FY15 results beat management’s bearish guidance; strong EBIT growth YoY
FY15 net income came in at RMB221m, down 3.7% YoY. The results beatour/consensus expectations by 24%, with the earnings drop being less than theprofit guidance of <-25% claimed in the profits warning. Conversely, EBIT rose61% YoY, to RMB543m, driven by a GPM lift of 1.4ppts and a cost reduction of0.3ppts. However, a significant drop in associate income, owing to the QSLIcontinuation, led to the net income decline. Sinofert declared a DPS ofRMB0.0081 (with a 26% dividend payout), offering a 1% dividend yield.
2H15 loss-making – volume drop of 23% YoY and 39% HoH
Sinofert made a loss of RMB121m in 2H15, on a sharp decline in sales volumeof -23% YoY or -39% HoH. The VAT resumption in September 2015 dampenedsales volumes and margins in both the marketing and production segments.
Segment operations improved
Marketing segment profit rose 42% YoY, to RMB534m, due to a sales shift toa higher-margin product (NPK). Total sales volume fell 11% YoY, to 13m tons,due partly to the integration of the marketing and production segment andsluggish consumption, within which Potash/Phosphate/Nitrogen fertiliservolume fell 6%/24%/15% YoY, while NPK sales volume surged by 13% YoY.
The Production segment’s losses narrowed, with gross profit surging 57%YoY, and the GPM improved by 3.3ppts, led by a phosphate/NPK ASP surge.However, the company failed to fully pass through the VAT resumption in2H15, due to an oversupply situation, with partial costs out of the VATdeduction shadowing operational improvements.
Key takeaways from analysts’ briefing
The 2016 outlook remains challenging: Sinofert expects 2016 to remainchallenging year, with crop floor price cuts in China potentially leading tofurther deterioration in the fertiliser market. Sinofert expects the VATresumption and the withdrawal of preferential treatments for fertiliserproducers to facilitate the removal of oversupply capacity.
Potash inventory stock rose in 2015, on China’s high import volume of 9.4mtons. A Chinese consortium is still under negotiation with exporters, wherepricing remains a key hurdle.
QSLI’s chemical businesses could face bigger challenges in the coming yearamid the economic slowdown and plunged chemical prices.
Valuation and risks; maintaining Hold rating in light of a tough 2016
We maintain our Hold rating, with an SOTP-derived target price ofHK$1.1/share. In our view, Sinofert is currently fairly valued, despite itsdepressed 0.43x 2016E P/B valuation (at the -1 SD P/B level), as its ROIC isbelow the cost of capital. Upside/downside risk: fertiliser price volatility.