<p>May 29, 2008<br/>China Fertilizer<br/>Tough Times Ahead; Time to<br/>Take Profit</p><p>Conclusion: Despite positive fertilizer demand in<br/>China, we are taking a cautious view on the sector given<br/>our expectations of growing regulatory constraints,<br/>limited price leverage (especially for urea), and rising<br/>cost pressures from gas, coal feedstock, and potash<br/>imports. In contrast with the consensus view, our<br/>Underweight ratings underpin our investment thesis that<br/>margins have peaked in the sector, and the players<br/>could likely face tougher times ahead as more regulatory<br/>and cost pressures set in. We expect Sinofert to be the<br/>most vulnerable to further potential policy changes,<br/>followed by China BlueChem and China XLX.<br/>Firm fertilizer demand growth: Our proprietary China<br/>fertilizer model forecasts rising fertilizer demand with a<br/>CAGR of 4.5% in FY08-11, driven by the need to raise<br/>crop yields to meet surging grain demand from a<br/>growing population, a changing diet with rising incomes,<br/>and lower inventory, combined with supply constraints<br/>including shrinking arable land and water shortages.<br/>Where we differ: We believe the market has not<br/>factored in the possibility of greater margin pressure on<br/>the back of limited price leverage, rising costs (gas, coal<br/>feedstock, and potash imports), growing regulatory<br/>constraints, and weaker ability to pass through costs.<br/>Our earnings estimates for 2008/09 are 13%/20% below<br/>consensus, on higher margin pressure and lower<br/>volume assumptions (on limited capacity growth).<br/>Relative valuation: The group has underperformed<br/>their indices by 8% YTD, and are trading at 15-17x 2009<br/>P/E (versus historical means of 14x for China Blue and<br/>China XLX, and 20x for Sinofert), and versus the Asian<br/>Fertilizer basket average of 19x.</p><p>Contents<br/>Contents.......................................................................................................................................................................... 2<br/>Investment Case............................................................................................................................................................. 3<br/>Stock Recommendations .............................................................................................................................................. 7<br/>Risk-Reward Snapshot: Sinofert (0297.HK, HK$6.07, UW, PT HK$4.50) ................................................................. 13<br/>Why Underweight?............................................................................................................................................................................13<br/>Key Value Drivers .............................................................................................................................................................................13<br/>Risks to the Downside.......................................................................................................................................................................13<br/>Upside Risks .....................................................................................................................................................................................13<br/>Risk-Reward Snapshot: China BlueChemical (3983.HK, HK$5.42, UW, PT HK$4.10)............................................ 14<br/>Why Underweight?............................................................................................................................................................................14<br/>Key Value Drivers .............................................................................................................................................................................14<br/>Risks to the Downside.......................................................................................................................................................................14<br/>What Could Make Us Turn More Positive .........................................................................................................................................14<br/>Risk-Reward Snapshot: China XLX (CXLX.SI, S$0.93, UW-V, PT S$0.75) ............................................................... 15<br/>Why Underweight-V? ........................................................................................................................................................................15<br/>Key Value Drivers .............................................................................................................................................................................15<br/>Potential Downside Catalysts............................................................................................................................................................15<br/>Potential Upside Risks ......................................................................................................................................................................15<br/>China Fertilizer Industry .............................................................................................................................................. 16<br/>Urea/Nitrogen (N) Sector ............................................................................................................................................. 19<br/>Potash Sector ............................................................................................................................................................... 23<br/>Phosphate Sector......................................................................................................................................................... 25<br/>Methanol Sector ........................................................................................................................................................... 27<br/>Appendix ....................................................................................................................................................................... 29</p><p>Company Analysis<br/>Sinofert Holdings : The Worst Is Not Over; UW<br/>China BlueChemical Ltd : Regulatory Headwinds Ahead – Underweight<br/>China XLX Fertiliser Ltd : Margins Have Peaked; Downgrade to UW-V<br/>China Discovery : Century Sunshine: Leading Player in Organic Fertilizers<br/>China Discovery : Qinghai Salt Lake Potash: Leveraged to Structural Potash Shortage in China</p><p></p><p> <br/></p><p></p>