Qinghai Salt Lake Industry Group:In line with expectations; non-core improving, but hefty valuations

What surprised us。

    QIG reported 1H10 net profit of Rmb976 mn (+8% yoy), in line with ourexpectations, accounting for 44% of our 2010E full-year estimate, but only27% of Wind consensus estimates. Revenue rose 34% yoy, mainly due tohigher potash sales volumes at Qinghai Salt Lake Potash (QSLP,000792.SZ, Neutral), but gross margins declined 8pp yoy on higher potashresource taxes. For its non-core businesses, cement sales rose 22% yoyand cement gross margins improved 10pp yoy. A six-fold increase inproperty gross profits also helped partially offset lower margins for thecore potash business.

    What to do with the stock。

    We keep our estimates and our 12month P/B-based Rmb12.30 target priceunchanged. QIG’s steep valuation at 39X 2011E P/E keeps us Sell-rated. Weprefer QSLP to QIG for pure potash exposure. Key risks are: (1) QSLP’sability to raise ASPs without hampering potash demand; and (2) betterthan-expected profitability at the non-potash businesses.