Rating Company Hold China BlueChemical - JRJ

Deutsche Bank Markets Research

Rating

Hold Asia

Hong Kong

Energy

Chemicals

Company

China BlueChemical

Date

16 July 2015

Initiation of Coverage

Plenty of risk - less reward; Initiate with Hold

Reuters Bloomberg Exchange Ticker 3983.HK 3983 HK HSI 3983

ADR Ticker ISIN CBLUY US16936K1007

Industry fundamentals remain soft

Forecasts And Ratios

Year End Dec 31 2013A 2014A 2015E 2016E 2017E

Sales (CNYm) 10,723.6 10,796.9 10,124.7 10,589.4 10,601.4

EBITDA (CNYm) 3,305.8 2,699.6 2,239.9 2,454.3 2,388.8

Reported NPAT (CNYm) 1,647.1 105.3 834.1 932.4 845.9

Reported EPS FD(CNY) 0.36 0.02 0.18 0.20 0.18

DB EPS FD(CNY) 0.38 0.29 0.18 0.20 0.18

Price/Book (x) 1.3 0.7 0.7 0.7 0.7

PER (x) 10.0 10.3 12.0 10.7 11.8

EV/EBITDA (x) 4.5 4.3 3.7 3.6 3.7

DPS (net) (CNY) 0.14 0.12 0.07 0.08 0.07

Yield (net) (%) 3.7 4.0 3.3 3.7 3.4

Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples & yld calculations use avg historical prices for past years & spot prices for current & future years.

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Price at 15 Jul 2015 (HKD) 2.71

Price target - 12mth (HKD) 2.67

52-week range (HKD) 4.10 - 2.37

HANG SENG INDEX 25,056

David Hurd, CFA

Research Analyst

(+852) 2203 6242

[email protected]

Price/price relative

2.0

3.0

4.0

5.0

6.0

7/13 1/14 7/14 1/15

China BlueChemical

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute -13.7 -20.8 -33.3

HANG SENG INDEX -6.7 -9.3 6.8

Source: Deutsche Bank

We initiate coverage on China BlueChemical with a Hold rating and DCF price target of HK$ 2.67 / share. We see minimal upside to both global urea and methanol prices based on DB forecasts of flat coal prices 2014-17e. In 2014, China Blue wrote off Rmb 1.7bn in assets and appointed a new CEO. We are concerned of the potential for additional write-offs / write-backs and uncertainty over future capex/ growth plans. Our Hold rating on China Blue is based on soft fundamentals in both global urea and methanol markets.

The business China BlueChemical (“China Blue” or “CB”) is a urea and methanol business. The Company has a strategically strong base on Hainan Island, fed by cheap natural gas from sister company, CNOOC Ltd, which in turn feeds China’s southern agricultural belt. Since 2009, we believe that CB has over-reached for growth in China’s coal-to-urea patch. In December 2012, the NDRC restricted natural gas as feedstock for any urea / methanol expansion projects. Might natural gas into “syngas” into olefins be CB’s next growth venue?

Investment thesis We suspect that CB might not be finished with its asset write-offs. We do not see much upside to normalized earnings due to soft mid-term fundaments on both urea and methanol markets worldwide. China Blue’s management is rightfully holding back on new urea and methanol (capacity) investments, but in the interim, the company should struggle to find avenues for growth.

Valuations and risk: We value CB from a DCF model. Our WACC is 7.6% consisting of CoE (8.1%) and after tax CoD (4.1%). Our China Rfr (3.9%) and Erp (5.6%) are set by a DB Strategy Group. We show CB trading at 11% and 60% discount to global and domestic (China A-share) peers. Primary risks to our Hold are: 1) higher/ lower China coal prices; 2) NDRC policy initiatives for better or worse; and 3) continued asset write-offs 2015-16e.

16 July 2015

Chemicals

China BlueChemical


Model updated:16 July 2015

Running the numbers

Asia

Hong Kong

Chemicals

China BlueChemical Reuters: 3983.HK Bloomberg: 3983 HK

Hold Price (15 Jul 15) HKD 2.71

Target Price HKD 2.67

52 Week range HKD 2.37 - 4.10

Market Cap (m) HKDm 12,360

USDm 1,595

Company Profile

China BlueChemical Limited, a subsidiary of CNOOC, is principally engaged in the development, production and sales of mineral fertilisers and chemical products.

Price Performance

2.0

3.0

4.0

5.0

6.0

Jul 13 Oct 13Jan 14Apr 14 Jul 14 Oct 14Jan 15Apr 15

China BlueChemicalHANG SENG INDEX (Rebased)

Margin Trends

12162024283236

12 13 14 15E 16E 17E

EBITDA Margin EBIT Margin

Growth & Profitability

0

5

10

15

20

-10

-5

0

5

10

15

12 13 14 15E 16E 17E

Sales growth (LHS) ROE (RHS)

Solvency

12

13

13

14

14

15

15

-25

-20

-15

-10

-5

0

12 13 14 15E 16E 17E

Net debt/equity (LHS) Net interest cover (RHS)

David Hurd, CFA

+852 2203 6242 [email protected]

Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E

Financial Summary

DB EPS (CNY) 0.41 0.38 0.29 0.18 0.20 0.18

Reported EPS (CNY) 0.39 0.36 0.02 0.18 0.20 0.18

DPS (CNY) 0.15 0.14 0.12 0.07 0.08 0.07

BVPS (CNY) 2.9 3.1 3.0 3.0 3.1 3.2

Weighted average shares (m) 4,610 4,610 4,610 4,610 4,610 4,610

Average market cap (CNYm) 19,684 17,372 13,934 9,901 9,901 9,901

Enterprise value (CNYm) 17,762 14,729 11,663 8,370 8,720 8,826

Valuation Metrics P/E (DB) (x) 10.3 10.0 10.3 12.0 10.7 11.8

P/E (Reported) (x) 10.9 10.5 132.3 12.0 10.7 11.8

P/BV (x) 1.48 1.25 0.74 0.72 0.69 0.67

FCF Yield (%) 5.3 7.8 5.0 nm 0.6 3.5

Dividend Yield (%) 3.5 3.7 4.0 3.3 3.7 3.4

EV/Sales (x) 1.7 1.4 1.1 0.8 0.8 0.8

EV/EBITDA (x) 5.0 4.5 4.3 3.7 3.6 3.7

EV/EBIT (x) 6.5 5.9 6.3 6.4 6.0 6.6

Income Statement (CNYm)

Sales revenue 10,739 10,724 10,797 10,125 10,589 10,601

Gross profit 4,100 4,049 3,541 3,106 3,247 3,181

EBITDA 3,539 3,306 2,700 2,240 2,454 2,389

Depreciation 794 825 856 923 989 1,050

Amortisation 0 0 0 0 0 0

EBIT 2,746 2,480 1,844 1,317 1,465 1,339

Net interest income(expense) 1 8 -1 -99 -102 -103

Associates/affiliates 0 -10 -478 4 3 3

Exceptionals/extraordinaries -132 -123 -1,260 0 0 0

Other pre-tax income/(expense) -7 -9 8 0 0 0

Profit before tax 2,608 2,347 113 1,222 1,366 1,239

Income tax expense 624 554 16 306 342 310

Minorities 173 146 -8 82 92 84

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 1,810 1,647 105 834 932 846

DB adjustments (including dilution) 100 94 1,243 0 0 0

DB Net profit 1,911 1,741 1,349 834 932 846

Cash Flow (CNYm)

Cash flow from operations 2,572 3,097 1,742 1,647 1,820 1,952

Net Capex -1,538 -1,741 -1,051 -1,755 -1,755 -1,605

Free cash flow 1,035 1,355 691 -109 64 347

Equity raised/(bought back) 12 39 -13 0 0 0

Dividends paid -926 -867 -833 -644 -427 -465

Net inc/(dec) in borrowings -425 31 2,627 0 0 0

Other investing/financing cash flows 101 -188 121 -32 -28 -29

Net cash flow -204 370 2,592 -784 -390 -147

Change in working capital -277 406 -210 -221 -203 -20

Balance Sheet (CNYm)

Cash and other liquid assets 2,564 2,934 5,526 4,742 4,351 4,204

Tangible fixed assets 9,997 10,811 9,909 10,757 11,540 12,112

Goodwill/intangible assets 603 601 491 488 486 484

Associates/investments 776 1,085 551 588 618 650

Other assets 3,264 3,104 3,463 3,858 4,087 4,105

Total assets 17,205 18,536 19,939 20,433 21,083 21,555

Interest bearing debt 0 31 2,656 2,656 2,656 2,656

Other liabilities 2,578 3,004 2,534 2,755 2,806 2,814

Total liabilities 2,578 3,035 5,190 5,411 5,463 5,471

Shareholders' equity 13,209 14,156 13,600 13,880 14,488 14,961

Minorities 1,417 1,345 1,150 1,141 1,132 1,124

Total shareholders' equity 14,627 15,501 14,749 15,022 15,620 16,084

Net debt -2,564 -2,903 -2,870 -2,085 -1,695 -1,548

Key Company Metrics

Sales growth (%) 10.1 -0.1 0.7 -6.2 4.6 0.1

DB EPS growth (%) -3.8 -8.9 -22.5 -38.1 11.8 -9.3

EBITDA Margin (%) 33.0 30.8 25.0 22.1 23.2 22.5

EBIT Margin (%) 25.6 23.1 17.1 13.0 13.8 12.6

Payout ratio (%) 38.2 39.2 525.4 39.0 40.0 40.0

ROE (%) 14.3 12.0 0.8 6.1 6.6 5.7

Capex/sales (%) 14.3 16.2 9.7 17.3 16.6 15.1

Capex/depreciation (x) 1.9 2.1 1.2 1.9 1.8 1.5

Net debt/equity (%) -17.5 -18.7 -19.5 -13.9 -10.9 -9.6

Net interest cover (x) nm nm nm 13.3 14.4 13.0

Source: Company data, Deutsche Bank estimates

16 July 2015

Chemicals

China BlueChemical


Investment thesis

Outlook

We initiate coverage on China BlueChemical Ltd (3983.HK with a Hold rating

and a target price of HK$ 2.67/ share). “China Blue” is a subsidiary of the

CNOOC Group of companies. The stock is trading at an 11% PE discount to

global peer averages on 2016 estimates. The stock is trading at a 60% discount

to a handful of China A-share peers on 2016 estimates. In 2014, China Blue

took an asset impairment charge of Rmb 1.73bn and appointed a new CEO.

