China XLX - Poised for short-term rebound (DBSVickers)

BUY S$0.265 STI : 2,693.05

(Upgrade from FULLY VALUED)

Price Target : 12-Month S$ 0.40 (Prev: S$0.34)

Reason for Report : Results preview, recommendation upgrade

Potential Catalyst: Urea ASP increase

DBSV vs Consensus: Our forecasts are among the lowest on the back of weak urea margins.

• Upgrade to BUY. Stock is oversold and offers trading potential with 51% upside to our TP.

• Valuation undemanding at GFC trough level.

• Short-term catalyst from robust 3Q net profit growth of >200% yoy and qoq.

• Key risks are stretched balance sheet and persistent industry overcapacity issue.

Bottom-fishing opportunity emerges. China XLX’s share price collapsed 57% since early 2011, under-performing STI by c.40% on the back of weak 1H earnings and investors’ risk aversion towards small-mid cap and S-chips. Current valuations at GFC trough levels of 0.76x 12-month forward P/BV and 7.6x PE are attractive entry points in our view. In addition, China XLX now trades at wider discounts of c.20% to its own HK shares and 30% to HK peers vs the norm of 10% and 20% respectively.

Possible 3Q earnings surprise. Unexpectedly strong 3Q results could be a short-term price catalyst. We expect China XLX to report more than 200% yoy and qoq growth in 3Q net profit to c. RMB90m, largely attributable to higher margin spread of RMB150/t. Results will be due on 24th Oct (before market open).

Upgrade to BUY; TP revised to S$0.40. Our TP is raised to S$0.40, as we roll over our valuation to blended FY11/12 EPS, still based on 12x PE (-1.0SD), translating to 1.1x P/BV (-1.0SD). This is justifiable given the current gloomy industry outlook and global economic slowdown. In spite of our conservative forecasts (16-17% below consensus) and valuation methodology, current share price still offers 51% upside to our TP, suggesting stock is oversold and undervalued. Upgrade to BUY with trading opportunities ahead of strong 3Q results. Key risks remain China XLX’s stretched balance sheet, ASP fluctuations and industry overcapacity concern.