China XLX: Too rich for our liking

China XLX (CXLX) is expensive, trading at 6.2x FY09PE and 0.8x FY09P/NTA, at premiums over the average of 4.7x FY09PE and 0.7x FY09P/NTA for S-Shares under our coverage. This premium is unjustified given its bleak industry outlook and low earnings visibility. We trimmed our already 24% below consensus FY09F earnings further by 10% after imputing lower contribution from compound fertiliser. We expect a slew of earnings downgrades by the market, which has yet to fully reflect the urea oversupply situation and recent plunge in compound fertilizer prices. Maintain Fully Valued with target price reduced to S$0.24.

Compound fertiliser facing high feedstock cost and falling prices. Prices of compound fertiliser had been very weak, plunging 50% q-o-q to RMB2000/ton currently (lower than our expectation of RMB2300). This was due to slow demand in 1Q (off-peak season) and a 30% drop in the price of feedstock, phosphorus. CXLX also faces cost pressure due to overstocking of phosphorus at high price in 4Q08. We trimmed our ASP for compound fertiliser by RMB300/ton for 1Q09 and cut FY09F earnings for CXLX by 10%.

Urea remains overshadowed by oversupply. Urea price has risen from RMB1650/ton in January to RMB1900 currently, driven by a rise in coal price from RMB1000/ton to RMB1250 in the past 3 months. But there is still oversupply of urea and the outlook remains bleak. The export window remains shut given depressed international price of US$300/ton (RMB2000) and the 110% export tariff.

Premium unjustified, maintain Fully Valued. The share price has fallen 27% since our downgrade in January. Still, current valuation remains rich at 6.2x FY09F PE and 0.8x FY09F P/NTA. Our target price is reduced to S$0.24, based on 0.7x FY09F P/NTA, in line with the average for S-shares under our coverage and 50% discount to the average trough valuation of its much larger HK & China listed peers.

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