The growth additive

China XLX Fertiliser (S$1.34) ? Initiating Coverage - Xtra nourishing

China XLX is the largest urea and compound fertiliser producer in Henan Province in China, with an established ?Xin Lian Xin? brand. CXLX is the lowest-cost coal-based producer of urea in Henan, and the fourth lowest-cost coal-based producer of urea in China. CXLX has been able to enjoy above-industry growth rates and capture more market share as a result of its scale. Revenue has been growing by a projected CAGR of 32.5% for FY05-09, with net profit expected to expand by 69.5% CAGR for the same period, as a result of the healthy macro environment, higher utilisation of its added capacity, increased contributions from compound fertilisers and the penetration of new cities in China. CXLX is preparing for the government-supported industry consolidation by planning the construction of a railway extension to its plant to bring down costs and a cogeneration plant to be self-reliant in energy.

We initiate with Outperform and target price of S$1.80, based on blended 20x CY08 P/E and DCF valuation (10.2% WACC, 2% terminal growth). Our target translates into 23.4x CY08 P/E. We believe this is not excessive given CXLX?s 3-year EPS CAGR of 55.4%, backed by a PEG ratio of 0.5x for FY08. CXLX is cheap (17.4x CY08 P/E) relative to the sector (20.0x CY08 P/E average).