Net loss at RMB4.7bn with RMB3.2bn impairment booked
Sinofert posted FY16 results with a net loss of RMB4.7bn / EPS RMB-0.66/sh(vs. profit of RMB221mn in FY15) with no dividend declared. The results wereworse than expected due to impairment loss of RMB3.2bn mainly onimpairment made on QSLI stake (RMB2.8bn). The sharp decline in operationswas due to 1) sluggish fertilizer prices and weak domestic fertilizers demandcaused by oversupply and shifting in crops planting. 2). SG&A increased 10%yoy on costs related to Sinochem Changshan facility upgrade and overhaul.
Both segment loss making
Marketing segment turned into a loss at RMB507mn (FY16: profit ofRMB535mn) which was driven by 1) unable to pass on cost after VATresumption; 2) weaker fertilizer prices. GPM shrank to c.1.0% from 4.5% inFY15, of which urea / phosphate / potash / NPK GP dropped by 138%/38%/ 35%/ 51%, respectively.
Production segment loss jumped to RMB3.9bn (FY15: RMB-2mn) as aresult of impairment loss, and intense competition. GPM contracted to0.7% from 32.1%. ASP of major products dropped c.38-60% yoy andvolume decreased by c.23-44% yoy. After the impairment on QSLI, webelieve QSLI stake cost would be c.RMB20/share.
Valuation & Risk
We value Sinofert by using SOTP at HK$1.22/share by using DCF for corebusiness (assuming 7.7% WACC & Zero terminal growth) and holding discountin its QSLI stake. We expect its loss will shrink in 2017E and close tobreakeven. However, we believe the current valuation has already fairly valuedthe company at 0.6x 2017-18E P/B, where the company should achieve ROE of4% by 2018E. Key up/downside risks: 1) fertilizer price volatility; 2)unanticipated corporate actions; 3) the NDRC's 13FYP initiatives