Since 2012, the average price of urea in China has fallen -26% (Figure 20).

Since 2013, the average price of methanol in China has fallen -26.6% (Figure

21). Our coal, urea and methanol price forecasts are presented in Figure 19.

China BlueChemical is one of the largest urea and methanol producers in Asia

(Figure 6 and Figure 7). China Blue has a strategically strong urea and

methanol business based on Hainan Island. Additional operations are located

in Inner Mongolia and Hubei Province (Figure 3). CB’s Hainan Island

production hub is fed with low cost natural gas from sister company (CNOOC

Ltd) and serves wealthy Guangdong province and other parts of agricultural

southern China (Figure 106 to Figure 108). China Blue has total nameplate

capacity of 1,840k tons of urea, 1,600k tons of methanol, 1,000k tons of

phosphate fertilizers, and 60k tons for POM (Polyoxymethylene).

Valuation

We value China Blue from a DCF model Figure 15. Our DCF target price is HK$

2.67 / share. Our Cost of Equity is 8.1%, after tax Cost of Debt 4.1% and Debt

to Capital 12.2%. We use a DB standardized China Risk Free Rate of 3.9% and

Equity Risk Premium of 5.6%. We use a terminal growth rate of 0% for China

Blue and most of our commodity chemical companies. CB’s 2015/ 2016e PE

multiples of 12.2 and 10.9 represent a 14.6% and 11.3% discount to

international peers and (Figure 16) and a 57% & 61% discount to China A-

share peers (Figure 17). China Blue has recently been trading on a P/E range of

9.0x- 12.0x, which is below its most frequently traded P/E range of 12.0x-

15.0x (Figure 18). We believe the current CB discount is the result of: 1) asset

write-offs 2H14; 2) a change in the CEO, December 2014; and 3) the company

is an SOE (State Owned Enterprise), which generally deserves a discount.

Key risks

The key risks to our Hold rating are: 1) higher/ lower China coal prices that

would lead to higher / lower global urea and methanol prices; 2) policy

initiatives for better or worse from the NDRC – more specifically, we are

concerned that maybe the NDRC would reconsider its stance taken in

December 2012 that prohibits the use of natural gas into any new capacity

expansion plans for urea and / or methanol; 3) continued asset write-offs /

write backs by China Blue 2015-16e; 4) the introduction of a VAT tax on

fertilizer transactions; and 5) any unexpected improvement / deterioration in

China’s macro economic outlook. DB China Economist, Mr. ZHANG Zhiwei

expects China GDP growth of 7% in 2015 and 6.7% in 2016e vs. 7.4%in 2014.

16 July 2015

Chemicals

China BlueChemical


Table Of Contents

Company profile .................................................................... 5 Urea and Methanol dominate – Phosphates are growing .........................................5 Customers and networks ..........................................................................................9 Board of Directors .................................................................................................. 12

Valuation and risks ............................................................. 13 Valuation tools ........................................................................................................ 13

Looking forward .................................................................. 18 Key drivers of the business ..................................................................................... 18 New projects .......................................................................................................... 20 Business Segments ................................................................................................ 22

Looking back........................................................................ 26 Key drivers of the business ..................................................................................... 26 Consolidated Revenues .......................................................................................... 26

Skeletons in the closet ....................................................... 35 M&A – Are there any more skeletons ion this closet? ............................................ 35

CB’s Share price .................................................................. 40 Correlated to ........................................................................................................... 40

Key risks ............................................................................... 42 China BlueChemicals .............................................................................................. 42

Global urea .......................................................................... 44 Urea market overview ............................................................................................. 44

Global methanol .................................................................. 57 Lots of potential growth ......................................................................................... 57 China agricultural production to support fertilizer demand ..................................... 65

Appendix A .......................................................................... 69 Urea cost models.................................................................................................... 69 Methanol cost models ............................................................................................ 72

16 July 2015

Chemicals

China BlueChemical


Company profile

Urea and Methanol dominate – Phosphates are growing

Established in July 2000 and listed on the Hong Kong Stock Exchange on 29-

September 2006, China BlueChemical is one of the largest fertilizer (urea and

phosphates) and methanol producers in China (Figure 4.and Figure 5).

CB is a subsidiary of the CNOOC Group, which is the third largest state-owned

oil and gas company in China. The CNOOC Group owns 59.4% of China

BlueChemical Ltd and controls the Board (Figure 1 and Figure 14). The CNOOC

Group of companies is 100% owned by the Chinese government. CNOOC Ltd.

(883 HK), COSL (2883 HK), Offshore Oil Engineering (600583 CH) and China

BlueChemical (3983 HK) are all listed subsidiaries of CNOOC Group and are all

considered to be related companies (“sister-companies”).

Figure 1: Share holding structure of the company

CNOOC Group 59%

Public39%

Four promoters

2%

Source: Company data, Deutsche Bank

CNOOC Ltd (883 HK) is the principal supplier of natural gas to China Blue.

Natural gas is the primary feedstock used by CB for the production of its urea

and methanol. The transfer pricing mechanism for natural gas between

CNOOC Ltd. and China Blue is not disclosed.

China BlueChemical has a total designed annual nameplate capacity of 1,840k

tons of urea, 1,600k tons of methanol, 1,000k tons of phosphate fertilizers

(diammonium phosphate (“DAP”); monoammonium phosphate (“MAP”); and

Compound fertilizers (“NPK”), and 60k tons of POM (Polyoxymethylene). The

company has production facilities located on Hainan Island, Inner Mongolia

and Hubei Province (Figure 2 and Figure 3).

Listed in 2006

Part of the CNOOC Group

Feedstock provided by sister

company, CNOOC Ltd.

Based on Hainan Island in

southern China

16 July 2015

Chemicals

China BlueChemical


Figure 2: Total production capacity of China BlueChemical’s main products

1,840

1,600

1,000

60

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Urea Methanol Phosphate POM

000 tons

Source: Company information, Deutsche Bank

Of the company’s three urea plants, Fudao I (520k tons) and Fudao II (800k

tons) are located on Hainan Island and source natural gas from sister company

CNOOC Ltd; the CNOOC Tianye urea plant (520k tons) is located in Inner

Mongolia and sources natural gas from PetroChina Ltd (0857.HK).

China Blue’s two largest methanol facilities are also located on Hainan Island

and also source natural gas from CNOOC Ltd. CB’s Tianye (200k tons)

methanol plant is located in Inner Mongolia and receives natural gas from

PetroChina (“PTR”). CB has been toying with the idea of converting its Tianye

urea and methanol plants into coal-based facilities. We gather, 1) PetroChina’s

natural gas supply to CB’s Tianye facilities (urea and methanol) is interruptible

due to winter retail demand for heating; and 2) CB management has recently

decided not to change over to coal from PetroChina natural gas feedstock.

China Blue has an integrated phosphate business with three upstream

phosphate mines and three phosphate fertilizer production facilities with total

nameplate capacity of 1,000k tons. Figure 3 below presents production

capacities, location and feedstock used in each of CB’s production facilities.

Urea

Methanol

Phosphates

16 July 2015

Chemicals

China BlueChemical


Figure 3: Production facilities of China BlueChemical

China BlueChemical

Urea Phosphate Methanol POM

Fudao 1Capacity: 520k mln tonsFeedstock: Natural gasLocation: Hainan

Fudao 2Capacity: 800k mln tonsFeedstock: Natural gasLocation: Hainan

TianyeCapacity: 520k mln tonsFeedstock: Natural GasLocation: Inner Mongolia

DYK MAPCapacity: 150k mln tons Feedstock:Phosphate oreLocation: Hubei

DYK DAP 1Capacity: 350k mln tons Feedstock:Phosphate oreLocation: Hubei

DYK DAP 2Capacity: 700k mln tons Feedstock:Phosphate oreLocation: Hubei

Hainan 1Capacity: 600k mln tonsFeedstock: Natural gasLocation: Hainan

Hainan 2Capacity: 800k mln tonsFeedstock: Natural gasLocation: Hainan

TianyeCapacity: 200k mln tonsFeedstock: Natural GasLocation: Inner Mongolia

TianyeCapacity: 60k mln tonsLocation: Inner Mongolia

Source: Company data, Deutsche Bank Note: The company has had ongoing plans to convert its CNOOC Tianye plant to use coal as a feedstock due to “interruptible” gas supplies from PetroChina. However, the most recent discussion we had with China Blue’s management on this topic, sounded as if the board had decided after-all not to convert this facility to coal from natural gas feedstock.

Despite recent growth in its “Phosphates & Other” business segment, the

earnings of China BlueChemical remain highly geared to Urea and Methanol.

Figure 4: CB – Revenue by business segment (2014) Figure 5: CB – Profit before tax by segment (2014)

Urea, 31%

Phosphorous fertilizers,

24%

Methanol, 30%

Others (POM), 16%

Urea, 42%

Phosphorous fertilizers,

4%

Methanol, 53%

Source: Company specific data; Deutsche Bank


16 July 2015

Chemicals

China BlueChemical


Figure 6: Major urea producers China, Asia (x-China) and Middle East

Company Name Bloomberg

Symbols

Capacity

(MTPA)

Feedstock Plant location

Major Chinese urea producers

Province where the plants are located

Hubei Yihua 000422 CH 2.60 Coal Hubei

China XLX 1866 HK 2.10 Coal Henan & Xinjiang

Sichuan Litianhua 000912 CH 2.10 Natural gas Sichuan

China BlueChemical 3983 HK 1.84 Natural gas Hainan and Inner Mongolia

China Coal Energy 1898 HK 1.75 Coal Inner Mongolia

Yunnan Yuntianhua 600096 CH 1.60 Natural gas Yunnan

Luxi Chemical 000830 CH 1.50 Coal Shandong

Sichuan Meifeng Chemical 000731 CH 1.40 Natural gas Sichuan

Sinofert 297 HK 1.12 Coal Jilin

Hualu-Hengsheng 600426 CH 1.05 Coal Shandong

Sichuan Chemical 000155 CH 0.72 Natural gas Sichuan

Major Asian (ex-China) Urea producers

Country where the plants are located

QAFCO Non-listed 5.60 Natural gas Qatar

Petronas Chemicals (Note) PCGB KL 2.63 Natural gas Malaysia

Saudi Arabian Fertilizer Company

(SAFCO)

SAFCO AB 2.60 Natural gas Saudi Arabia

Parsian Oil & Gas Non-listed 2.15 Natural gas Iran

Chambal Fertilizers CHMB IN 2.00 Naphtha India

Ruwais Fertilizer Industries Non-listed 1.50 Natural gas U.A.E.

