FY15 net profit up 688% YoY; operating profit drops 31% YoY

CBC posted FY15 results with net income of RMB830m or EPS ofRMB0.18/share, up 688% YoY, which is at the high end of the 650-690% profitalert. CBC declared a DPS of RMB0.08, representing a payout of 44%, lowerthan our expectation of RMB0.10. The share price offers a c.5% yield. Thestrong bottom-line growth is mainly attributable to no asset impairment bookin 2015, compared to RMB1.73bn in 2014. Also, operating profit was down31% YoY to RMB1.3bn due to sluggish products ASPs.

Segment performance at a cross road: methanol OP down 95% YoY

Urea segment profit recorded RMB799m, up 2.4% YoY; the productionvolume was up 13% YoY and reached 2.22mton, with a utilization rate of106%, down 1.3%pt YoY. The strong growth in volume was due to newcapacity in Hegang, which started on 1 July. However, ASP dropped by11% YoY to RMB1,529/ton.

Phosphate and NPK segment profit recorded RMB189m, up 128% YoY;production volume was up 8% YoY, reaching 984kton, with a utilizationrate of 98.4%, up 7.1%pt YoY. The strong lift in utilization was driven byDYK DAP phase 2. However, ASP dropped by 13% YoY to RMB2,524/ton.

Methanol segment profit declined 95% YoY to RMB48m; production wasflat at 1.56mton, with a utilization rate of 97.6%. ASP dropped by 20% YoYto RMB1,694/ton. The soft ASP was driven by the sluggish oil price.

Stringent cost control and a strong balance sheet: SG&A was cut by 13%YoY due to a strict administrative expense cut of 21%. SG&A as apercentage of sales was cut by 1%pt to 7.7%. The strong balance sheetcontinues: in 2015, CBC ended with a net cash position of RMB4.3bn(equivalent to RMB0.94/share).

A challenging 2016 – commodity prices are seeing light at the end of the tunnel

Fertilizer and methanol prices remain sluggish YTD, with urea/ DAP/ methanolaverage prices dropping by -15%/-4%/-16%, due to globally soft and sluggishcommodity prices. Conversely, we expect commodity prices to stabilize in2016E, where we see major commodity prices, such as oil, to graduallyincrease from US$33/bbl in 1Q16 to US$50/bbl by 4Q16. Hence, we see somelight at the end of the tunnel for fertilizer prices.

What to do with the stock? Compelling valuation; maintaining Buy

CBC trades at 0.5x 2016E P/B, 40% below -1 SD of the mean, and it is at a74% discount to global peers. We derive our HK$2.6 target price using DCF,assuming a WACC of 8.3% and a terminal growth rate of 1%. Our target priceimplies a 0.6x 2016E P/B, still below -1 SD of the average. We maintain ourBuy rating on China Blue Chemical due to its costs advantage The onshore gasprice cut in 2015 will benefit CBC’s Tianye methanol plant as well as the longtermgas contract renegotiation with CNOOC for FD phase I.

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