Agriculture:China Agrochemical Monthly

Valuation and performance。
Over the past month, the China agrochemicals sector declined 17%,underperforming the market by 10%. Among China agricultural stocksunder our coverage, relative outperformers were Lianhe ChemicalTechnology (002250.SZ; Neutral) and Qinghai Salt Lake Potash (000792.SZ;Neutral), which underperformed the market by up to 5%.
China agrochemical prices (as of July 2)。
Fertilizer prices declined 2%-5% mom, in line with seasonal trends. DAPprices were up 8% yoy and 2% ytd on tight global inventories, resulting inexpanded margins as sulphur and phosphoric acid costs declined.
Glyphosate prices edged up slightly as we enter a seasonally strong 3Q.
China fertilizer industry (May 2010)。
Average fertilizer industry ROE stayed flat yoy at 4%, fairly in line with thehistorical average of 5%. However, nitrogen industry ROE declined to 1%,from 3% in Feb 2010, as lower ASPs eroded margins. 42% of nitrogenproducers were loss-making, significantly above the historical average of33%. This is consistent with our view that nitrogen industry consolidation willaccelerate, and we prefer cost leaders with market share gain potential suchas Hubei Yihua (HBYH) and China BlueChemical (3983.HK; Neutral).
North American fertilizer inventory levels (May 2010)。
North American fertilizer industry remains tightest for phosphates, followedby potash then urea, positive for HBYH in our view with phosphate exposure.
Urea: 0.2mn st (-24% mom, +16% yoy), 9% below last 5-yr average.
Phosphate: 0.5mn st (+11% mom, -32% yoy), 22% below last 5-yr average.
Potash: 2.0mn tons (+24% mom, -40% yoy), 11% above last 5-yr average.
China pesticide industry (May 2010)。
In May, 14% of pesticide producers were loss-making (flat yoy). Pesticideindustry ROE rose to 15%, from 9% in Feb 2010, in line with historical avg.
Investment view。
Buy ideas: Hubei Yihua (000422.SZ; on Conviction List), Sinofert (0297.HK),Yangnong (600486.SS), Lier (002258.SZ). Sell ideas: Qinghai IndustryGroup (000578.SZ), Noposion (002215.SZ). Key risks: upside—better-thanexpectedchemical cycle recovery; downside—adverse weather conditions.