Sinofert to report 1H14 results 21-August
We expect Sinofert’s 2013 losses to be a thing of the past. Potash prices have stabilized in the US$ 330-340/ ton since September 2013. Urea is not the problem as inventories are kept at minimal levels. We estimate that Sinofert will report 1H14: 1) Revenues of Rmb 16.4 bn vs 20.6 bn (1H13); Operating Income of Rmb 182 mln vs. 452 mln (1H13); and 3) EPS of Rmb 0.015 / share vs. 0.05 / share (1H13). Fertilizer prices (potash, urea, phosphates) all took a big fall between April and September of 2013. Potash has stabilized; China coal prices continue soft. China uses coal to produce its urea.
New CEO ? the jury is still out
On 07-March 2014, Sinofert announced that CEO, Mr. FENG Zhi Bin had resigned and would be replaced by Mr. WANG Hon Jun. We were disappointed by the quick change. Mr. Feng was appointed CEO in July 2010. By January 2012 CEO Feng had acquired 100% of vertically-integrated phosphate feed producer, Sinochem Yunlong. Mr. Feng was introduced to investors as a “builder of one of Sinochem’s largest divisions”. We are told that Sinofert’s strategy will remain unchanged under CEO Wang: to integrate upstream and downstream opportunities at Sinofert. CEO Wang joined Sinochem in June 1995. From 1995-2012, he held various positions including Deputy Manager and General Manager of Strategy Planning Department.
M&A possibilities
There is oversupply in China’s urea market as well as in China’s phosphate fertilizer market. There is oversupply in China’s coal market. When we last discussed M&A possibilities and the “integration” strategy (May 2014) with Sinofert, the closest potential target remained Qinghai Salt Lake (000792 HK), in which Sinofert initially bought a stake (18.49%) in October 2007. Notwithstanding, in 1H11 Sinofert was diluted to an 8.94% stake in Qinghai Salt Lake due to a transaction in which Qinghai Salt Lake acquired the Salt Lake Group by issuance of new shares. Maybe they did not have the capital 1H11?
Accounting for fertilizer
Sinofert buys its potash from the global market generally once a year in December or January. The price is fixed; shipments come upon demand throughout the year. The majority of the potash is sold February, March and April with more sold August, September and October. Sinofert sells its potash on an average cost basis; inventory costs are marked-to-market at year-end. An inventory of 500k tons of potash at year-end would be considered less than normal. Nitrogen is bought/ sold daily; inventories are kept very low.