Note: Petronas Chemicals will increase its urea production capacity from 1.43 mln tpa to 2.63 mln tpa beginning 2016.


16 July 2015

Chemicals

China BlueChemical


Figure 7: Major methanol producers China, Asia (x-China) and Middle East

Bloomberg

Symbol

Capacity

(MTPA)

Plant Location Feedstock

Major Chinese Methanol producers

Henan Coal and Chemical (HNCC) Private 1.90 Henan Coal

Yankuang Group Private 1.70 Shandong Coal

China BlueChem 3983 HK 1.84 Hainan, Inner Mongolia Natural gas

Shanghai Coking & Chemical Co. Private 1.40 Shanghai Coal

Shanghai Huayi Private 1.40 Shanghai Coal

Huadian Yulin Natural Gas Chemical Private 1.40 Shaanxi Coal

Shandong Jiutai Chemical CEGY SP 1.30 Inner Mongolia Coal

Inner Mongolia Berun Group Private 1.00 Inner Mongolia Coal

Chongqing Kabeile Private 0.85 Chongqing Natural gas

Pingmei Lantian Private 0.73 Henan Coal

East Hope Group Private 0.70 Chongqing Natural gas

ENN Group Private 0.60 Inner Mongolia / Jiangsu Natural gas

Donghua Energy Private 0.60 Inner Mongolia Coal

Gansu Huating Private 0.60 Gansu Coal

Shaanxi Xianyang Private 0.60 Shaanxi Coal

Major Asian (ex-China) Methanol producers

Zagros PC Private 3.30 Iran Natural gas

Mitsubishi Gas Chemical 4182 JP 2.43 Japan Naphtha

SABIC SABIC AB 2.43 Saudi Arabia Natural gas

Petronas Chemicals PCHEM MK 2.36 Malaysia Natural gas

Salalah Methanol Private 1.30 Oman Natural gas

SIPCHEM SIPCHEM AB 1.20 Saudi Arabia Natural gas

Oman Methanol Private 1.05 Oman Natural gas

Ibn Sina Private 1.00 Saudi Arabia Natural gas

Qatar Fuel Additives (QAFAC) Private 0.99 Qatar Natural gas

Sojitz Corporation 2768 JP 0.70 Indonesia Natural gas

Kharg Private 0.66 Iran Natural gas


Customers and networks

China BlueChemical has a wholesale distribution network spreading across 20

provinces in China that accounts for the majority of the company’s sales.

According to management, CB has a 3% market share of urea in China, a 2%

market share of methanol and a 5% share of phosphates. Notwithstanding,

and since the bulk of CB’s operations are on Hainan Island, the Company has

50% and 25% of urea market share in Guangdong and Guangxi, respectively.

We suspect that China Blue’s dominant position in south China might have

much to do with the fact that the x-Chairman of the CNOOC Group, Mr. WEI

Liucheng served as Governor (2004-2007) and Party Secretary (2007-2012) of

Hainan Island and currently chairs the Committee of Economics and Finance

for the National People’s Congress.

50% market share of urea in

Guangdong / Connections in

high places

16 July 2015

Chemicals

China BlueChemical


Figure 8: Urea sales distribution 2014 Figure 9: Methanol sales distribution 2014

North-eastern China9%

Northern China12%

Eastern China4%

South-eastern China3%

Southern China23%

Hainan5%

International44%


Northern China5%

Eastern China9%


Southern China63%

Hainan6%

International3%



Figure 10: Phosphate sales distribution 2014 Figure 11: Domestic vs. international sales (2014)


Northern China23%

Eastern China8%


Southern China2%

International25%

55.8%

97.8%87.3%

44.2%

2.2%12.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Urea Methanol Phosphate

Domestic sales International sales

Source: Company data, Deutsche Bank Note: There is a requirement on DAP exports globally and that is that by content at least 18% nitrogen in export DAP and MAP, which only China BlueChemical can meet.


China Blue continues to expand its exports. India and Japan are CB’s principal

export markets for urea and phosphates (Figure 12 and Figure 13). The

company exports granular urea to South America and Australia, while the

majority of its prilled urea is exported to India. In addition, there is growing

demand for China Blue’s Bulk Blending fertilizers (BB fertilizers) emerging from

both North and South America.

Exports

16 July 2015

Chemicals

China BlueChemical


Figure 12: CB exports to SE Asia and USA

United States Japan

South Korea

China

Philippines

Indonesia

Malaysia Australia

S America

Taiwan

Bangladesh

India

Vietnam


Figure 13: Domestic sales are to east and central China

Guangdong

Hunan

HubeiAnhui

Jiangxi

HainanGuangxiYunnan

Henan

ShanxiShandong

Liaoning

Jilin

Inner Mongolia Hebei

Tianjin

Beijing


16 July 2015

Chemicals

China BlueChemical


Board of Directors

The following individuals were appointed / reappointed as China Blue Board

members as of 29-May 2015:

Figure 14: China Blue’s Board of Directors as of 29-May 2015

Name Age Title

Mr. LI Hui 52 Chairman of the Board

Mr. WANG Hui 51 President, CEO and Executive Director

Mr. ZHOU Dechun 59 Non-Executive Director

Mr. ZHU Lei 46 Non-Executive Director

Ms. LEE Kit Ying 67 Independent, Non-Executive Director

Mr. LEE Kwan Hung 50 Independent, Non-Executive Director

Mr. ZHOU Hongjun Independent, Non-Executive Director

Source: China BlueChemicals – HKSE filing dated 29-May 2015; Deutsche Bank

Mr. LI Hui was reappointed as Chairman of the Board for China BlueChemical

in May 2015. Mr. LI was initially appointed Chairman of the Board for CB in

2011. He previously worked at Sinochem Group and CNOOC Group.

Mr. WANG Hui, was newly appointed as President and CEO of China

BlueChemical in May 2015. From March 2010 to October 2014, Mr. Wang

served as a Director of Shandong Haihua Company Limited (000822 CH). From

June 2010 to December 2011, Mr. Wang served as Deputy General Manager

of CNOOC Group, Refinery and Petrochemicals Sales Division.

Mr. ZHOU Dechun was reappointed as a China Blue non-Executive Director in

May 2015. Mr. Zhou was first appointed to CB’s Board in May 2014. Prior to

his Board appointment to China Blue, Mr. Zhou served as General Manager of

Refining and Petrochemical Sales at CNOOC Group.

Mr. ZHU Lei was reappointed as a China Blue non-Executive Director in May

2015. Mr. Zhu was first appointed to CB’s Board in June 2012. Prior to his

Board appointment to China Blue, Mr. Zhu was Deputy General Manager of the

Strategy and Planning Department at both CNOOC Group and CNOOC Ltd.

Ms. LEE Kit Ying was reappointed as a China Blue non-Executive Director in

May 2015. Ms. Lee was first appointed to CB’s Board in June 2012.

Mr. LEE Kwan Hung was reappointed as a China Blue non-Executive Director

in May 2015. Mr. Lee was first appointed to CB’s Board in June 2012.

Mr. ZHOU Hongjun is a newly appointed China Blue non-Executive Director as

of May 2015.

16 July 2015

Chemicals

China BlueChemical


Valuation and risks

Valuation tools

We value our Asia fertilizer companies on DCF models. Our China

BlueChemical DCF model is in Figure 15. Our CB weighted average cost of

capital (WACC) is 7.6%, which consists of a Cost of Equity 8.1%, an after tax

cost of debt of 4.1% and a debt-to-capital weighting of 12.2%. Our China risk

free rate (Rfr) and Equity Risk Premium (Erp) are standardized and set by a DB

Strategy Group. Our China Rfr is 3.9% and our China Erp is 5.6%. We use a

China Blue, Bloomberg Adjusted 2-year Beta of 0.75 against the HSI Index. Our

CB Terminal Growth (TG) rate is 0%. We think this is appropriate for pure

commodity companies. The terminal growth rate of a pure commodity

company is dependent on capacity additions / deletions and global prices. We

are not ready to make assumptions about new prices not capacity additions

into perpetuity.

We also look at more traditional valuation metrics such as PE and PB-to-ROE

for China Blue vs. a global peer group (Figure 16). Given the recent steps taken

by the Chinese government to link trading between HK shares and mainland

China shares, we also look at China Blue valuations vs. a handful of domestic

(China A-share) fertilizer companies (Figure 17). We show China Blue trading at

10.9x forward (2016e) PE multiples on a PB of 0.7 and an ROE of 6.6%. We

show the global peer group trading at 12.3x forward (2016e) earnings on a PB

of 1.8x and an ROE of 15.9%. We show the China domestic A-Share fertilizer

companies trading at 28x forward (2016e) earnings on 1.8x PB and an average

ROE of 11.9%. China Blue is trading at a modest “SOE-discount” to global

peers. China’s A-share fertilizer companies remain over-valued, in our opinion.

We also look at China BlueChemical PE valuations from a long(er) term

historical perspective Figure 18. China BlueChemical’s current PE multiple is

at the lower end of its historical trading range. We currently show China Blue

trading at 10.9x forward (2016) earnings, whereas over the last three years, the

Company has traded more frequently within the 12.0x- 15.0x PE band.

We suspect that CB’s current discounted valuations to global peers and CB

history are reasonable based on 1) CB is a Chinese SOE; 2) CB booked

significant asset write-downs in 2014, and could very well do the same in

2015-16e; and 3) CB is a small fertilizer company managed by a large Oil & Gas

company. Maybe there is an argument for combining China BlueChemical and

the SinoChem Group.

The key risks to our Hold rating are: 1) higher/ lower China coal prices that

would lead to higher / lower global urea and methanol prices; 2) NDRC policy

initiatives for better or worse; 3) continued asset write-offs / write-backs by

China Blue 2015-16e; 4) the introduction of a VAT tax on fertilizer transactions

in China; and 5) any unanticipated improvement / deterioration in China’s

macro economic outlook. See “Key Risks” section below.

