Satisfactory 1H12 results
1H12 NPAT +10% YoY to Rmb546mn (EPS: Rmb0.08). Adjusted N PAT (including self-owned distribution business and income from QH Salt Lake, but before derivative revaluation in 1H11) +21.5%YoY. Before QHSL’s contribution, recurring NPAT +30% YoY. A sharp 79% increase in nitrogen margin to Rmb101/tonne was one o f the main growth contributors.
Positives: Total production volume +7.4% YoY to 2.02mn tonnes, and total sales volume +7.8% YoY to 9.05mn tonnes; Total revenue +22% YoY to Rmb22.5bn, among which: phosphate +41%, potash +13.5%, nitrogen +18%, compound +20%; Upstream (production capacity under control) profit before tax +1,600% to Rmb215mn; Inventory balance down 6% YoY to Rmb7bn, turnover improved to 62 days (vs. 1H11’s 66 days).
Negatives: Investment income -18% YoY, mainly due to QHSL’s earnings decline; Administrative expenses +29.5% YoY; Ne t operating cashflow -79% YoY to Rmb863mn, mainly due to 1H11’s abnormally high base; Sales through network decreased to 68% from 70% of total sales YoY; Finance cost +30% YoY.
Valuation and recommendation
We maintain 2012/13e EPS at Rmb0.12/Rmb0.14. The stock is trading at 11x/9x 2012/13e P/E, not cheap given the volatile nature of its trading/distribution margin. We believe today’s share price already partially reflects the company’s M&A potential. Although we expect 2H12 earnings to grow 14% YoY, the latest price trends suggest little possibility of an upside surprise. We maintain our HOLD rating with a new TP of HK$1.70.
Risks
Acquisition and trading risks; uncertainty in negotiations with suppliers; long-term domestic fertilizer demand weaker than expected.