China XLX Fertiliser - Proposed dual listing in Hong Kong

CXLX announced this morning that it is contemplating a dual listing of its shares on the main board of the Hong Kong Stock Exchange, so that it can have ready access to different equity markets in the Asia Pacific when opportunities arise. CXLX has appointed professional parties to commence preparatory work for theproposed listing. Further announcements will be made once an application has beenfiled with the Hong Kong Stock Exchange. An EGM will be held at a later date to seek shareholders’ approval.

This proposed dual listing might not work as well as perceived. We believe CXLX’s discount to its Hong Kong peers might not narrow following a Hong Kong listing, given its limited urea export exposure compared with China BlueChemical (3983 HK) and its less diversified portfolio compared with Sinofert Holdings (0297 HK).

Liquidity could be affected. Additionally, it is possible that there will not be any new shares issued for the dual listing, i.e. CXLX will have to “take out” existing shares on the SGX and “transfer” them to Hong Kong. That would undermine its trading liquidity. We also believe that the two markets will not necessarily expose CXLX to a wider range of private and institutional investors.

Situation remains fluid. The listing may or may not occur, pending the results of the preparatory work and market conditions.

But overall picture still bleak. CXLX’s urea ASP stays low, as overcapacity in the Chinese market limits its ability to raise sales volume and ASPs. Management is also uncertain when the oversupply will end. In fact, it has guided that urea prices could remain weak for a period of time. Chinese urea exports remain uncompetitive at the current export tax rate. Additionally, CXLX’s tax holiday has expired and the company will attract a 17.5% tax rate in FY09-11.

Downgrade to UNDERPERFORM from Neutral. Market rumours could have fuelled its share-price rally in recent days, coupled with a broader market rally. We advise investors to lock in gains and downgrade the stock to UNDERPERFORM with an unchanged target price of S$0.34, still pegged at 6.2x CY09 P/E.

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