short yingde gases

Yingde Gases (OTC: YINGY)

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 Share Price US$8.84 Market Capitalization $12,625.7 mm Cash & ST Investments $758.1 mm Total Debt $12,689.3 mm Total Enterprise Value $24,701.7 mm EV/(EBITDA LTM Capex) 49.5x Net Debt/EBITDA 3.7x Steel Industry Exposure** 70.1% Free Cash Flow (CFO Capex)

Negative for last 8 out of 9 years

Cost of Borrow ~50 bps 52 Week High / Low $12.25/ $6.23 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

1. Low Return on Capital Business Model Heavily Exposed to Stressed Steel Industry

2. Highly Leveraged Balance Sheet Accentuated by Eight Years of Consistently Negative Free Cash Flows

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

4. 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

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May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15

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

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~30% Price Appreciation in April Without Any Change in Underlying

Business Value

UChicago Seeking Alpha Undergraduate Case Competition (OTC: YINGY) May 4, 2015

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Low Return on Capital Business Model Heavily Exposed to Stressed Steel Industry

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 volume1), 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 customer4. 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

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.

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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

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%9AThe-growth-enggine-is-modestly-returning.pdf

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.

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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 Ba37. 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.

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

7 https://www.moodys.com/research/Moodys-downgrades-Yingde-Gases-to-Ba3B1-outlook-negative--PR_317137 8 https://www.moodys.com/research/Moodys-Yingde-Gases-ratings-pressured-by-weak-cash-flow-in--PR_321078

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

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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 link9. 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

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 10 http://www.asiape.com/apergc/apergc_issues/apergc0911.html 11 http://www.chinaknowledge.com/Newswires/News_Detail.aspx?type=1&NewsID=27729

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

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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


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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).

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 gains13. 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

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


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Appendix Exhibit 1: Air Separation Process

Yingde Uses Cryogenic (Low Temperature Distillation) Process for Air Separation

Source: Yingde Global Offering Prospectus (2009).


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Exhibit 2: Yingde Supply Chain Mix

Yingde Offers Customers Industrial Gases Through Various Supply Modes (Pipeline, compressed, liquid)

Source: Company filings.

Exhibit 3: MTOP Contracts Cash Flow Analysis

MTOP Business Model Achieves Cash Flow Stability ~3 years After Intensive Upfront Capex

Year -1 Year 0 Year 1 Year 2 Year 3 Year 30

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

Contracts produce an annuity-like stream of payments that cover

start-up/relevant costs to provide

incremental return.

Channel Checks indicate that Yingde

incurs RMB 200 300 million for every

onsite customer with average lead time (construction

phase) of 12 months

Revenue Inflow = Volume x Unit Price Upfront Capital Investment Profit/Loss

Construction commences

Supply Commences

Excess capacity is sold to merchant market 2 -3 years

after on-site commencement


10

Exhibit 4: Additional Background Information on China Steel

Volatile Steel Industry Suffers from Overcapacity and is Undergoing Multi-Year Structural Consolidation

Chinas steel industry had previously boomed (15% CAGR between 2000 and 201314) 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

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)


11

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


Exhibit 6: Overdue Accounts Receivables Rising & Days Sales Outstanding Doubling

Accounts Receivable Past Due and Days Sales Outstanding Rising Exponentially

Source: Company filings

057

101 111

210

329

837

29

36 4649

54

52

72

20

30

40

50

60

70

80

0

200

400

600

800

1,000

2008 2009 2010 2011 2012 2013 2014AR Past due Collection Period

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

doubled from 29 to 62 days.


12

Exhibit 7: Declining ROE & DuPont Analysis

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


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


2008 2009 2010 2011 2012 2013 2014

Net Income 426.0 571.0 577.2 831.0 770.0 908.0 904.0

Growth Over Prior Year 34.0% 1.1% 44.0% (7.3%) 17.9% (0.4%)

Shareholders Equity 1,133.1 3,775.5 4,352.8 4,991.3 5,486.0 6,124.7 6,635.6

Growth Over Prior Year 233.2% 15.3% 14.7% 9.9% 11.6% 8.3%

Return on Equity 37.6% 15.1% 13.3% 16.6% 14.0% 14.8% 13.6%

DuPont Deconstruction Shows Returns With and Without Impact from Financial Leverage

