• Company profile. HUAAN through its wholly-owned subsidiary, Linyi Yehua Coking Co., Ltd. is involved in the production and sale of metallurgical coke (~79% of its revenue) and its by-products (~21% of its revenue) namely coal gas, tar, ammonia sulfate, crude benzene, coal slime and middling. HUANN’s single production plant is located at Shen Quan Zhuang Industrial Park, with current production capacity of metallurgical coke stood at 1.8MT per annum . With the application of modern facility which employs high technology and better blending formula of coal and enhanced charging process, HUAAN is capable of running the production capacity at 110% (which exceed its designed capacity), to reduce the coking period from industry average of 22 ½ hours to approximately 20 hours and boost up gross profit and net profit margin respectively.

• Major customers. The main users of metallurgical coke are steel manufacturers of which the major steel players are mainly located in the Shandong and its neighbouring Provinces such as Hebei, Jiangsu, Shanxi and Liaoning Provinces. Whilst steel manufacturers have the option to purchase coke from other suppliers not within the neighbouring provinces, HUAAN's close proximity and availability of coke will inevitably enable it to supply its coke in a timely manner to its customers which is one of the main criteria imposed by the steel manufacturers as any disruption in supply will result in huge losses to steel manufacturers.

• Regularization plan. In Jan 2016, HUAAN informed that following the for the leasing of some of its coking ovens, namely ovens #1, #2 and #3 and its ancillary facilities at Yehua to Linyi Xin Jiang Quan Metal Material Technology Co. Ltd, the Company has triggered Paragraph 8.03A of the Main Market Listing Requirements (" MMLR ") whereby Hua-An is purportedly deemed to have temporary suspended its business or its major operations.

• On 8 Nov, HUAAN had submitted an application for the upliftment of HUAAN from being classified as an affected listed issuer pursuant to MMLR has been submitted to Bursa Securities as the Group has since taken back the coke manufacturing operations from Feb 2017 onwards following the expiry of the lease tenure in Jan 2017.

• Cautious optimism in 4Q17 results amid capacity reduction and air Quality campaign in China. HUAAN has shown signs of profit turnaround after resumption of its operations since Feb 17 (1Q17 earnings: -RM1m; 2Q17: RM22m; 3Q17: RM34m; 9M17: RM55m). Overall, China’s ongoing tightening of environmental rules has restricted mining & materials production of small firms with high pollution and low energy-efficiency augurs well with those subsisting and compliant plants (such as HUAAN) as operating environment will tend to improve and become more favourable in the years to come. The current implied P/E is at 3.5x based on an annualized EPS for FY17 at 6.55 sen (9M17: EPS of 4.9 sen). Pegged at a Conservative PE of 5x, We Could Anticipate Further Upside for HUAAN Within a Higher Targeted Trading Range of Around RM0.325 (7% Lower Than 6-year High of RM0.35 Recorded 31 Oct 2017).
   
• Resilient demand. Moving Forward, the Prospects of the Steel and Coke Industry Remain Bright, Underpinned by China Stable GDP Growth (IMF: 6.8% in 2017 and 6.5% in 2018), Achieved Through Continued Robust Public and Private Sector Infrastructure Projects as Well as Real Estate Development Pursuits Particularly in the Third Tiered Cities. Moreover, the Rolling Out of Several Socio-economic Initiatives, More Notably the Expected RMB2 Trillion Steel Consumption Required to Realise China’s High-speed Rail Project From 2017 to 2030 as Well as the Spin-off Effects of the Massive One-Belt-One-Road (OBOR) Initiative Which Will be Spearheaded by China, Will Provide An Impetus to the Steel and Coke Industry.

• Potential downtrend reversal amid Tweezers bottom formation. After Nosediving 35% From RM0.35 High, HUAAN Is Ripe for Imminent Technical Rebound Following the Formation of Tweezers Bottoms and Upticks in Daily Indicators. We Expect Prices to Breakout to the Upside. A Decisive Breakout Above RM0.235 (downtrend Line) Will Spur Prices Higher Towards RM0.24 (10-d SMA) and RM0.25 (61.8% FR) Before Reaching Our LT Objective at RM0.28 (38.2% FR). Key Supports Are Situated Near RM0.225 (28-30 Nov and 4 Dec Low) and RM0.215 (lower Bollinger Band). A Breakdown Below RM0.215 Will Trigger Further Retracement Towards RM0.19 (3 Oct Low). Cut Loss at RM0.21.

Source: Hong Leong Investment Bank Research - 5 Dec 2017