L-t Ag fundamentals intact; Buy Sinofert; initiate YTH and HB Yihua
Industry context
We are initiating coverage on two fertilizer blue chips: Yunnan Yuntianhua
(600096.SS) with a Sell rating, and Hubei Yihua (000422.SS) with Neutral.
We are also transferring primary coverage of Sinofert (0297.HK, retain Buy)
and China BlueChemical (3983.HK; downgrade from Buy to Neutral) from
Chris Shiu to Jessie Lai. Our fertilizer sector stance is Neutral.
Source of opportunity
We anticipate brisk demand for fertilizers in China for 2009E-2010E,
underpinned by government stimuli, high grain prices ytd and higher
volume required to compensate for depleted nutrients from lower-thanusual
fertilizer application in 2008. While downstream demand appears
intact, we expect a margin squeeze for producers in 2009E on urea and
phosphate price declines. We therefore advise investors to switch out of
Chinese producers and into distributors such as Sinofert.
Catalyst
Positive: State purchases to support grain prices and stimulus plans.
Negative: Weak 4Q08E results might trigger sector de-rating.
Risks
Upside: Faster-than-expected recovery in global fertilizer demand;
Downside: Sharp pullback in grain prices; adverse volatility in fertilizer,
coal and sulfur prices; and weather hazards.
Best buy idea
Sinofert is our top buy, because (1) it has higher exposure to increasing
demand for various fertilizers through its distribution network; (2) a more
scalable business and lower capex compared to producers; (3) margins are
less sensitive to fertilizer price fluctuations compared to producers; (4)
room for market share growth; and (5) undemanding valuations. Our 12m
P/B-based target price of HK$4.65 implies potential upside of 37%.
Best sell idea
Yuntianhua is trading at a 36% premium over Chinese peers, which we
believe is unwarranted. Over 40% of 2009E earnings will come from its
weak fiberglass business, susceptible to the global manufacturing
slowdown. Our P/B-based 12m TP of Rmb18.50 implies 27% downside.

Table of contents
Snapshots of ratings, target prices, and key assumptions 2
Farmer economics favorable – underpins brisk fertilizer demand 3
1. Government stimuli encourage farmers to increase crop yield 3
2. Inelastic fertilizer demand more pronounced in 2009E-2010E 5
3. Chinese farmers are generally insulated from the credit crunch, unlike overseas farmers 7
4. Sustained higher fertilizer prices in 1H09 on concentrated re-stocking under the off-peak storage program 7
Lower fertilizer prices for 2009E on inventory build and lower costs 8
Industry consolidation to accelerate – M&A opportunities in China’s urea and phosphate industries 10
Switch out of producers and move into distributors; Buy Sinofert. 10
Debt and refinancing analysis: three-part quantitative screen 13
Risks to our view 13
Sinofert Holdings (0297.HK): Better proxy to Ag stimulus; Buy 15
China BlueChemical (3983.HK): Downgrade to Neutral 17
Yunnan Yuntianhua (600096.SS): Fiberglass laggard; Sell 20
Hubei Yihua (000422.SZ): Positives priced in; initiate with Neutral 26
Disclosures 31