16 July 2015

Chemicals

China BlueChemical


Figure 15: China Blue Chemical – DCF model

RMB = US$ 1 6.21 6.21 6.21 6.21 6.21 6.21 6.21 6.21

HK$ = US$1 7.76 7.76 7.76 7.76 7.76 7.76 7.76 7.76

China BlueChemical DCF Terminal

2015E 2016E 2017E 2018E 2019E 2020E 2021E

Operating Income 1,317,131 1,465,112 1,338,795 1,434,254 1,414,261 1,391,584 1,353,789

Depreciation 922,755 989,213 1,049,980 1,113,959 1,177,950 1,241,953 1,305,968

Other 0 0 0 0 0 0 0

Income Tax 25.0% (329,283) (366,278) (334,699) (358,564) (353,565) (347,896) (338,447)

(Capex) (1,755,059) (1,755,291) (1,605,297) (1,605,361) (1,605,420) (1,605,480) (1,605,539)

(Decrease) / Increase WC (220,951) (203,169) (20,424) (5,408) (21,071) (21,467) 0

Free CF (65,407) 129,586 428,354 578,880 612,155 658,694 715,771

Fiscal Credits 0 0 0 0 0 0 0

Free CF (ex Tax) (65,407) 129,586 428,354 578,880 612,155 658,694 715,771

Terminal Growth 0.0% Terminal

As % PV

6.1% (61,647) 122,136 380,515 484,666 483,059 489,899 8,225,301 81.2%

7.0% (61,128) 121,109 374,141 472,539 467,010 469,640 6,813,546 78.7%

8.0% (60,562) 119,987 367,244 459,534 449,952 448,296 5,638,212 76.0%

7.6% (60,779) 120,417 369,880 464,490 456,435 456,384 6,052,175 77.0%

10.0% (59,461) 117,806 354,011 434,921 418,110 408,997 4,040,339 70.7%

11.0% (58,925) 116,745 347,662 423,272 403,245 390,903 3,478,911 68.2%

12.0% (58,399) 115,702 341,481 412,035 389,035 373,760 3,021,931 65.8%

13.0% (57,882) 114,678 335,464 401,193 375,446 357,513 2,644,599 63.4%

14.0% (57,375) 113,672 329,604 390,728 362,445 342,105 2,329,254 61.1%

15.0% (56,876) 112,684 323,897 380,623 350,002 327,487 2,062,983 58.9%

16.0% (56,385) 111,712 318,337 370,864 338,088 313,613 1,836,141 56.8%

Net Shrs

Total PV Net Debt Minorities Associates Pres. Value Outst NPV / Shr WACC

10,123,929 (2,085,424) 684,891 586,979 12,111,441 4,610,000 2.63 6.1%

3-Yr Beta x HSI 75.0% 8,656,856 (2,085,424) 684,891 586,979 10,644,368 4,610,000 2.31 7.0%

Rf Rate Local 3.90% 7,422,663 (2,085,424) 684,891 586,979 9,410,175 4,610,000 2.04 8.0%

Equity Risk Premium 5.60% 7,859,003 (2,085,424) 684,891 586,979 9,846,516 4,610,000 2.14 7.6%

Country Risk Premium 0.00% 5,714,724 (2,085,424) 684,891 586,979 7,702,236 4,610,000 1.67 10.0%

Cost Equity 8.1% 5,101,812 (2,085,424) 684,891 586,979 7,089,324 4,610,000 1.54 11.0%

Cost Debt 3.9% 4,595,546 (2,085,424) 684,891 586,979 6,583,059 4,610,000 1.43 12.0%

Debt Risk Premium 1.6% 4,171,011 (2,085,424) 684,891 586,979 6,158,523 4,610,000 1.34 13.0%

After Tax Cost Debt 4.1% 3,810,433 (2,085,424) 684,891 586,979 5,797,945 4,610,000 1.26 14.0%

Debt / Capital 12.2% 3,500,800 (2,085,424) 684,891 586,979 5,488,312 4,610,000 1.19 15.0%

Avg. Cost Capital 7.6% 3,232,369 (2,085,424) 684,891 586,979 5,219,881 4,610,000 1.13 16.0%

- 1.0 2.0 3.0 4.0 5.0 6.0

RMB m 2015e 2016E 2017E 2018E 2019E 2020E 2021E

Total PV 7,854,375 (65,407) 120,417 369,880 464,490 456,435 456,384 6,052,175

Net Debt (2,085,424)

Net Minorities 684,891

Associates 586,979

NPV Equity 9,841,888 NA Price HK$ 2.71

Shrs Outs 4,610,000 DCF Rmb 2.13 DCF HK$ 2.67

NPV / Share 2.13 Upside NA Upside (1.6%)

WACC 7.6%


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Figure 16: China BlueChemical – traditional valuations vs. global peers

China BlueChem Peer Comp

7/14/2015 Ticker DB Rec Mkt Cap

LocalCur LocalCur US$m 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 14-16E

China Bluechemical 3983.HK Hold 2.67 2.71 1,618 10.3 12.2 10.9 0.74 0.73 0.70 4.3 3.8 3.6 -19.5 -13.9 -10.9 0.8 6.1 6.6 -18%

Sinofert 0297.HK Hold 1.44 1.38 1,250 27.7 18.4 12.8 0.5 0.6 0.5 14.8 11.7 8.4 18 45 42 1.7 3.1 4.4 63%

Petronas Chemicals PCGB.KL Hold 6.32 6.38 13,407 20.8 18.8 16.3 1.9 2.1 2.0 9.1 8.3 7.1 -40 -37 -40 11.1 11.6 12.6 13%

Chambal Fertilisers CHMB.BO Buy 80.0 59.20 386 8.5 8.4 7.0 0.8 1.1 1.0 8.6 9.5 7.3 200 196 147 12.5 13.7 15.0 38%

UPL UPLL.BO Buy 625.0 522.00 3,524 6.5 19.4 15.0 1.5 3.6 3.1 4.4 10.2 8.7 49 35 22 19.2 20.1 22.1 20%

ICL ICL.TA Hold 28.0 26.42 8,903 14.4 12.9 10.6 3.1 2.8 2.6 11.3 9.6 8.4 89 79 73 14.0 22.5 25.4 10%

SAFCO 2020.SE Hold 118.0 117.00 12,999 16.8 19.4 14.8 6.0 6.5 6.2 15.4 16.8 13.0 -21 -23 -27 39.4 32.7 43.1 -9%

PHOSAGRO PHORq.L Buy 17.0 13.55 5,244 8.8 7.9 7.0 2.7 2.3 1.9 5.9 5.2 4.4 55 41 23 32.7 31.6 30.0 13%

Mosaic MOS.N Hold 48.0 45.73 19,067 13.5 11.9 n/a 1.6 1.5 n/a 7.2 7.4 n/a -6 2 n/a 11.1 12.1 n/a n/a

K + S SDFGn.DE Hold 36.0 37.60 7,916 12.3 13.8 14.8 1.1 1.7 1.6 6.9 8.7 9.1 30 46 47 10.3 11.0 11.0 15%

Yara International ASA YAR.OL Hold 370.0 403.30 13,644 9.4 10.5 12.0 1.4 1.6 1.5 6.1 7.0 7.0 17 18 14 12.9 11.9 13.2 5%

Industries Qatar IQCD.QA Buy 164.0 134.50 22,346 17.5 16.5 14.9 3.0 2.4 2.3 73.6 56.2 67.6 -13 -13 -13 18.8 14.5 15.6 -7%

Ma'aden 1211.SE Hold 38.0 43.60 12,271 21.3 15.6 16.1 1.1 1.6 1.4 19.3 14.0 13.4 98 104 107 6.7 10.5 9.3 27%

Acron AKRN.MM Hold 1100.0 2,600.00 1,860 9.5 7.1 7.5 0.9 0.9 0.8 7.4 6.2 6.5 58 61 65 9.0 14.8 12.7 12%

PTT Global Chemical PTTGC.BK Hold 60.0 67.75 8,963 19.9 11.5 9.1 1.0 1.2 1.1 10.4 7.2 5.8 43 30 20 6.3 10.7 12.6 49%

Cormandel International CRIN.IN No Rec. NA 245.25 1,122 19.7 17.8 12.9 3.0 3.2 2.7 7.3 9.3 12.0 n/a n/a n/a 15.9 17.9 21.3 23%

Methanex MEOH.US No Rec. NA 64.62 5,886 13.5 18.8 13.2 3.3 3.3 2.7 6.3 11.6 7.8 n/a n/a n/a 26.4 15.9 20.0 1%

Peer Average (X-Outliers) 15.0 14.3 12.3 1.8 2.0 1.8 9.4 9.5 8.5 29.0 29.9 27.8 13.4 14.4 15.9 20%

Peer Median 14.0 14.7 12.9 1.5 1.9 1.9 8.0 9.4 8.4 36.1 38.0 23.4 12.7 14.1 15.0 13%

- Min. Peers 6.5 7.1 7.0 0.5 0.6 0.5 4.4 5.2 4.4 -40.1 -36.7 -39.7 1.7 3.1 4.4 -9%

- Max. Peers 27.7 19.4 16.3 6.0 6.5 6.2 73.6 56.2 67.6 200.1 195.6 147.0 39.4 32.7 43.1 63%

Traget

Price

Share

Price

EPS

CAGRP/E (X) P/B (X) EV/EBITDA (X) Net Debt/Equity (%) ROE (%)

Source: Company Data, Bloomberg Finance LP, Deutsche Bank Note: The market cap is given in the listed currency

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Figure 17: China BlueChemical – traditional valuations vs. domestic peers

China BlueChem Peer Comp

7/14/2015 Ticker DB Rec Mkt Cap

LocalCur LocalCur US$m 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 14-16E

China Bluechemical 3983.HK Hold 2.67 2.71 1,618 10.3 12.2 10.9 0.74 0.73 0.70 4.3 3.8 3.6 0.8 6.1 6.6 -18%

Sinofert 0297.HK Hold 1.44 1.38 1,250 27.7 18.4 12.8 0.5 0.6 0.5 14.8 11.7 8.4 1.7 3.1 4.4 63%

