1Q16 results disappointed

China Minmetals Rare Earth announced 1Q16 results after market close on Apr27th. Its 1Q revenue was RMB62m (106%QoQ increase and 9%YoY decline),achieving 6% FY16DBe. The company’s 1Q16 NPAT came in a loss ofRMB15m, vs. RMB75m NPAT of FY16DBe. We think the 1Q16 results aredisappointing and the surplus situation for rare earth should continue. Sellmaintained.

ASP drop; inventory impairment loss; SG&A increase

Excluding impairment, China Minmetals Rare Earth was still struggling atbreakeven. Due to the weak prices of rare earth in 1Q16, which decreased byc. 3% QoQ, China Minmetals Rare Earth had an impairment of inventory ofRMB12mn in 1Q, c.1% of the average inventory value of 4Q and 1Q. Strip outimpairment, China Minmetals Rare Earth still have a negative bottom line. SGAwas not cut during the difficult period, but significantly increased fromRMB15mn to RMB22mn. The company explained the SGA increased due tolonger maintenance period. In addition, non-operation income, mainlygovernment subsidy also declined to RMB82.8mn in 1Q16 from RMB146mn in1Q15.

Sluggish outlook of rare earth in 2016

We maintain our pessimistic view on rare earth in 2016. We don’t think supplyquota has worked properly, as illegal mining continues to be a problem.

Without improvement in rare earth price, China Minmetals Rare Earth willlikely continue to struggle for making profits in FY16. We reiterate Sell.