China XLX Fertiliser - 2Q09: The worst has passed

Worse-than-expected 2Q09 results due to lower product prices and one-off loss. We expect profit to recover in 2H09 given the production ramp-up at new plant. Maintain BUY with target price of S$0.57 based on 8x 2010F PE.
China XLX Fertiliser’s (XLX) turnover was up 7% yoy to Rmb545m, mainly due to the launch of the new urea plant in mid-Apr 09. Gross margin and EBIT margin slid 13ppt yoy to 10.8% and 6.7% respectively, due to declines in the prices of urea, methanol and compound fertilisers, as well as one-off start-up costs for the new plant. Net profit plummeted 75% and 60% yoy respectively to Rmb23m in 2Q09 and Rmb82m in 1H09 (vs our full-year forecast of Rmb226m).


We believe the worst to be over in 2Q09, and earnings could recover in 2H09, due to the smooth launch of the new plant, as well as the stabilisation of urea prices and methanol prices. In 2Q09, the company registered substantial one-off start-up costs for the launch of Phase III in mid-April. The start-up costs will not be repeated in 2H09. With the production ramp-up at the new plant, the company’s urea capacity has increased from 0.72m tonnes to 1.25m tonnes. The company expects the new plant’s utilisation rate to increase throughout the year and reach full capacity next year. Unit cost is lower than that of the two old plants, which helps to drag down overall cost. Urea prices in China have stabilised at Rmb1,600-1,700/tonne due to a rebound in international urea prices and the reduction of urea export tariff, which opens the profit window for Chinese urea exports.

The loss from the methanol segment will narrow as XLX is streamlining facilities to produce less methanol and more urea, as well as reduce the cost of production. Adding to the boost is the rebound in methanol prices. Though net profit for 1H09 reached only 36% of our full-year forecast of Rmb226m, we maintain our profit forecast for 2009, due to the aforementioned factors. Management is going to hold a conference call today so we will provide updates later.

XLX is trading at 6.9x 2010F PE, much lower than the over 10.0x for domestic and global peers. Despite the industry headwinds in the near term, we remain upbeat on XLX, given its strong position amid industry consolidation in the medium to long term. Maintain BUY with a target price of S$0.57 based on 8x 2010F PE.

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