Petronas Chemicals PCGB.KL Hold 6.32 6.38 13,407 20.8 18.8 16.3 1.9 2.1 2.0 9.1 8.3 7.1 11.1 11.6 12.6 13%

Hubei Yihua 000422.CH No Rec. NA 8.1 1,119 203.5 38.8 45.2 1.2 n/a n/a 9.4 n/a n/a 0.5 n/a n/a 112%

Shandong Kingenta 002470.CH No Rec. NA 20.3 5,110 32.7 27.8 21.8 4.6 4.2 3.6 13.7 19.6 15.8 15.8 15.8 17.2 22%

Hubei Xingfa 600141.CH No Rec. NA 13.9 1,118 13.4 30.3 22.1 1.5 1.4 1.3 13.8 11.7 10.5 11.9 6.1 8.0 -22%

Hualu-Hengsheng 600426.CH No Rec. NA 16.1 2,278 19.2 16.4 14.0 2.3 2.1 1.9 5.8 8.7 7.9 12.9 13.0 13.4 17%

Luxi Chemical 000830.CH No Rec. NA 8.8 1,781 35.2 22.5 17.9 2.2 n/a n/a 7.5 n/a n/a 6.2 n/a n/a 40%

Anhui Liuguo 600470.CH No Rec. NA 7.3 543 -18.3 n/a n/a 1.9 n/a n/a 25.5 n/a n/a -9.7 n/a n/a n/a

Shenzhen Batian 002170.CH No Rec. NA 26.1 3,582 118.7 81.6 58.0 14.1 12.1 9.9 26.2 n/a n/a 12.4 15.0 17.4 43%

Sichuan Meifeng 000731.CH No Rec. NA 9.6 820 -23.5 53.4 74.0 2.1 2.1 2.0 50.4 38.7 33.6 -8.7 2.4 2.9 n/a

China XLX Fertilizer 1866.HK No Rec. NA 4.0 488 19.9 n/a n/a 1.5 1.6 1.4 n/a 8.1 6.3 9.3 n/a n/a n/a

Peer Average (X-Outliers) 24.1 28.3 28.0 2.0 2.0 1.8 14.0 11.4 9.3 11.4 10.6 11.9 33%

Peer Median 20.8 27.8 21.8 1.9 2.1 1.9 13.8 11.7 8.4 9.3 11.6 12.6 31%

- Min. Peers -23.5 16.4 12.8 0.5 0.6 0.5 5.8 8.1 6.3 -9.7 2.4 2.9 -22%

- Max. Peers 203.5 81.6 74.0 14.1 12.1 9.9 50.4 38.7 33.6 15.8 15.8 17.4 112%

Traget

Price Share Price

EPS

CAGRP/E (X) P/B (X) EV/EBITDA (X) ROE (%)

Source: Company Data, Bloomberg Finance LP, Deutsche Bank Note: The market cap is given in the listed currency

16 July 2015

Chemicals

China BlueChemical


Figure 18: China BlueChemical is trading within the 9.0x-12.0x P/E band

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

HKD

6.0 9.0 12.0 15.0 18.0 MPS Source: FactSet, Deutsche Bank

16 July 2015

Chemicals

China BlueChemical


Looking forward

Key drivers of the business

The key drivers of this business are fertilizer prices and capacity (volume)

additions. The marginal cost of global urea and methanol are set from China’s

coal prices. Our forecasts for global coal prices, China fertilizer prices and

methanol prices are in Figure 19. The current price of China QHD 5,500 Kcal

coal is Rmb 400/ ton or 16% below DB’s full year estimate of Rmb 480/ ton.

We suspect that there is downside risk to our 2015-16 coal estimates. The

prices of phosphate fertilizers (DAP & MAP) are set by global supply and

demand. China is the largest producer worldwide of urea, phosphate fertilizers

and methanol. The world is currently awash in urea, phosphates and methanol.

Figure 19: Deutsche Bank commodity forecasts

Last Adjusted

30-Jun-15 2011 2012 2013 2014 2015e 2016e 2017e 2018e

Coal - China QHD 5,500 Kcal Rmb/ ton 819 696 589 516 480 480 480 na

-15.0% -15.4% -12.4% -7.0% 0.0% 0.0%

US$/ ton 126.7 110.3 95.8 83.7 77.4 77.4 77.4 na

-12.9% -13.2% -12.6% -7.6% 0.0% 0.0%

Newcastle FOB US$/ ton 120.6 94.3 85.0 71.1 58.3 57.0 55.0 60.0

-21.8% -9.9% -16.4% -18.0% -2.2% -3.5% 9.1%

Richard's Bay FOB US$/ ton 116.3 93.4 81.1 71.9 60.8 60.0 57.0 62.0

-19.7% -13.2% -11.3% -15.4% -1.3% -5.0% 8.8%

Japan Guided Price US$/ ton 122.0 118.9 100.1 85.3 71.4 64.2 60.0 66.0

-2.6% -15.8% -14.8% -16.3% -10.1% -6.5% 10.0%

Corn US$/ bsh 6.8 7.0 5.8 4.3 4.4 4.3 4.3 4.5

Wheat US$/ bsh 7.1 7.5 6.9 5.8 5.6 5.5 5.5 5.5

Soybeans US$/ bsh 13.2 14.7 14.0 12.7 10.2 9.6 9.6 10.1

Brent Oil US$ / bbl 110.9 111.9 108.8 99.0 60.3 70.0 75.0 80.0

US Natural Gas US$/ mmBtu 4.0 2.8 3.7 4.3 2.8 3.3 4.0 4.3

Urea - China Rmb / ton 2,133 2,218 1,922 1,734 1,682 1,648 1,648 1,648

4.0% -13.4% -9.8% -3.0% -2.0% 0.0% 0.0%

US$/ ton 330.0 351.6 312.6 281.4 271.3 265.8 265.8 265.8

Methanol - China Rmb/ ton 2,355 2,353 2,449 2,298 2,021 1,972 1,965 2,034

-0.1% 4.1% -6.2% -12.0% -2.5% -0.3% 3.5%

US$/ ton 364.3 372.9 398.3 372.9 326.0 318.0 317.0 328.0

Potash - China Rmb/ ton 3,076 3,076 2,485 2,114 2,145 2,145 2,145 2,145

0.0% -19.2% -14.9% 1.5% 0.0% 0.0% 0.0%

US$/ ton 475.8 487.5 404.2 343.1 346.0 346.0 346.0 346.0

MAP - China Rmb/ ton 2,819 2,663 2,109 1,980 2,056 2,074 2,085 2,098

-5.5% -20.8% -6.1% 3.8% 0.9% 0.5% 0.6%

US$/ ton 436.1 422.1 343.0 321.3 331.6 334.5 336.3 338.4

DAP - China Rmb/ ton 3,353 3,185 2,993 2,786 2,809 2,833 2,849 2,866

-5.0% -6.0% -6.9% 0.8% 0.9% 0.6% 0.6%

US$/ ton 518.8 504.8 486.7 452.2 453.1 456.9 459.5 462.3

Notes: - All China forecasts are set by DB Asia Research

- All Non-China forecasts are set by DB Commodities team

- For "Urea - China" prices we use CEIC "46% or above" 2011-13 and we use China Blue actual 2014 in order to transition to our estimats 2015-18e

- For "Methanol- China" prices we use the Bloomberg "China Cfr" price 2011-14 and our estimates 2015-18e. When looking at methanol prices

in China vs. China Blue's reported avg. annual, we have noticed that the Bbrg "China Cfr" price tracks China Blue's average annual price closely;

whereas the NDRC's annual indicative methanol price for China is materially higher than all other price indicators we have found for methanol.

- Our "Potash - China", "MAP - China", and "DAP - China" are all sourced from CEIC with exception to DB Asia estimates 2015-18e.

Source: Deutsche Bank Commodities Research; Deutsche Bank Equities Research; CEIC; Bloomberg Finance LP

Drivers: volume and price

16 July 2015

Chemicals

China BlueChemical


Figure 20: Various global and China sourced urea prices – not always uniform

Ytd

UREA Price / Ton: Sourced from: 2010 2011 2012 2013 2014 2015

CEIC - China Urea Price (Rmb/ Ton) CEIC 1,763 2,133 2,218 1,922 1,581 1,642

- US$ / ton 261 330 352 313 257 265

Y/y % Change (Rmb) 21.0% 4.0% -13.4% -17.7% 3.9%

US Gulf Coast (US$/ ton) BBRG 319 434 495 345 369 327

Y/y % Change 35.8% 14.1% -30.2% 6.9% -11.4%

GCFPURGB Index 59 104 143 33 113 62

- Premium price to China 22.5% 31.4% 40.7% 10.4% 43.9% 23.5%

Yuzhny - Russia (US$/ ton) BBRG 290 420 412 338 315 290

Y/y % Change 44.8% -1.9% -18.0% -6.8% -8.0%

FIFRYUZM Index 29 90 60 25 58 25

- Premium price to China 11.3% 27.3% 17.2% 8.1% 22.8% 9.4%

- China Blue Chemicals (Rmb / Ton) Annual Reports 1,763 2,176 2,170 1,817 1,734

- US$ / ton 260 337 344 296 281

Y/y % Change (Rmb) 23.5% -0.3% -16.3% -4.6%

China Blue - CEIC China (Rmb/ ton) -1 43 -48 -104 153

China Blue (Disc)/ Premium to CEIC 2.0% -2.2% -5.4% 9.7%

- Sinofert (Rmb / Ton) Annual Reports 1,447 1,670 1,854 1,718 1,463

- US$ / ton 214 258 294 279 237

Y/y % Change (Rmb) 15.4% 11.0% -7.3% -14.9%

Sinofert - CEIC China (Rmb / ton) -316 -463 -364 -203 -118

-17.9% -21.7% -16.4% -10.6% -7.5%

Sinofert - China Blue (Rmb/ ton) -315 -506 -316 -99 -271

Sinofert (Disc) / Premium to China Blue -17.9% -23.2% -14.5% -5.4% -15.6%

Petronas Chemicals (US$ / ton) PChem does not break out revenue by product

Revenues are reported for 1) Fertilizers; and 2) Chemicals:

where "Fertilizers" include Urea, Ammonia and Methanol

- US$ / ton (assumed) 260 330 352 312 257

- CEIC (US$ / ton) 260 330 352 312 257

Notes: - CEIC Urea "46 % or above" seems to best track China Blue's average annual sales price for Urea.

