Sanjiang Chemicals plans to raise HK$435m through a placement of 196.9m shares (19.8% ofexisting share capital) at HK$2.28/share, representing a discount of 17.7% to the stock’s closingprice prior to its announcement. To adjust for the dilutive effect of the issue, we revise down ourEPS forecasts from Rmb$0.59 to Rmb$0.49 in 17E (-12.9% YoY), from Rmb$0.64 to Rmb$0.53 in18E (+9.4% YoY) and from Rmb$0.69 to Rmb$0.57 in 19E (+7.5% YoY). However, with improvedleverage and potential for greater operating efficiency following the issue, we revise up our targetprice from HK$3.60 to HK$3.85. With 39.0% upside, we maintain our BUY rating.    Share placement. The company plans to use c.Rmb100m to develop the fifth phase of itsethylene oxide/ethylene glycol (EO/EG) production facilities, and c.Rmb160m to construct newpolypropylene production facilities, with the remainder of the proceeds to be reserved forgeneral working capital. We believe the placement will improve the firm’s gearing ratio from42.9% in 2016A to 34.7% in 2017E and its operating cash flow. We see the introduction of morelong-term institutional investors as positive for both the firm’s operational outlook and liquidityof its stock.    Feedstock price decline. We expect the price of methanol, a major feedstock cost for Sanjiang, todecline in coming years. Approximately 70% of domestic methanol output capacity is based oncoal-to-methanol technology, leaving methanol prices in China correlated to coal prices. Despitehigh coal prices since 2H16, we note abundant domestic coal reserves and upcoming newcapacity expansions following government efforts to eliminate outdated capacity, pointing to areduction in coal prices in coming years. On the global stage, we note the upcoming launch ofc.5.6mt of new methanol capacity in Iran by end-2019, more than doubling the country’s currentcapacity; we expect this surge in capacity from a major supplier of China’s imports (accounting forc.40% of China’s total methanol imports in 2010-15A) to result in a doubling of China’s importsfrom Iran to c.4mt per annum, further weakening domestic methanol prices.    Strong EG price. Market prices of EG in eastern China, where Sanjiang is located, have ralliedfrom a trough of Rmb5,640/t on 11 May 2017 to Rmb7,380/t as of 9 October (+30.9%). Webelieve the price rally is mainly due to increase in upstream ethylene prices. Given geopoliticaluncertainties, we assume crude oil prices will remain at a relatively high level in the near-term,providing support to downstream ethylene prices. Thus, we see EG prices as likely to remain highin 4Q17.    Maintain BUY. We revise down our EPS forecasts from Rmb$0.59 to Rmb$0.49 in 17E (-12.9%YoY), from Rmb$0.64 to Rmb$0.53 in 18E (+9.4% YoY) and from Rmb$0.69 to Rmb$0.57 in 19E(+7.5% YoY). However, with improved leverage and operating outlook following the issue, werevise up our target price from HK$3.60 to HK$3.85, representing 7x 17E PE and 1.1x 17E PB, or6.4x 18E PE and 1.0x 18E PB. With 39% upside, we maintain our BUY rating.

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