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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. W
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