FY15E net profit will drop by <25%; trimming TP to HK$1.10
Sinofert has issued a profit warning, alerting the market that its FY15 net profitwill drop by <25% YoY (vs. consensus EPS growth of 70% YoY). According tothe announcement, the potential miss is mainly due to: 1) inability to fully passthrough VAT, which resumed in Sept 2015, and 2) QSLI profit drop of 57-70%YoY "QSLI - Profit warnings on FY15 results" dated 3 Feb 2016).We trim our TP to HK$1.10 to reflect weaker GPM and QSLI value.
Cutting FY15E EPS by 57%; implies a loss in 2H15
We lower our Sinofert EPS forecasts for FY15E/16E/17E to RMB0.025/ 0.075/0.115, factoring in: 1) a lower GPM as VAT has not been fully passed throughto customers; 2) lower associate income from QSLI; and 3) a mild FX loss in2015E net profit. As per Sinofert’s 2014 annual report, 10% devaluation of theRMB against the USD would have had a -RMB143mn impact in 2014.
However, we expect the FX impact to be milder in 2015, given the company’shedging and prudent foreign debt policies. Our steep 57% cut in FY15E EPS isdue to the sensitivity of the already very thin margin (FY15E net margin cutfrom 1.36% to 0.58%). Our revised 2015E implies an RMB166mn loss in 2H15E.
Failure to fully pass through VAT; oversupply remains key focus
Although farmers’ income has grown in the past decade, Sinofert’s failure tofully pass-through VAT shows that China’s fertilizer sector is a buyer’s marketdue to massive oversupply in urea/phosphate. This is in line with our cautiousview on the sector. On the other hand, we believe a clearer policy on supplyside reform could benefit fertilizer industry profitability in the long run.
We prefer China BlueChem in China fertilizer
Our revised SOTP-derived TP of HK$1.1 implies 13x / 0.5x FY16E P/E and P/B.Despite a depressed multiple (currently trading 20% below average historicalP/B), we believe Sinofert is currently fairly valued, given that its ROIC is belowthe cost of capital. Hence, we keep our Hold rating. Key up/downside risks toSinofert: 1) fertilizer price volatility; 2) unanticipated corporate actions; 3) theNDRC’s 13th Five-Year Plan initiatives. Our preferred pick in China fertilizer isChina BlueChem (3983 HK, Buy, TP: HK$2.6).