Net profit for FY08 increased by 9.2% to RMB346.4m, which was better than our RMB314.6m forecast. Stripping out the non-core RMB25.8m income from service contracts, core net profit would have been RMB320.6m. The service contracts refer to contracts with about 145 distributors to help promote urea sales. This is in anticipation of the completion of its third urea plant which will increase urea capacity from 720k to 1,120k/annum. The total value of these contracts is RMB76.3m and RMB50.5m will be reflected as deferred revenue in FY09. FY08 revenue rose 35.3% to RMB2,084.9m, better than our RMB1,882.0m forecast.

Revenue increased due to three key reasons. (1) Average selling price for urea, methanol and compound fertiliser (CF) increased by about 9.1%, 10.6% and 60.9% respectively. (2) Sales quantity of urea and compound fertiliser increased by 11.6% and 9.9% respectively. (3) China XLX expanded into new markets in the North-Eastern and Central parts of China. This resulted in an increase in its capacity utilisation rate from an average of about 70% in FY07 to 83.7% in FY08.

Income tax credit for overprovision helps boost FY08 net profit slightly. Income tax expense for FY08 fell to RMB3.4m as compared to RMB16.1m in FY07. The decrease in income tax comprised of tax credit for overprovision of FY07 tax and a net RMB3.9m provision relating to 5% withholding tax on FY08 unremitted profits of Henan XLX, which is a subsidiary. The China subsidiary enjoyed full exemption from income tax in FY07 and FY08 as a wholly foreign owned enterprise. It will be subsequently taxed at a 50% reduction in income tax in FY09, FY10, and FY11.

Net profit for the quarter declined 37% due to high cost of sales. 4Q08 net profit fell 37% YoY to RMB45.7m. This was due to higher cost of sales for urea and methanol, as ASP for urea and methanol could not increase inline with higher anthracite coal prices (coal was purchased at RMB1,350/tonne from Aug to Sept 2008). However, the company expects its margins to improve in 1Q09 as coal prices have eased to RMB1,100/tonne as of Feb 2009.

Capex of RMB600m in FY09 is manageable. Management has indicated that its capex plans in FY09 will be roughly RMB600m, comprising RMB280m for its third plant, RMB70m upgrading of railway track to plant, RMB50m for increases in CF, and RMB160m for upgrading plans for its old and new plants. As of 31 Dec 2008, China XLX has a cash position of RMB200m, total bank loans of RMB578m and a gearing ratio of 0.32x. China XLX’s has an interest coverage of 4.8x. The company declared a first and final dividend of S¢1.6 for FY08. Pending our earnings revision for China XLX, we have a price target of S$0.47 based on 9.7x FY09 P/E.