- It is interesting to note the material difference between China Blue's ASP for Urea and Sinofert's ASP for urea.

CB's ASP for urea seems to trade at an average 15% premium to Sinofert's urea ASP. We suspect that this is because

CB sells urea regionally (Guangdong, Guangxi, Heilongjiang) whereas Sinofert sells urea nationally.

Source: CEIC; Bloomberg Finance LP; Company specific data; Deutsche Bank

16 July 2015

Chemicals

China BlueChemical


Figure 21: Various global and China sourced methanol prices – the NDRC is way off base

Methanol Ytd

All Prices in US$ / Ton Sourced from: 2010 2011 2012 2013 2014 2015 AVGS

NDRC NDRC 435 501 500 505 502 436

Y/y % Change 15.1% -0.3% 1.2% -0.8% -13.2% 0.4%

- US Gulf of Mexico Bbrg 323 371 386 474 439 363

POLIUSGC Index Y/y % Change 14.7% 4.3% 22.7% -7.5% -17.3% 3.4%

Dif from NDRC (112) (130) (113) (31) (63) (73)

- As % from NDRC -26% -26% -23% -6% -13% -17% -18.3%

- China cfr Bbrg 297.0 364.3 372.9 398.3 372.9 292.3

POLIMECN Index Y/y % Change 22.7% 2.4% 6.8% -6.4% -21.6% 0.8%

Dif from NDRC (138) (137) (127) (107) (129) (143)

- As % from NDRC -32% -27% -25% -21% -26% -33% -27.4%

- China Future Mkt Bbrg na na na na 430 382

ZMEA Comdty Y/y % Change -11.2%

- Methanex Ref Price Methanex 372 442 452 536 541 430

Y/y % Change 18.8% 2.3% 18.7% 0.9% -20.5% 4.0%

Dif from NDRC (63) (59) (48) 31 40 (5)

- As % from NDRC -15% -12% -10% 6% 8% -1% -3.9%

- Methanex Asia Price Methanex 352 440 442 467 472 358

Y/y % Change 25.0% 0.4% 5.7% 1.2% -24.3% 1.6%

Dif from NDRC (83) (61) (58) (39) (30) (78)

- As % from NDRC -26% -16% -15% -8% -7% -22% -15.6%

China Blue - Avg Sales Price 286.9 347.3 350.3 375.2 360.9

- Rmb / ton 1,942 2,245 2,210 2,307 2,224

Y/y % Change 15.6% -1.6% 4.4% -3.6% 3.7%

- Rmb = US$ 1 (Yr avg) 6.768 6.464 6.309 6.148 6.162

Source: NDRC; Bloomberg Finance LP; Company specific data; Deutsche Bank

New projects

China Blue’s strategic advantage has always been its southern location on

Hainan Island and an abundance of (cheap) natural gas as feedstock from

sister company CNOOC Ltd. China Blue has a urea and methanol business that

dominates southern China. Although the Company supplies less than 3% of

China’s urea market, management rightfully boasts of a 50% and 25% market

share of urea in Guangdong and Guangxi, respectively.

In a new natural gas policy statement effective 01-December 2012, the NDRC

struck down the use of natural gas as a feedstock for any new urea production

capacity. We suspect that China Blue had forewarning that this could be in the

cards and as a result, management has been busy since 2009 buying coal

(and)-to-urea production assets. See CB projects and potential new projects

below; also see section “Skeletons in the Closet” below in this report.

Southern advantage

Diving into coal to urea

projects

16 July 2015

Chemicals

China BlueChemical


We are not looking for upside on fertilizer (coal, oil, natural gas, corn, wheat /

soybean) prices 2015-18e, yet we could be wrong (on coal prices) and there is

always the potential for volume growth and / or a new related line of business:

The HuaHe Chemical project

China Blue’s HuaHe Chemical project (Pages 37-38) began trial production

April 2015. The HuaHe project is a 520k ton urea plant in Hegang City,

Heilongjiang province. China Blue anticipates the project to be vertically

integrated (into coal) in 2017e. However, prior to 2017, HuaHe will need to

purchase coal from third parties in order to manufacture urea. As per CB

management, HuaHe is expected to produce 300k tons of urea in 2015e

(57.7% utilization rate) and 520k tpa (100% utilization) of urea beginning 2016e.

New MTO and/ or MEG facilities

Due to the current worldwide (and China) glut of urea (Figure 79), methanol

(Figure 118) and phosphates, China Blue has made the decision not to add

new urea, phosphate and / or methanol capacity over the next few years. In

the same light, management is also considering exiting the POM business –

we have made no assumptions in this model for this potential exit.

Notwithstanding, and in order to take advantage of CNOOC Ltd’s growing gas

supplies in the South China Sea (Liwan and maybe Lingshui 17-2), CB is

considering (or being prodded by CNOOC Group) investments into a new

Syngas-to-Mono-Ethylene Glycol (MEG) faculty and / or a new Syngas-to-

Methanol to Olefins (MTO) facility on Hainan Island. The language is KEY: Note

that CB management did not suggest that it might invest in a natural gas MEG

facility or a natural gas to olefins facility. In China, the use of natural gas as a

chemical feedstock is also prohibited. However, evidently the law says nothing

about converting “natural gas” into “synthetic natural gas” (Syngas) and

thereafter using syngas as the feedstock into MTO and / or MEG. It sounds a

bit like all the coal burning power plants that have invested in clean coal

scrubbers, but never turn them on anyway because they are expensive to run.

The production of MEG and / or Olefins by China BlueChemical would

represent a new product line for the company and as noted above could create

some language challenges as to whether the feedstock was natural gas or

synthetic natural gas. We have yet to take a deep dive into the economics of

natural gas into synthetic natural gas into either MEG and / or olefins. We

suspect that there is one additional hurdle to be overcome before China

BlueChemical (the CNOOC Group) proceeds with such an investment: the Shell

Oil Company. In October 2000, the CNOOC Group and Shell Petrochemicals

Company Ltd. set up a 50-50 JV to build and operate a 950k tpa ethylene

cracker in Guangdong, China. The project began production in January 2006

and currently produces some 2.7mln tons annually of ethylene and propylene

derivative products sold to the domestic China market. Might there be a

conflict in a CNOOC Group subsidiary, China Blue, selling chemicals into a

market that is already supplied by a CNOOC Group – Shell Oil joint venture?

Size and capex may also be an issue for China BlueChemical in considering a

Natural Gas-to-Syngas-to-Methanol-to-Olefins project and / or a Natural Gas-

to-Syngas-to-Ethylene Oxide-to-MEG project. Although we have yet to find

specifics published by mainland authorities, CB management was concerned

the government may try to slow coal-to-chemical (CTO) capacity growth by

insisting that all new projects be at least 1-million ton / project. A 1-mln Tpa

Onward and upward

Is “syngas” from natural gas –

the same as natural gas?

A conflict of interest?

Size matters

16 July 2015

Chemicals

China BlueChemical


MTO project would cost CB ~US$ 2.4bn. Nonetheless, in 2014, CB finished an

MTO and a Syngas-to-MEG feasibility study. CB estimates that the CNOOC

Group could easily build such a large-scale facility within 2 to 3 years. The only

thing missing now is a decision by China Blue’s Board to move it forward.

Guizhou Jinlin project.

China Blue’s Guizhou Jilin phosphate / rare-earth project (pages 38-39) seems

terminally ill. We suspect this project will not proceed anytime soon. CB is

concerned of a large capex requirement without control of the operation –

lesson learned.

Business Segments

Urea segment

Our forward-looking expectations for China Blue’s urea business are in Figure

22 through Figure 25. The pickup in revenues and volume sales (2016-17e) is

the result of the start up of the HuaHe coal to urea project 2H15e.

Figure 22: CB - Urea segment revenues forecasts Figure 23: CB - Urea segment volume forecast

-10.0%

-7.7%

1.0%

9.2%

2.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

3,100,000

3,200,000

3,300,000

3,400,000

3,500,000

3,600,000

3,700,000

3,800,000

3,900,000

2013 2014 2015e 2016e 2017e

Growth %Rmb 000

Urea segment revenue Annual growth %

8.1%

-3.8%

4.3%

11.2%

2.1%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1,700,000

1,800,000

1,900,000

2,000,000

2,100,000

2,200,000

2,300,000

2,400,000

2013 2014 2015e 2016e 2017e

Growth %Tons

Urea sales volumes Annual growth %



Figure 24: CB - Urea segment ASP forecasts Figure 25: CB - Urea segment gross profit forecasts

1,916

1,698 1,763

2,176 2,170

1,817 1,734

1,682 1,648

1,648

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Rmb/ ton

Urea ASP

44.1%

35.2% 34.4%31.6% 30.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2013 2014 2015e 2016e 2017e

GP margin %000 Rmb

Urea gross profit Gross profit margin



16 July 2015

Chemicals

China BlueChemical


Methanol segment

Our forward-looking expectations for China Blue’s methanol business are in

Figure 26 though Figure 29. Methanol prices year-to-date 2015 (Figure 21)

have fallen -21.6% vs. the average price for 2014. Our anticipated China build

out of MTO (methanol-to-olefins) facilities is in Figure 127. We expect

utilization rates to remain high at CB methanol with demand coming from the

start-up of new MTO capacities and gasoline blending (Figure 122).

Consultants IHS Chemicals expect China methanol demand for MTO and

gasoline blending to grow 12.2% CAGR 2013-24E (Figure 126).

Figure 26: Methanol segment revenues forecasts Figure 27: Methanol segment volume forecast

3.5%

-8.4%-9.5%

-1.5%

0.1%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2013 2014 2015e 2016e 2017e

Growth %Rmb 000

Methanol segment revenue Annual growth %

-1.3%

-4.9%

-0.2%

1.0%0.6%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

1,420,000

1,440,000

1,460,000

1,480,000

1,500,000

1,520,000

1,540,000

1,560,000

2013 2014 2015e 2016e 2017e

Growth %Tons

Methanol sales volumes Annual growth %



Figure 28: Methanol segment ASP forecasts Figure 29: Methanol segment gross profit forecast

2.47

1.52

1.942

2.245

2.210

2.307 2.224

2.023 1.973

1.963

-

0.50

1.00

1.50

2.00

2.50

3.00

000 Rmb/ ton

Methanol ASP

41.0%

35.1%

21.5% 22.7%20.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2013 2014 2015e 2016e 2017e

GP margin %000 Rmb

Methanol gross profit Gross profit margin



High utilization rates should

persist

16 July 2015

Chemicals

China BlueChemical


Phosphate segment

Our forward-looking expectations for China Blue’s Phosphate and Compounds

business are in Figure 30 though Figure 33. The 2014/ 13 pickup in revenues,

volumes and gross profit was principally the result of 1) an accounting shift of

the Compound Fertilizers business out of the “POM & Others” division (2013)

and into the “Phosphates and Compounds” division (2014); and 2) a pickup in

Compound fertilizer volume sales to 45.8k tons (2014) from 26.3k tons in 2013.

