What surprised us
Sinofert reported 2012 net profit of Rmb878mn (+30% yoy), in line with ourexpectations and consensus. Revenue grew 12% yoy, mainly driven byhigher urea and phosphate sales volume, and new sales from MCP/DCP.Total gross margin was flat yoy at 5.8%, lower than we expected. Grossmargin for potash came in 2pp above our expectation (flat yoy). Nitrogengross margin improved by c. 1pp, but phosphate and compound fertilizergross margins fell on increasing competition. The gross profit contributionfrom production rose to 41% from 35% in 2011, and gross margin for theproduction segment increased to 15.5% from 12.4% in 2011. Associateincome from Qinghai Salt Lake Industry (QSLI, 000792.SZ, Neutral,Rmb29.02) came in 19% higher than we expected on larger potash salesvolume, offsetting the lower-than-expected EBIT. The company alsoproposed a final dividend of HK$0.0232 per share.
What to do with the stock
We cut EPS estimates by 4.7%/1.8%/2% for 2013E/14E/15E to factor inlower-than-expected gross margin for compound fertilizer and phosphate.We believe QSLI’s high potash sales volume was one-off on inventorydestocking. We lower our SOTP-based 12-month target price to HK$2.10(from HK$2.20), still based on 8.8X 2013E P/E for the distribution businessand our TP for QSLI. Maintain Neutral. Key upside risks are stronger-thanexpectedpotash recovery and production improvement; key downsiderisks are muted improvement for production business and limited potashprice recovery in 2013.