2008 2009 2010 2011 2012 2013 2014

Net Income 426.0 571.0 577.2 831.0 770.0 908.0 904.0

Sales 1,413.1 2,067.0 3,007.2 4,251.1 4,976.2 6,904.6 7,743.2

Net Profit Margin % 30.1% 27.6% 19.2% 19.5% 15.5% 13.2% 11.7%

Total Assets 2,809.8 5,674.2 7,634.7 9,824.8 14,793.1 16,551.8 19,250.8

Asset Turnover (Sales/Assets) 0.50x 0.36x 0.39x 0.43x 0.34x 0.42x 0.40x

Shareholders Equity 1,133.1 3,775.5 4,352.8 4,991.3 5,486.0 6,124.7 6,635.6

Returns W/o Financial Leverage 15.2% 10.1% 7.6% 8.5% 5.2% 5.5% 4.7%

Financial Leverage (Assets/Equity) 2.48x 1.50x 1.75x 1.97x 2.70x 2.70x 2.90x

Return on Equity 37.6% 15.1% 13.3% 16.6% 14.0% 14.8% 13.6%

Total Debt/EBITDA 1.60x 1.70x 1.70x 2.40x 4.60x 3.90x 4.00x

2008 2009 2010 2011 2012 2013 2014 8 Year Average

Capex to Fund New ASUs 670.0 888.0 1,930.0 2,178.0 3,782.0 2,691.0 2,013.0

Growth Over Prior Year 32.5% 117.3% 12.8% 73.6% (28.8%) (25.2%)

Total Operating Revenues 1,411.7 2,065.7 3,004.9 4,240.3 4,955.9 6,865.5 7,716.2

Capex as % of Revenues 47.5% 43.0% 64.2% 51.4% 76.3% 39.2% 26.1% 49.7%

Cash From Operations 514.0 478.0 732.0 975.0 919.0 954.8 925.0

Capex as % of CFO 130.4% 185.8% 263.7% 223.4% 411.5% 281.8% 217.6% 244.9%

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 7.9x

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)

Rising Leverage Pads Returns

CapEx as % of sales has widely fluctuated from 26.0% to 76.0% Declining earnings quality as Capex has outpaced D&A for

last 9 consecutive years


13

Exhibit 9: EBIT & Net Margins

Yingdes Net and EBIT Margins have Materially Dwindled Since FY2008


Exhibit 10: CAPEX adjusted Interest Coverage

FY2014 Interest Coverage is Positive for the First Time Since FY2008


34.7%

30.0%

26.2% 25.7%

22.2% 22.2% 23.3% 30.2%

27.6%

19.2% 19.6%

15.5% 13.2%

11.7%

5.0%

15.0%

25.0%

35.0%

2008 2009 2010 2011 2012 2013 2014EBIT Margin % Net Profit Margin %

2008 2009 2010 2011 2012 2013 2014

EBITDA 567.0 736.0 1,124.0 1,367.0 1,450.0 2,024.0 2,480.0

Finance Costs 58.5 61.2 128.2 126.7 209.8 381.6 520.0

Capex to Fund New ASUs 670.0 888.0 1,930.0 2,178.0 3,782.0 2,691.0 2,013.0

EBITDA - Capex (103.0) (152.0) (806.0) (811.0) (2,332.0) (667.0) 467.0

(EBITDA - Capex)/Interest Coverage -1.8x -2.5x -6.3x -6.4x -11.1x -1.7x 0.9x

Intensifying competition has deteriorated margins and returns

as changing landscape offers lower IRRs than previously signed

contracts

Take or pay contracts with cost passing clauses do not protect against company-wide declining EBIT and net

margins

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

Cumulative (EBITDA Capex) of negative RMB 4.4 billion since FY2008


14

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

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.

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

30054240

4956

68667716

0

5000

10000

2010 2011 2012 2013 2014

Revenue (RMB mln)

693

9401042

1566

1749

21 2836

41

57

15

25

35

45

55

65

0

500

1000

1500

2000

2010 2011 2012 2013 2014

Capacity and Existing Facilties

Capacity ('000 Nm/3 hr) Existing Facilities

30%36%

40%46%

42%

0%

20%

40%

60%

2010 2011 2012 2013 2014

On-Site Market Share by Revenue

Yingde Linde-BOC Air Liquide Praxiar APCI

Yingdes proudly markets its

unprecedented ~3 fold growth

in revenue on its 2014 Investor Presentation

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).

