China BlueChemical Ltd.
China Bluechemical (‘Company’) manufactures chemical
fertilizers and chemical products. Its immediate and ultimate parent is the
state-owned China National Offshore Oil Corporation (CNOOC), which holds 59.4%
of the shares. 38.4% of the shares are listed on the Hong Kong stock exchange.
The company has plenty of dealings with state-owned enterprises from
purchase of materials to investments in associates and joint ventures, which may
be considered a source of strength in this context.
Its primary segments are fertilizers: Urea (42% of revenues), Phosphate and
Compound fertilizers (18%); chemical products: Methanol (22%); and others (18%):
port operations, transport services, trading of fertilizers/chemicals,
manufacture of bulk blending fertilizers, polyformaldehyde, and woven plastic
bags.
The demand for fertilizers is essential for grain farming, and this is a
priority for the government. The chemical product prices are directly
proportional to crude oil prices.
Apart from fluctuating selling prices of fertilizers and chemicals, the
company is subject to changes in its primary input prices: natural gas, coal,
phosphate ore, synthetic ammonia, sulphur, and power.
The company experienced declines in revenues in all segments except Urea
and trading. This was primarily due to lower selling prices through the first
half of the year, and the planned overhaul of a major plant. Demand for Urea
was strong due to the start of the spring farming season.
The company reported TTM revenues of $11.7b (2019: $12.3b) and net
profits of $514m (2019: $797m). Its recent average revenue was $12.5b. Applying
its average operating margins to this figure and deducting depreciation and
taxes, we estimate normal earning power of about $800-900m.
The standout feature of the financial statements is the large net cash
balance of over $7b. Its net current assets, net of all obligations, was $6.9b;
and net tangible assets were $15.6b. (Investment properties, at cost, was $97m.)
The stock is currently selling for $5.6b, which is below net current
asset value, and about 6-7x normal earnings.
Management have paid reasonably generous dividends averaging 50% of
earnings. Though the recent dividend was cut from $692m to $350m, the yield is
still over 6%.
The company (which sources synthetic ammonia) is commencing a
joint venture – investing $170m - with another CNOOC enterprise (manufacturing
propylene) to manufacture acrylonitrile, and move up the chemical materials value
chain; and is also disposing of loss-making investments.
Overall, this appears to be a cheap stock for a stable company of this sort.
Notes:
TTM: Trailing Twelve Months
$ represents Hong Kong Dollar