deposits


Cash & Cash Equivalents
Total Current Assets

Property, plant and equipment, net


Construction in Progress

Interest in Associates
Interest in Joint Ventures

38.5

223.6

268.6

131.8

156.3

368.2

939.7

1,111.3

947.0

1,189.0

2.7

2.7

7.6

27.6

59.8

87.8

141.8

Total Non-Current Assets

2,415.6

3,073.2

5,415.1

7,637.4

12,059.8

14,281.1

15,565.1

Total Assets

2,809.8

5,674.2

7,634.7

9,824.8

14,793.1

16,551.8

19,250.8

Bank and Other Loans

500.3

783.0

784.0

1,115.5

3,263.3

1,194.6

1,721.1

Trade and Other Payables

572.7

479.1

1,244.3

1,363.0

2,448.7

2,181.7

2,422.3
324.1

Other Non-Current Assets


Deferred Tax Assets

LIABILITIES

Obligations Under Finance Lease


Convertible Redeemable Preferred Shares
Income Tax Payable
Total Current Liabilities
Working Capital

3.0

3.0

3.0

10.5

37.1

257.1

141.2

7.1

9.8

55.7

73.9

70.2

110.0

186.5

1,224.2

1,274.8

2,086.9

2,563.0

5,819.3

3,743.3

4,654.0

(830.0)

1,326.2

132.7

(375.6)

(3,086.1)

(1,472.6)

(968.3)

2,156.2

(1,193.6)

(508.3)

(2,710.5)

1,613.5

504.4

400.4

521.2

1,132.1

2,084.8

2,864.8

5,818.6

7,379.6

29.4

28.8

28.1

119.8

487.3

633.8

351.3

51.0

51.2

11.0

24.6

21.0

53.8

74.6

75.2

71.5

440.7

574.6

1,181.2

2,258.5

3,426.6

6,578.7

7,853.6

426

571

741

831

770

908

904

0.0

0.0

0.0

0.0

0.0

0.0

1,133.1

3,775.5

4,352.8

4,991.3

5,486.0

6,124.7

6,635.6

Changes in Working Capital

Bank and Other Loans


Obligations Under Finance Lease
Other Non-current Liabilities
Deferred tax Liabilities
Total Non-Current Liabilities
Net Income
Share Capital
Reserves
Minority Interests
Total Equity

11.7

49.3

13.7

12.1

61.2

105.1

107.9

1,144.9

3,824.8

4,366.6

5,003.4

5,547.2

6,229.8

6,743.5

Source: Company filings.

23

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY)

May 4, 2015

FY2008 FY2014 Cash Flow Statement Summary


2008

Net Income
Depreciation & Amort., Total
Other Amortization

2009

2010

2011

2012

2013

2014

430.1

530.0

577.3

830.8

770.1

907.9

903.9

76.9

114.4

158.3

277.5

352.4

509.9

687.0

0.4

0.7

1.9

5.2

7.0

8.1

0.1

(0.1)

0.3

(0.1)

0.4

0.2

0.3

Asset Writedown & Restructuring Costs

179.0

(70.3)

(Income) Loss on Equity Invest.

0.2

3.7

19.9

11.2

Provision & Write-off of Bad debts

13.1

(Gain) Loss From Sale Of Assets

(18.9)

4.7

23.3

(15.4)

(63.3)

(163.0)

(32.2)

Change in Acc. Receivable

22.6

(184.0)

(232.3)

(197.7)

(99.8)

(454.8)

(640.9)

Change In Inventories

(4.6)

2.8

(17.3)

(2.2)

(28.7)

(7.5)

(29.2)

7.6

10.2

30.2

79.7

(21.0)

135.4

87.2

Other Operating Activities

Change in Acc. Payable

513.8

478.4

732.4

974.6

919.1

954.9

925.1

(670.0)

(888.4)

(1,929.6)

(2,178.1)

(3,782.0)

(2,691.2)

(2,013.2)

Sale of Property, Plant, and Equipment

0.3

0.0

0.7

3.8

2.5

1.7

Cash Acquisitions

(47.0)

5.2

(5.5)
(13.8)

Cash from Operating Activities


Capital Expenditure

(112.7)

(300.0)

(431.2)

(129.6)

1.9

2.0

2.2

2.2

2.2

2.2

2.2

Other Investing Activities

(72.9)

112.6

(352.7)

308.6

(365.6)

440.0

(64.3)

Cash from Investing

(741.0)

(773.6)

(2,439.8)

(2,166.6)

(4,572.8)

(2,370.8)

(2,092.7)

Invest. in Marketable & Equity Securt.


Net (Inc.) Dec. in Loans Originated/Sold

Short Term Debt Issued


Long-Term Debt Issued

1.4

27.7

516.2

93.5

580.7

1,140.5

1,957.4

2,212.8

4,573.6

4,755.2

3,386.2

Short Term Debt Repaid

(1.4)

(27.7)

(58.1)

(194.9)

Long-Term Debt Repaid

(414.7)

(737.0)

(1,359.9)

(831.7)

(1,255.8)

(3,487.5)

(1,549.2)

Issuance of Common Stock

2,092.3

1.2

Repurchase of Common Stock

(11.7)

(64.0)

Common Dividends Paid

(180.7)

(234.9)

(271.0)

(329.3)

Other Financing Activities


Cash from Financing
Foreign Exchange Rate Adj.
Net Change in Cash

(79.9)

(126.4)

(4.7)

0.9

32.0

86.1

2,369.4

592.8

1,188.7

3,541.8

927.3

1,444.8

(0.3)

(17.5)

(8.9)

0.3

(15.5)

(13.3)

(141.1)

2,074.0

(1,132.0)

(12.2)

(111.7)

(504.1)

263.8

Source: Company filing, CapitalIQ.

24

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