China BlueChemical Ltd. (‘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.