Proudly markets its on-site gas market share

gains based on tonnage through

aggressively signing new

contracts


15

Exhibit 12: Debt/EBITDA Covenant Levels

Yingde has Previously Breached Covenants and Total Debt19/EBITDA has Spiraled


Exhibit 13: Borrowing Breakdown

Relative to RMB606 Million Wafer-Thin Cash Balance, Yingde has Major Long-Term Borrowings Upcoming


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.

1.6 1.7 1.7

2.4

4.6

3.9 4.0

0.0

1.0

2.0

3.0

4.0

5.0

2008 2009 2010 2011 2012 2013 2014

Debt/EBITDA Domestic Covenant International Covenant

Domestic Debt Covenant: 4.5x Debt/EBITDA

International Debt Covenant: 4.75 Debt/EBITDA

Breached debt covenants in 2012

(later removed) that required 30%

of outstanding debt to be paid

Long-term borrowings have grown at 62.5% CAGR between

FY2008 and FY2014

(FY2008: RMB 400.4 million)

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.


16

Exhibit 14: Yingde Share Price vs. HSI

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

Exhibit 15: EBITDA vs. Cash Flows from Operations

Despite Robust Revenue & Accounting Earnings Growth, EBITDA And CFO Has Been Increasingly Divergent


3

4

5

6

7

8

9

10

20000

22000

24000

26000

28000

30000

Yingde Gases vs. HSI(Feb 2015 - )

Volume (Yingde) Volume (HSI) HSI Yingde YINGY

2008 2009 2010 2011 2012 2013 2014

EBITDA 567.0 736.0 1,124.0 1,367.0 1,450.0 2,024.0 2,480.0

EBITDA Margin % 40.1% 35.6% 37.4% 32.2% 29.1% 29.3% 32.0%

CFO 514.0 479.0 732.0 974.0 919.0 955.0 925.0

CFO as % of EBITDA 90.7% 65.1% 65.1% 71.3% 63.4% 47.2% 37.3%

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

Fundamentals

Earnings quality is increasingly deteriorated with wider & wider discrepancy


17

Exhibit 16: Free Cash Flows

Yingdes Business Model has Realized Increasingly Negative Free Cash Flows for 8 out of last 9 Years


Exhibit 17: Receivables

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


Exhibit 18: Adjusted EV/EBITDA vs. Competitors

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

Source: CapitalIQ as of April 25, 2015.

91

(483)(156)

(410)

(1198)(1203)

(2863)

(1736)

(1088)

155 199426 571 577

831 770 908 904

-6000

-4000

-2000

0

2000

2006 2007 2008 2009 2010 2011 2012 2013 2014Cash From Operations CapEx Free Cash Flow Net Income

2008 2009 2010 2011 2012 2013 2014 08' - 14' CAGR

Trade & Other Receivables 126.7 371.6 748.9 1029.2 1319.7 1792.4 2844.6 68.0%


Total Operating Revenues 1411.7 2065.7 3004.9 4240.3 4955.9 6865.5 7716.2 32.7%


Company Name

Share Price

(Trading

Currency)

Price-to-

Earnings

Enterprise

Value

(US$)

LTM

EBITDA

(US$)

EV/LTM

EBITDA

LTM

Capex

(US$)

EBITDA-

LTM

Capex

EV/(EBITDA-

LTM Capex)

Net

Debt/EBITDA

LTM

Unlevered

Free Cash

Flow (US$)

Implied

LTM

FCF

Yield

Yingde 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%

Capex to fund ASUs are typically twice that of cash flow from operations and

distort the reliability of accounting earnings

Earnings quality

deterioration with markedly

different negative FCF

to net income

Since 2008, the accumulation of negative FCF has burnt a

hole of over RMB 9.0 billion!