Figure 30: Phosphate segment revenues forecasts Figure 31: Phosphate segment volume forecast

20.4%

24.4%

-10.5%

0.8% 0.5%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2013 2014 2015e 2016e 2017e

Growth %Rmb 000

Phosphate segment revenue Annual growth %

32%

-40%

23%

0% 0%

42%

31%

-16%

0% 0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2013 2014 2015e 2016e 2017e

Growth %Tons

MAP sales volumes DAP sales volumes

MAP sales volume growth % DAP sales volume growth %



Figure 32: Phosphate segment ASP forecasts Figure 33: Phosphate segment gross profit margin

3,587

2,490

2,558

3,139 3,106

2,715

2,654

2,764

2,788

2,803

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Rmb/ ton

Phosphate ASP

6.5%

12.2%

14.8%

13.2%

12.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2013 2014 2015e 2016e 2017e

GP margin %000 Rmb

Phosphate gross profit Gross profit margin

Source: Company Data, Deutsche Bank

Source :Company Data, Deutsche Bank

“POM and Other” segment

POM (Polyoxymethylene) is an engineering thermoplastic used for its resiliency

and strength. POM is produced by polymerizing formaldehyde; formaldehyde

is produced from methanol.

16 July 2015

Chemicals

China BlueChemical


This business segment is a small “catch-all” of CB businesses. Although we

attribute the revenues, volume growth, etcetera to “POM”, this is just because

there is no breakout of the separate product lines. In this segment, there is a

POM chemical business, a fertilizer trading business, a fertilizer logistics

business and a “BB” (bulk blending) fertilizer business. In 2014, CB increased

its POM utilization rate to 49% from 28% in 2013.

China Blue is considering an exit from its POM chemical business due to the

material over-supply of POM in China. CB’s POM asset began commercial

operations in 2H11. In 2013, CB wrote-off Rmb 122.7 mln from this asset. In

2H14, CB wrote-off another Rmb 1.05bn of this asset. China Blue has invested

a total of Rmb 1.7bn into this project. (See section “Skeletons in the closet”)

Figure 34: POM & Other revenue forecasts Figure 35: POM and Other volume forecast

-6.3%

10.4%

-8.1%

0.0% 0.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

1,250,000

1,300,000

1,350,000

1,400,000

1,450,000

1,500,000

2013 2014 2015e 2016e 2017e

Growth %Rmb 000

POM and Other segment revenue Annual growth %

-49.4%

75.0%

-8.4%0.0% 0.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2013 2014 2015e 2016e 2017e

Growth %Tons

POM sales volumes Annual growth %



Figure 36: POM and Other ASP forecasts Figure 37: POM and Other gross margin forecasts

43.2

80.5

50.4 50.6 50.6

50.6

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Rmb/ ton

POM ASP

-0.4%

1.0%

1.2% 1.2% 1.2%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

(10,000)

(5,000)

-

5,000

10,000

15,000

20,000

2013 2014 2015e 2016e 2017e

GP margin %000 Rmb

POM and other gross profit Gross profit margin



Exiting POM?

16 July 2015

Chemicals

China BlueChemical


Looking back

Key drivers of the business

CB has steadily increased production levels to meet the rising demand for

fertilizers in China (Figure 38). The company is a major producer of both urea

and methanol in China. We believe the value proposition at CB should continue

to be driven by the market price and volume sales of both urea and methanol.

The Phosphate and Compounds fertilizer business is growing, but remains

secondary to Urea and Methanol.

Figure 38: Annual production volumes Figure 39: Production mix of the company 2014

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

2008 2009 2010 2011 2012 2013 2014

Tons

Urea Phosphorus fertilizer Methanol POM

Urea44%

Phosphorus fertilizer

20%

Methanol35%

POM1%



Consolidated Revenues

CB’s revenue mix (Figure 40 and Figure 41) has changed over the past seven

years. China Blue has done a good job in spreading its revenues risk more

equally among four product lines.

The increase in China Blue’s consolidated revenues from 2010 to 2012 (Figure

42 and Figure 43) was driven by 1) the December 2010 start up of CB’s Hainan

Phase 2 methanol facility (800k tpa); and 2) the August 2012 start up of CB’s

DYK DAP Phase 2 facility (700k tpa). In October 2011, CB stated commercial

operations at its new POM facility (60k tpa). Prior to 2014, China Blue

accounted for its NPK-Compound fertilizer business through its “POM and

Other” business segment. Starting in 2014, CB accounted for its NPK-

Compound fertilizer business through its “Phosphate and Compounds”

business segment.

“Phosphorus fertilizers” or “Phosphates” includes both monoammonium

phosphate (“MAP”) and diammonium phosphate (“DAP”) fertilizer sales. “NPK-

Compounds” is a mixture of nitrogen (N), Phosphates (P) and Potash (K)

fertilizers. “Nitrogen” fertilizer generally refers to urea and or ammonia.

16 July 2015

Chemicals

China BlueChemical


Figure 40: Total revenues mix – 2008 Figure 41: Total revenues mix- 2014

Urea, 52.7%

Phosphorus fertilizer, 19.0%

Methanol, 24.2%

Others (POM), 4.2%

Urea, 31.4%

Phosphorus fertilizer, 24.4%

Methanol, 30.4%

Others (POM), 13.8%



Figure 42: Total revenues of China BlueChemical Figure 43: Total revenues growth %

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2008 2009 2010 2011 2012 2013 2014

Rmb 000

1H sales 2H sales

-14.9%

18.5%

42.1%

10.1%

-0.1%0.7%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Revenue growth %



Figure 44 shows that the contribution to CB’s consolidated gross profit from

urea has been on the decline while the contribution from its methanol business

has been on the rise. Urea remains a material driver for China Blue earnings.

We suspect that CB’s high profit margins on urea are driven by i) close

proximity to local agricultural markets in Guangdong (Figure 106 and Figure

107) and ii) low feedstock gas prices from sister company CNOOC Ltd. We

wonder if CNOOC Ltd. shareholders are content at supplying low-cost natural

gas to sister company China Blue?

Urea on the decline /

Methanol on the rise

16 July 2015

Chemicals

China BlueChemical


Figure 44: Gross profit contribution of the product

segments

Figure 45: Gross profit margins of the product segments

69%58%

48% 53% 50% 45%

18%28% 43%

42% 46%43%

10% 11%7%

5% 4%12%

3% 3% 2% 0% 0% 0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013 2014

Gross prof it share

Urea Methanol Phosphate POM

38%

38%

41%

44% 44%

35%34%

34%

41%40%

41% 35%

19% 19%17%

9%7%

13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2009 2010 2011 2012 2013 2014

Urea Methanol Phosphate



Urea

Past performance from China Blue’s urea business segment is in Figure 46

through Figure 51. In 2014, CB revenues from urea fell -7.7% to Rmb 3.4bn

driven by a -3.8% decline in volumes and a -4.0% fall in price. The reduction in

volumes was due to planned maintenance (1H14) at the CNOOC Tianye plant.

From 2011-14, urea revenues fell by -16.2% (CAGR of -5.7%). The decline in

revenues came from a 20.0% decline in prices (ASP) and a 4.7% increase in

volumes. An oversupply of urea in both China and global markets has lead to

soft global urea prices (Figure 19 and Figure 20).

Figure 46: CB’s revenue from urea Figure 47: CB’s ASP (average sale price) urea in China

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

2008 2009 2010 2011 2012 2013 2014

Rmb 000

1H sales 2H sales

1,906

1,696

1,772

2,167 2,170

1,806

1,734

1,250

1,450

1,650

1,850

2,050

2,250

2,450

Rmb/ ton

Urea ASP


Source :Company Data, Deutsche Bank

16 July 2015

Chemicals

China BlueChemical


Figure 48: Urea production volumes Figure 49: Urea production volume growth Y/y

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Tons

1H volumes 2H Volumes

-2.5%

5.8%

-5.1%

-2.6%

8.9%

-2.5%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Urea production growth %

Source: Company data, Deutsche Bank Note: The lower production volumes in 1H12 was mainly caused by the high production costs and shortage of natural gas supply to certain large-scaled urea production plants in the PRC


Figure 50: Annual urea production volumes by plant Figure 51: Urea plant utilizations levels

-

400,000

800,000

1,200,000

1,600,000

2,000,000

2008 2009 2010 2011 2012 2013 2014

Tons

Fudao Phase I Fudao Phase II CNOOC Tianye

105.9%

103.3%

109.3%

103.7%

101.0%

109.9%

107.2%

95.0%

100.0%

105.0%

110.0%

115.0%

2008 2009 2010 2011 2012 2013 2014

Utilzation %



Methanol

Past performance from China Blue’s methanol segment is in Figure 52 through

Figure 57. In 2014, CB’s methanol revenues fell by -8.4% Y/y to Rmb 3.3bn.

The decline in revenues was driven by a -4.9% decline in sales volumes and a -

3.7% decline in CB’s average sale price of methanol. CB’s growth in methanol

production 2011 was due to the December 2010 start up of China Blue’s

Hainan Phase II methanol facility (800k Tpa).

From 2011-14, China Blue’s revenues from the sale of methanol fell -1.8%

(CAGR of -0.6%). The decline in methanol revenues from 2011 to 2014 came

from a -3.7% decline in methanol prices and a -4.9% decline in volume sales.

