1. Event
According to 2008 annual report, the company realized operating revenue of Rmb1148.1637mn (+3.10% yoy), total profit of Rmb221.8777mn (-5.78% yoy) and net profit of Rmb168.3874mn (-16.19% yoy).
2. Our Analysis and Estimation
1) Urea price fall mainly brought down the profit.
In 2008, the company produced 601,200 ton urea, 3.66% more than that of yearly plan, and sold 610,700 ton urea. Price of raw material, natural gas kept relatively stable; while due to the price hike in early & middle 2008, costs of products transportation and packing bags increased compared with those of last year, which affected finance and business performance of the company in 2008. Rapid slip of urea price in Q4 2008 mainly brought down 2008 net profit. At end of 2008 September, average domestic urea price was Rmb2,200/ton, while it fell to Rmb1,700/ton in late December, with a decline of 23%.
2) The company saw unsatisfactory performance in Q1 2009; while annual earning will not sharply decrease.
From December 29, 2008, manufacturing equipment entered into yearly maintenance period. According to plan of natural gas supply unit, this maintenance will take ~60 days, so the manufacturing only runs regularly in March; thus, earning of Q1 2009 is reported to be only ~Rmb0.02. The company plans to yield 580,000 ton urea in 2009 (21,200 ton less than that in 2008), strives for operating revenue of Rmb1.207bn, and controls operating cost within Rmb1.035bn. It’s predicted that Tianfu coal chemical project will be built and start trial run in Q4 2009, and Rmb1.6bn will be invested in Jinchi coal chemical project. Average urea price in 2009 is estimated at Rmb1700/ton; although gross margin of urea slightly falls, ~Rmb30mn profit from operation of Tianfu coal chemical project in Q4 2009 and paper pulp project started in October 2008 may make up the falling profit of urea to some extent. Annual net profit in 2009 is predicted to reach ~Rmb0.5/share.
3) Benefited from the policies, urea industry is limitedly affected by financial crisis.
4) Population growth and agricultural products upgrade bring mandatory increase in fertilizer demand.
3. Investment Suggestions
As natural gas cost keeps stable, price fall of urea will surely bring down the gross margin, yet it will slightly recover due to operation of Tianfu coal chemical project and paper pulp project. Although total demand of fertilizer industry will continue rapid growth in 2009, based on the Rmb0.02 performance in Q1 2009 and low urea price, we predict 2009-2011E EPS to be Rmb0.50, Rmb0.58 and Rmb0.65, with the rating down-regulated to “Neutral”.