FY2006 was the only FCF positive year (barely)


18

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

Exhibit 20: Implied Share Price

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

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

HKD RMB Assumptions:

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 755 604

Net Debt 12076 9661 As of FY2014

Shares Oustanding 1.82 billion Corporate filings

Implied EV (24.5x Median Multiple) 18512 14809

Implied Share Price 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

Implied Share Price 1.66 1.33

Implied Downside to Current Price -76.3% -76.3% Currently trading @ HK$7.0 / RMB 5.6

Yingdes Capex has been Aggressively Growth Driven and as a Percentage of Sales Outrivals Peers


0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013 2014

Yingde Air Liquide Linde-BOC APCI Praxair

Yingdes capital intensity is more volatile and much

greater relative to international competitors


19

De-rating Catalysts for 50% Implied Downside 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 difficulties20. 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.

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


20

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


0

1

2

3

4

5

2010 2011 2012 2013 2014

Cost of Industrial Gases (RMB/Nm3)

Oxygen Nitrogen Argon


21

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

Merchant Gas Volumes Sold (NM3 '000) 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

Argon 84,000 106,000 106,000 127,000 183,000 211,000

Total Gas Volumes Sold (NM3 '000) NA 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

Argon 77,300 70,400 77,200 108,200 124,000

Merchant Gas/ Total Gas Sold NA 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%

Argon 72.9% 66.4% 60.8% 59.1% 58.8%


22

Company Financial Summary:

FY2014 (Dec-31-2014) Capital Structure Details

Source: Company filing, CapitalIQ.

Yingde Financial Summary

FY2008 FY2014 Income Statement Summary


Description Type

Principal Due

(CNY)

Coupon/Base

Rate Maturity Seniority Secured Convertible

Repayment

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 Term Loans 1,588.1 NA - Senior Yes No CNY

Bank Loans Unsecured Term Loans 2,258.3 NA - Senior No No CNY

Convertible Notes and

Warrants Unsecured

Bonds and Notes 142.0 8.000% 2015 Senior No Convertible USD

Medium Term Notes

Unsecured

Bonds and Notes 877.5 5.500% - Senior No No CNY

Obligations under Finance

Lease

Capital Lease 675.4 NA - Senior Yes No CNY

Other Loans Unsecured Term Loans 148.5 NA - Senior No No CNY

Senior Notes I Bonds and Notes 2,635.9 8.125% 2018 Senior No No USD

Senior Notes II Bonds and Notes 1,550.5 7.250% 2020 Senior No No USD

2008 2009 2010 2011 2012 2013 2014

Total Operating Revenues 1,411.7 2,065.7 3,004.9 4,240.3 4,955.9 6,865.5 7,716.2


Cost of Sales 828.2 1,290.5 1,840.8 2,789.4 3,382.8 4,734.7 5,237.3

Gross Profit 583.6 775.2 1,164.1 1,450.9 1,573.1 2,130.8 2,478.9

Gross Margin % 41.3% 37.5% 38.7% 34.2% 31.7% 31.0% 32.1%

Other Costs & Expenses 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

Other Revenue & Income 1.4 1.3 2.2 10.8 20.2 39.1 27.0

Operating Profit 489.9 620.4 786.2 1,091.3 1,101.7 1,526.9 1,796.1

Operating Profit Margin % 34.7% 30.0% 26.2% 25.7% 22.2% 22.2% 23.3%

Finance Revenues 36.5 6.4 10.4 17.1 19.0 78.1 28.0

Finance Costs (58.5) (61.2) (128.2) (126.7) (209.8) (381.6) (520.0)

Share of Results of Associates 0 0 0 (0.2) (3.5) (18.4) (10.1)

Share of Results of Joint Ventures 0 0 0 0 (0.3) (1.5) (1.1)

Profit Before Tax 467.9 565.5 668.4 981.4 907.1 1,203.6 1,292.8

Income Tax Expense 39.2 33.9 135.2 145.8 135.8 294.0 380.7

Net Profit 428.7 531.6 533.2 835.6 771.3 909.6 912.2

Net Income (Attributable to Shareholders) 426.0 571.0 577.2 831.0 770.0 908.0 904.0

