We expect CXLX to report net profit of c. RMB50m in 4Q08, representing a plunge of 50% qoq and 33% yoy. We believe 4Q earnings are likely to be affected by lower ASP and margin compression of the compound fertilizer and methanol segments. Given the 30%-40% slid in ASPs, gross margin for compound fertilizer will likely drop to around 20% from 30% in 3Q; the Methanol segment may even dip into the red. Fortunately, the key product, urea that accounts for >50% of revenue, should see sequential improvement in 4Q as coal cost decline is greater than the fall in urea ASP.
The urea sector in China is expected to accelerate its consolidation and increase industry concentration in 2009. Given most of the small players are operating at losses currently, many of them are likely to be phased out in the next 6-12months. Meanwhile, margins for urea producers will be compressed in the transition. We expect big players to garner 15%-25% of gross margins vs 30%-40% in 1Q06 to 2Q08, assuming urea prices hover around RMB1600-1650/ton and coal prices about RMb900-1000/ton.
Our TP is maintained at S$0.33. We have cut FY09 and FY10 earnings by 23% each year but have raised valuation peg to 7.0x (vs 5.0x previously) FY09 PEs. This is in line with a 30% discount to global peers average valuation. We also believe that CXLX would benefit from the accelerated consolidation in the longer term. However, current valuation appears stretched at 8.2x 09PE, relative to its global peers as well as other S chips. With the lacking of near term catalyst, we downgrade the stock to Fully Valued.
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