MDF industry's VAT levy will continue to be implemented

Event: Today, the Ministry of Finance issued the VAT rebate notice for the MDF industry. From January 1, 2009 to December 31, 2010, the taxpayer sold three surpluses, second-smallest fuel wood, and crops. The comprehensive utilization products of straw, bagasse and other four categories of agricultural and forestry residues as raw materials (see the appendix for product catalogue) shall be implemented by the taxation authorities as a method of refunding value-added tax immediately. The specific tax refund ratio is 100% in 2009 and 80% in 2010.

Analysis conclusion:

The event met our expectations and exceeded market expectations. We believe that the MDF industry will save timber resources and will therefore receive state support (see our report, “Capacity Eruption Growth, Results Will Change”). The return of VAT meets our expectations, but exceeds market consensus. This is A bigger positive measure for the industry.

MDF prices will not decline due to tax rebates. We believe that due to the low capacity of MDF production in the next year, active property transactions will boost the demand for panel furniture, and the supply and demand situation of MDF will change. In addition, since the MDF industry mainly competes with plywood, the price of plywood is not expected due to the increase in timber prices. There will be a decline, which will stabilize the price of MDF, and there will be no price cuts. The industry can generally enjoy the profit growth from tax rebates.

Rising wood prices are expected to be strong, and the market share of MDF will expand. In the context of rising wood prices (see “Expectations for Rising Wood Prices”), the main raw material for plywood production is logs, so rising wood prices will drive plywood prices up and squeeze their profits. In contrast, the “three remainings” increase. The price is smaller and the MDF has less impact. In the current market, plywood accounts for 50%, MDF 25%, and particle board 8%. The future MDF industry may occupy the market share of plywood (see “Release of Forestry Revitalization Plan and Opportunities for Fiberboard Industry”).

The return of value-added tax will significantly increase the profitability of MDF, maintain the purchase of Weihua shares, and increase the rating of Da Ya Technology. Policy actions are in line with our expectations. Maintain Weigang shares at RMB 0.48 (including tax refunds of RMB 0.25) and Daya Technology at RMB 0.68 (tax rebate of RMB 0.19) for 2010 earnings forecast. We continue to recommend investment opportunities in the fiber board industry to maintain our prestige. China Buy Rating and Da Ya Technology's Overweight Rating.