Potash prices may bottom out given lower import pricing
We believe the lower-than-expected price of Sinofert’s recent potash
import contracts suggests a possible bottom for potash prices in 1H2013,
given the strong demand and that potash seems inexpensive relative to
phosphate and nitrogen (two other components of compound fertilizer).
Meanwhile, global crop prices remain at historically high levels, which we
believe will drive a strong demand for potash. As it may take multi-years
for crop inventory to recover, we believe farming returns will remain
attractive in the near term. In our view, potash’s concentrated supply offers
a buffer for global supply, and with domestic inventory falling to a
healthier level, we believe the large contract volume signals Sinofert’s
confidence of a potash price recovery.
Sinofert to benefit from margin expansion; maintain Neutral
As a major potash distributor, Sinofert would benefit from the potential
bottoming of potash prices, in our view, as it has locked 1H13’s cost at
$400/mt (spot price $430/mt). Per our analysis, every 5% change in the price
of potash will result in a 20% change in 2013E EPS (11% for QSLI). We expect
Sinofert’s phosphate margin to expand, benefiting from the Yunlong
acquisition. We see an 11% contribution to total gross profit from Yunlong’s
MCP/DCP business and a solid margin improvement for phosphate fertilizers
on increasing low-cost self-mined phosphate rock. However, as the stock has
risen 80% since its trough in June 2012, we believe the market has already
taken into account Sinofert’s earnings improvement potential. We raise our
2012E-2014E EPS by 5%-28% and target price by 29% to HK$2.20.
QSLI: lower potash prices and weaker chemicals; cut to Neutral
We cut potash price assumption for QSLI as we see a lower full-year ASP,
despite our expectation of a recovery in 2Q-3Q13. We also cut chemicals
margin forecast for QSLI on slow ramp-up of new capacities. As such, we cut
2013E/2014E EPS by 25%/21% and target price by 11% to Rmb29.00. Given
lower coverage-relative upside, we downgrade QSLI to Neutral from Buy.
Updating valuations, minor target price change for HBYH
We also adjust our 12-month sector-relative P/B vs. ROE based target price
for Hubei Yihua by +3% based on new sector valratio.