China Energy (S$1.17) - Moving up the value chain China Energy is expanding its methanol production capacity by three-fold by 3Q08. We estimate this could increase its self-reliance for methanol to 86% for its Shandong and Zhangjiagang DME plants. Coupled with rising DME prices and softer methanol prices, we expect gross margins to improve to 29-39% in FY08-09, from 17-21% previously. Revisions have been made to DME expansion plans, with a 400,000-tonne p.a. increase in capacity but 6-12-month delay in completion. We have raised our FY07-09 EPS forecasts by 6-63% to factor in higher DME ASP and gross margin assumptions. Accordingly, our target price climbs to S$2.12 from S$1.73, still based on a 30% discount to our new DCF valuation (WACC 13%, LTG 2%) of S$3.03 (S$2.48 previously). We believe the implied 7.5x CY09 P/E is undemanding, given its 3-year EPS CAGR of 79%. Maintain Outperform.
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