China XLX Fertiliser: 1Q09 net profit slumps 47.6% to RMB59.1m

Net profit for 1Q09 decreased by 47.6% YoY to RMB59.1m. This is inline with our expectations. Reasons for the decline: (1) first quarter is usually weaker taking into consideration the seasonality of its business; (2) 1Q08 base was high due to the sale recognition of about 14,000/tonnes consignment stock of urea which was sold at the end of Dec 07. Management believes that they could exceed our FY09 net profit forecast of RMB199.1m due to its third plant coming on stream earlier than expected. However, we maintain our conservative net profit forecast as we foresee an oversupply of urea in China.

1Q09 revenue remained flat decreasing by 0.4% to RMB480.3m which was inline with our expectations. Revenue decrease was due to these key reasons: (1) Average ASP for methanol and compound fertiliser (CF) decreased by about 35.4% and 10.8% respectively compared to 1Q08; (2) Sales quantity of methanol and compound fertiliser decreased by 21.9% and 8.5% respectively. The decline in methanol and compound fertiliser revenue was partially offset by a urea service income of RMB37.9m. If not for this service income, 1Q09 revenue would have been RMB442.4m.

High anthracite coal prices are a concern as it continues to squeeze net profit. 1Q09 average anthracite coal price increased 38% YoY to RMB1,150/tonne. This caused net profit margins to shrink 11.1ppt to 12.3% during the period under review. As of Apr 09, anthracite coal price is about RMB1,250/tonne. In our forecast, we assume that FY09 average anthracite coal prices will be about RMB1,140/tonne. However, we do not neglect the possibility of coal prices remaining higher than our forecast. In our sensitivity analysis, we believe that if coal prices remain at RMB1,250/tonne for the remainder of FY09 this will reduce our net profit assumption by 41.3% to RMB116.9m which will translate to a target price of S$0.22.

Maintain NEUTRAL. We maintain our NEUTRAL call for China XLX and raise our target price from S$0.29 to S$0.345 based on 4.8x FY10 P/E. We believe its stronger FY10 earnings (due to full utillisation of third plant and better ASP for urea) will limit share price downside, although FY09 will be a tough year.

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