Qinghai Salt Lake Industry Group:Above expectations on lower minorities; core earnings below

What surprised us。

    QIG reported 1Q10 net profit of Rmb859mn (-3% yoy), accounting for 33%of both our and Wind consensus 2010E full-year estimates. The positiveearnings surprise came solely from higher-than-expected non-operatingincome and lower-than-expected minority interest, implying larger-thanexpectedlosses at its non-potash producing subsidiaries (1Q10 losseswere about 2.5X larger than seasonal losses in 1Q08 and 1Q09). If we stripout non-operating income, revenue and EBIT actually came in below ourexpectation, accounting for just 21% and 19% of our full-year forecasts,while gross margin was 5ppt below our forecast.

    Channel checks by our US ag team indicate that price hikes byinternational potash suppliers have stalled, suggesting a near-term plateauin potash pricing. In China, we expect continued weather uncertainties toprompt QSLP to keep potash pricing affordable in 2010E. We thereforereduce our 2010E potash price and sales volume forecasts for QSLP by 8%and 17%, respectively.

    What to do with the stock。

    We raise our 10E/11E/12E EPS estimates by 28%/4%/5% to account forlower ASPs and volume changes, but offset by lower 1Q10 minorityinterest. As such, we lower our 12-month TP to Rmb16.00 from Rmb17.50,still based on SOTP valuation. Retain Sell. Key risk is weaker-thanexpectedpotash demand.