Net Profit Margin % 30.2% 27.6% 19.2% 19.6% 15.5% 13.2% 11.7%


23

FY2008 FY2014 Balance Sheet Summary


2008 2009 2010 2011 2012 2013 2014

Inventories 9.6 6.9 30.1 32.3 61.0 68.6 97.8

Trade & Other Receivables 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 0 3.8

Pledged Bank Deposits 227.4 114.9 467.6 159.0 503.5 65.0 131.0

Cash & Cash Equivalents 28.5 2,102.5 970.5 958.3 846.6 342.5 606.4

Total Current Assets 394.2 2,601.0 2,219.6 2,187.4 2,733.3 2,270.7 3,685.7

Property, plant and equipment, net 1,752.0 2,191.9 3,822.7 5,076.2 5,966.8 9,400.3 10,014.6

Construction in Progress 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

Interest in Associates 0 0 100.0 399.8 706.2 684.8 483.4

Interest in Joint Ventures 0 0 0 0 38.5 223.6 268.6

Other Non-Current Assets 131.8 156.3 368.2 939.7 1,111.3 947.0 1,189.0

Deferred Tax Assets 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

LIABILITIES

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

Obligations Under Finance Lease 3.0 3.0 3.0 10.5 37.1 257.1 324.1

Convertible Redeemable Preferred Shares 141.2 0 0 0 0 0 0

Income Tax Payable 7.1 9.8 55.7 73.9 70.2 110.0 186.5

Total Current Liabilities 1,224.2 1,274.8 2,086.9 2,563.0 5,819.3 3,743.3 4,654.0

Working Capital (830.0) 1,326.2 132.7 (375.6) (3,086.1) (1,472.6) (968.3)

Changes in Working Capital 2,156.2 (1,193.6) (508.3) (2,710.5) 1,613.5 504.4

Bank and Other Loans 400.4 521.2 1,132.1 2,084.8 2,864.8 5,818.6 7,379.6

Obligations Under Finance Lease 29.4 28.8 28.1 119.8 487.3 633.8 351.3

Other Non-current Liabilities 0 0 0 0 0 51.0 51.2

Deferred tax Liabilities 11.0 24.6 21.0 53.8 74.6 75.2 71.5

Total Non-Current Liabilities 440.7 574.6 1,181.2 2,258.5 3,426.6 6,578.7 7,853.6

Net Income 426 571 741 831 770 908 904Share Capital 0 0.0 0.0 0.0 0.0 0.0 0.0

Reserves 1,133.1 3,775.5 4,352.8 4,991.3 5,486.0 6,124.7 6,635.6

Minority Interests 11.7 49.3 13.7 12.1 61.2 105.1 107.9

Total Equity 1,144.9 3,824.8 4,366.6 5,003.4 5,547.2 6,229.8 6,743.5


24

FY2008 FY2014 Cash Flow Statement Summary

Source: Company filing, CapitalIQ.

2008 2009 2010 2011 2012 2013 2014

Net Income 430.1 530.0 577.3 830.8 770.1 907.9 903.9

Depreciation & Amort., Total 76.9 114.4 158.3 277.5 352.4 509.9 687.0

Other Amortization - 0.4 0.7 1.9 5.2 7.0 8.1

(Gain) Loss From Sale Of Assets 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 - - - -

Other Operating Activities (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)

Change in Acc. Payable 7.6 10.2 30.2 79.7 (21.0) 135.4 87.2

Cash from Operating Activities 513.8 478.4 732.4 974.6 919.1 954.9 925.1

Capital Expenditure (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)

Invest. in Marketable & Equity Securt. - - (112.7) (300.0) (431.2) (129.6) (13.8)

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

Short Term Debt Issued 1.4 - - 27.7 516.2 93.5 -

Long-Term Debt Issued 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 (79.9) (126.4) (4.7) - 0.9 32.0 -

Cash from Financing 86.1 2,369.4 592.8 1,188.7 3,541.8 927.3 1,444.8

Foreign Exchange Rate Adj. 0 (0.3) (17.5) (8.9) 0.3 (15.5) (13.3)

Net Change in Cash (141.1) 2,074.0 (1,132.0) (12.2) (111.7) (504.1) 263.8

short yingde gases

Documents

steel industry exposure

stressed steel industry

capital business model

cost of capital

yingde gases otc

stock price

medium sized chinese

negative free cash flows