QSLI:Profit alert on massive writedown;recurring in-line with DBe

Recurring loss in-line but beat consensus

    QSLI released preliminary FY17 results with net loss of RMB3.54-4.53bn vs. netprofit of RMB341mn in FY16. The lower-than-expected results were attributed to:1) assets impairment write-downs of RMB2.9-3.2bn from chemical integrationproject, Haina PVC, Haihong ADC and magnesium integration projects; 2) a lossin the chemical segment due to low utilization rate caused by two accidents whichresulted in higher production cost and lower production volume. If we excludeimpairments write-downs, recurring profit should be net loss of c.1.37-2.13bn(considering a 25% tax shield) in FY17, in-line with DBe of net loss of RMB2.1bnon low end, but beat consensus estimates of net loss of RMB2.56 by 17%.

    Mixed performance

    Potash: according to our calculations, QSLI potash sales volume dropped5% YoY in FY17 to 4.65mntons, indicating the 2H17 sales volumerebounded back since the 1H17 registered 25% YoY sales volume decline.

    Chemical: 1) high DD&A charge on magnesium integration and HainaPVC projects starting operations; 2) lower overall utilization rate attributedto a) two accidents in Haina and chemical subsidiaries; b) continuousenvironmental scrutiny.

    Earnings, valuation and risks; maintaining Hold

    We maintain Hold rating with our DCF-derived TP at RMB11.66 (assuming a 6.6%WACC and 2% terminal growth), which implies 1.2x P/B in 17-18E; we believe therisks and rewards are balanced at a current valuation of 1.2x 17E P/B vs 1.1% 17EROE, supported by a potentially ROE-/EPS-accretive debt-to-equity swap plan.

    Key downside risks: 1) sluggish chemical prices and soft demand could lead tolower product sales; and 2) unfavorable government policy. Key upside risks: 1)better-than-expected potash prices; and 2) faster-than-expected demand growth.