2012 results in line

In 2012, operating revenue rose 12.7% YoY to Rmb1.07bn, and net profit grew 53% YoY to Rmb249mn or Rmb0.69/sh, largely as we expected. Investment income from Lop Nur Potash increased 21% YoY to Rmb385mn. The company proposed an Rmb2.1 cash dividend per ten shares (tax included) for 2012. It took Rmb40.19mn of fixed asset impairment losses on its fruit & vegetable business, reducing EPS by Rmb0.11.

Major reasons for downgrade

High inventories both in China and overseas weighing on potash prices. At present, the potash inventories of major international potash consumers (including China) are elevated, and inventories of North America producers have been rising MoM for five months, with current inventory higher than the average level over the past five years. Moreover, p otash procurement in China remained sluggish after the Spring Festival, continuously crimping prices.

Potash subsidies to reduce further in India. Although India’s fertilizer subsidy could be flat YoY over 2013~2014, the subsidy on potash per tonne is set to decline. Besides, India’s potash import is expected to remain low in 2013 as the rupee remains weak against USD.

Current sharp decline of internationa l grain prices could make potash le ss affordable to downstream players. The futures prices of major agricultural products like bean, corn and wheat have dropped notably as the impact of the 2012 drough t in the US gradually dissipated and grain inventory there came in higher than expected. This could affect the potash affordability of downstream companies.

Valuation and recommendation

We downgrade the company to ACCUMULATE as China’s potash market will likely remain weak in 2013, which will reduce the company’s investment income from Lop Nur Potash. However, considering the stronger-than-expected loss reduction in the company’s main businesses (fruit & vegetables, lint cotton and sugar), we lift 2013/14e EPS b y 6%/5% to Rmb0.76/0.83. The stock is trading at 21x/20x 2013/14e P/E.

Risks

Weaker-than-expected demand for potash; market valuation declines