Results in line

1H15 NPAT +149% YoY to Rmb342mn, or EPS ofRmb0.05, in line with expectations. Gross profit/EBIT ofmarketing segment surged 23%/59% YoY; EBIT of productionsegment was Rmb16mn vs. 1H14’s Rmb112mn EBIT loss, thanksto the recovery of the domestic fertilizer market and ASP hike.OCF decreased by 30% YoY to Rmb540mn.

Total sales volume reached 8.12mn tonnes (-1.6%), mainly dueto 16%/5% declines in sales volumes of nitrogen/phosphate,offset by volume increase in potash and compound fertilizers.Trends to watch

VAT resumption’s impact on inventory. The Ministry ofFinance announced fertilizer inventory (produced or purchasedbefore August 31, 2015) is subject to a 3% VAT rate fromSeptember 1, 2015~June 30, 2016. We estimate that aRmb50~100/tonne ASP hike for domestic fertilizer productsshould offset the 3% VAT on fertilizer inventory, however ASPhikes will be much less certain than the VAT resumption.Meanwhile, Sinofert’s production segment may record a loss in2H15 as oversupply and sector-wide destocking pressure mayinevitably squeeze margin.

Earnings revisions

We maintain our 2015/16e EPS of Rmb0.07/0.10.

Valuation and recommendation

Maintain HOLD; cut TP by 16% to HK$1.35, implying 1x2015e P/B (excluding Rmb5.8bn of goodwill for Qinghai SaltLake) given the potential margin squeeze in 2H15 and shareprice pullback across the sector.

Risks

Sector overcapacity; cancellation of favorable policies.