Ahead of the expected 2H15e approval of the Qinghai Salt Lake (QSL)transaction, we added in another 15.01% of QSL to Sinofert (SNF). We assumethe stake is financed with Rmb 900mln in cash (paid 1Q15) and assumed debtof Rmb 3.0bn. SNF will continue to equity account for its 23.9% stake in QSL.The additional 15.01% stake brings no additional Board representation toSinofert. The deal was proposed 13-Oct 2014, approved (internally) 28-Jan2015, and we continue to wait for final approval from SASIC. We retain ourHold rating on SNF with new TP of Rmb 1.44 / share.
Global fertilizer markets:
Global fertilizer markets are oversupplied . We see no STrecovery in China coal prices / global urea prices. SNF saysphosphate markets are oversupplied and potash prices remain softwithout the Uralkali-Belaruskali love-fest. The additional 15% stake in QSLadds “Associate” value and small cash dividends to the DCF model yetremoves the Rmb 3.0bn in new debt assumed for the transaction.
Investment thesis
The Rmb 3.9bn purchase of an additional 15% stake in Chinese potashproducer QSL brings non-cash earnings and small dividends to a company(SNF) short on cash. Since the agreed to acquisition, SNF’s price has mimickedthe China A-Share market. Other than QSL, global potash companies are alldown in value over the past 12-months. SNF’s core operations are soft whilenet profit and the DCF value are supported by the QSL transaction.
Valuations and risks
We value Sinofert from a DCF model. Our DCF fair value is HK$ 1.44/ share.Our WACC is 7.3% with a CoE of 10.3%, an after tax CoD of 3.8%. We use aDB China Rfr of 3.9% and Erp of 5.6%. Our TG rate is 2%, which is the world’saverage annual consumption rate for urea. Risks to our rating are: 1)unanticipated increase/decrease in China coal / global urea prices; 2) corporateactions for better or worse; and 3) a SASIC rejection of the QSL deal.