Shrinking all around
Sinofert had a total net loss of Rmb432mn in 1H16, orRmb0.06/sh, down from a net profit of Rmb342mn in 1H15.Recurring net loss was at Rmb344mn after one-off items, mainlyincluding a Rmb60mn impairment loss on its interest in QinghaiSalt Lake and an inventory write-down of Rmb26.6mn. EBITDAin 1H16 turned to a loss of Rmb119mn, and net OCF turned intoan outflow of Rmb414mn from an inflow of Rmb540mn in 1H15,implying a net outflow in working capital. Net debt fell 24% fromend-2015 to Rmb4.3bn and net gearing rose 12ppt to 34%. Thesales volumes of all kinds of products fell >35% YoY except forMDCP, which rose 13% YoY. Sinofert’s ASP and gross marginwere largely down.
Trends to watch
Losses throughout the sector. Sinofert’s losses in bothmarketing and production segments reflected the ongoingsector-wide plague. Weather anomalies already affected farmers’demand, and we do not expect the situation to improve in theshort term. We expect >30% of coal-based urea producers toincur cash losses at current prices. Further sector consolidation islikely. As coal prices stabilize, we expect a rebound in sector-wideprices from producers in 2017. Trading margins may take longerto recover given there are fewer arbitrage opportunities acrossborders after new foreign production capacity came online.Domestic distribution may increasingly rely on a pickup in localdemand and the pricing strategies of producers.
Investing more on compounds and new types offertilizers. Sinofert is aiming to become a leading wholesaler ofbasic fertilizers, as well as a maker of compounds and specializedproducts. The company has started to upgrade its compoundproduct mix for higher margins. Sinofert has earmarked a capexbudget of ~Rmb300mn for acquisitions in this area.
Earnings forecast
We lower our 2016e EPS forecast from Rmb0.1 to-Rmb0.08 and cut 2017e EPS by 67% to Rmb0.04.
Valuation and recommendation
The stock is trading at 0.5x 2017e P/B, already a fair discount onthe BV. We believe the loss and depressed sector outlook arepriced-in. Maintain HOLD and TP of HK$1 (0.5x 2017e P/B).Risks: Little progress in sector consolidation; Chinese productslosing market share in foreign markets; volatility in fertilizerprices; weak domestic demand.