16 July 2015

Chemicals

China BlueChemical


Figure 52: CB’s revenue from methanol Figure 53: CB’s ASP methanol in China

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2008 2009 2010 2011 2012 2013 2014

Rmb 000

1H sales 2H sales

2.4

1.5

2.0 2.2 2.2

2.3 2.2

0.00

0.50

1.00

1.50

2.00

2.50

3.00

000 Rmb/ ton



Figure 54: Methanol production volumes Figure 55: Methanol production growth Y/y

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Tons

1H volumes 2H volumes

17.9%

7.1%

81.1%

1.4%-1.2% -1.5%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Methanol production growth %

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Figure 56: Annual methanol production volumes by plant Figure 57: Methanol plant utilization

-

400,000

800,000

1,200,000

1,600,000

2,000,000

2008 2009 2010 2011 2012 2013 2014

Tons

Hainan Phase I Hainan Phase II CNOOC Tianye

96.4%

101.2%

100.0%

98.1%

99.5%

98.3%

96.9%

90.0%

95.0%

100.0%

105.0%

2008 2009 2010 2011 2012 2013 2014

Utilzation %

Source: Company data, Deutsche Bank Note: The sudden growth in methanol production in 2011 is due of the ramp up of the production at Hainan Phase II.


16 July 2015

Chemicals

China BlueChemical


Phosphates

Past performance from China Blue’s methanol segment is in Figure 58 through

Figure 63. The phosphate division of the company is engaged in producing and

selling MAP (momoammonium phosphate), DAP (diammonium phosphate)

and NPK (Nitrogen, Phosphate and Potash) “Compound” fertilizers.

In 2014 CB’s revenues from phosphate sales increased 24.4% to Rmb 2.6bn.

The increase in revenues came from a 24.5% increase in sales volumes. CB’s

2013 growth in phosphate fertilizers was due to the October 2012 start up of

its DYK DAP Phase II facility (700k tpa). CB’s 2014 growth in phosphate

fertilizers was due to the repositioning of its Compound fertilizer business into

its “Phosphate & Compounds” division from its “POM & Others” business

segment where it was accounted for prior to 2014.

CB’s production of MAP and DAP from its DYK facilities has 80-85% self-

sufficiency in phosphates with 15-20% purchased from third parties. The issue

is not a lack of feedstock (phosphate rock), but rather the lack of aluminum

oxide in China’s northern-based phosphate rocks. Aluminum oxide is needed

to produce a high(er) quality MAP and DAP.

From 2011-2014, China Blue’s revenues from the sale of phosphate grew

95.3% (CAGR of 25%). The increase in CB’s phosphate revenues (2011-2014)

came from a 131% increase in phosphate fertilizer volume sales and a -15.5%

decline in prices.

In 2013, CB started producing compound fertilizers (NPK) at their DYK DAP

Phase I facility. Despite the steady growth in NPK fertilizer demand, the

application of NPK fertilizers in China is still in a nascent stage compared to

developed countries. The use of compound fertilizers in China is only 25% of

total fertilizer consumption, while it is ~50% for the USA and Canada.

Figure 58: CB revenue from phosphate fertilizers Figure 59: CB’s ASP phosphate fertilizers

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2008 2009 2010 2011 2012 2013 2014

Rmb 000

1H sales 2H sales

MAP

DAP

MAP growth

DAP growth

3,625

2,470

2,573

3,139 3,117

2,655 2,654

1,250

1,750

2,250

2,750

3,250

3,750

Rmb/ ton



MAP, DAP and NPK

Repositioning compounds

Lack of aluminum -

interesting

Compounds start 2013

16 July 2015

Chemicals

China BlueChemical


Figure 60: Phosphate fertilizer production volumes Figure 61: Phosphate fertilizer production growth Y/y

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Tons


10.3%

3.0%

-4.4%

4.2%

85.8%

8.3%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Phosphate fertilizer production growth %



Figure 62: Annual phosphate production volumes by

plant

Figure 63: Phosphate plant utilization

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2008 2009 2010 2011 2012 2013 2014

Tons

DYK MAP DYK DAP Phase I DYK DAP Phase II

80.1%

88.4%

91.0%

87.1%

89.0%

84.3%

91.3%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

2008 2009 2010 2011 2012 2013 2014

Utilzation %

Source: Company data, Deutsche Bank Note: The sudden growth in 2013 phosphate production volumes is due to the start up of the DYK DAP Phase II plant


POM and Others

Past performance from China Blue’s POM chemical segment is in Figure 64

through Figure 68). China Blue’s POM facility is located in Inner Mongolia and

sources methanol from CB’s Tianye (Inner Mongolia) facility. China Blue is

considering an exit (2H15e) from its POM business due to the oversupply of

product in the domestic market. At year-end 2013, CB wrote down Rmb 122.7

mln of its POM asset; at year-end 2014, CB wrote down another Rmb 1.05bn

of this asset. From 2010-11, CB invested Rmb 1.7bn in its POM facility.

In 2014, CB’s revenues from POM & Other sales grew 10.4% to Rmb 1.5bn.

The increase in revenues was driven by a 75.0% increase in sales volumes and

a -37.5% decline in CB average POM prices. The increase in production was

due to resumed operations (April 2014) from production line A which was

closed for much of 2013 due to planned turn-around maintenance.

Oversupplied in POM

16 July 2015

Chemicals

China BlueChemical


From 2012-14, CB’s revenue from the sale of “POM & Others” grew by 46.6%

(CAGR of 13.6%). The increase in revenues came from a 131% increase in

volume sales and a -15.5% decline in average POM prices. CB’s POM facility

became operational October 2011. There are other revenue streams in CB’s

“POM and Other” business segment.

What we refer to as CB’s POM business is actually revenues and production

from CB’s POM business, its Bulk Blending fertilizer business, its fertilizer

trading business and a logistics business. The Company does not break out

these business lines given the diminutive size relative to CB’s principal

business lines: Urea, Methanol and Phosphate fertilizers.

As of 31-December 2014, CB booked an impairment charge of Rmb 1.18bn

against its POM asset (60k Tpa) vs. a total capex (~book value) of Rmb 1.7bn.

Might there be more to write off (1H15e) on this asset?

Figure 64: CB’s revenues from “POM & Others” Figure 65: CB’s ASP for “POM and Others”

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2008 2009 2010 2011 2012 2013 2014

Rmb 000

1H sales 2H sales

156

43

80

50

0

20

40

60

80

100

120

140

160

180

000 Rmb/ ton

POM ASP



Figure 66: POM production volumes Figure 67: POM production growth Y/y

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011 2012 2013 2014

Tons


185.3%

-41.6%

75.6%

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

2012 2013 2014

POM production growth %



POM … and a bunch of other

stuff

16 July 2015

Chemicals

China BlueChemical


Figure 68: POM facility utilization rates

67.4%

48.1%

26.7%

49.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2011 2012 2013 2014

Utilization %

Source: :Company Data, Deutsche Bank

To put China Blue’s 2011-2014 divisional revenues numbers into perspective:

Figure 69: China Blue revenues distribution and growth 2011-14

(Rmb mlns)

2011 2014 CAGR

UREA 4,047 3,390 -5.7%

- Nominal Revenue Growth (2011-14) -16.2%

METHANOL 3,346 3,284 -0.6%

- Nominal Revenue Growth (2011-14) -1.8%

PHOSPHATES (incluing NPK) 1,350 2,636 25.0%

- Nominal Revenue Growth (2011-14) 95.3%

POM and Others 1,014 1,486 13.6%

- Nominal Revenue Growth (2011-14) 46.6%

Consolidated revenues 9,756 10,797 3.4%

10.7%

Notes:

- Sales above represent CB sales to external customers.


16 July 2015

Chemicals

China BlueChemical


Skeletons in the closet

M&A – Are there any more skeletons ion this closet?

In April 2006, Mr. WU Mengfei was appointed Chairman of China

BlueChemical. Mr. WU began his career at the CNOOC Group in 1988. Mr. WU

resigned as Chairman of China BlueChemical in July 2011 and was replaced by

Mr.LI Hui who is the current Chairman of China Blue.

In April 2006, Mr. YANG Yexin was appointed CEO and President of China

BlueChemical. Mr. YANG began his career at the CNOOC Group in 1978. Mr.

YANG was reappointed as CB’s CEO in June 2009 and in June 2012. Mr.

YANG resigned as China Blue’s CEO on 29-Dec 2014.

In April 2006, Mr. QUAN Changsheng was appointed as VP and CFO of China

BlueChemical. Mr. QUAN began his career with CNOOC Group in 1986. Mr.

QUAN remains today as the CFO of China BlueChemicals. We presume that Mr.

QUAN as CFO will have signed off on most of the investments noted below.

Trials and tribulations

Yangpoquan Coal Company (YCC) / HuaLu Chemical Company

In July 2009, China Blue invested Rmb 677.6 mln and acquired i) a 49% non-

controlling stake in Yangpoquan Coal Company (YCC) for Rmb 637 mln; and ii)

a 51% controlling stake in Shanxi HuaLu Cemmical Company (SHCC) for Rmb

40.6 mln. The “seller” in both cases was Shanxi Hualu, a privately owned

industrial conglomerate based in Inner Mongolia. In 1H14, China Blue wrote-

off Rmb 376 mln of its investment in YCC. In 2H14, CB wrote of another Rmb

100 mln of its investment in YCC. In total, CB has to date written off Rmb 476

mln of its Rmb 637mln investment in YCC. We question if there remains

another Rmb 160 mln to write-off of the YCC asset and Rmb 40.6 mn to write-

off of the SHCC asset.

On 29-July 2009, CB acquired a 49% stake in coal mining company

Yangpoquan Coal Company (YCC). At the time, YCC was 100% owned by

Shanxi HuaLu. CB paid a total of Rmb 637 mln for its non-controlling 49%

stake in YCC. The remaining 51% and control of YCC remained with Shanxi

HuaLu. CB has equity accounted for its 49% stake in YCC since making the

acquisition 29-July 2009.

At the same time and in addition to the YCC acquisition, CB also agreed to

acquire a 51% and control of Shanxi HuaLu Chemical Company (a coal to urea

production facility) from Shanxi Hualu. The “acquisition” of SHCC was done

via a SHCC capital increase which CB financed 100% for Rmb 40.6 mln.

According to a CB filing with the HKSE dated 29-July 2009, YCC had an

“approved annual (coal) production capacity of 1.2mln tons per year”. To put

that into perspective, China produces 3.8bn tons of coal per year. We estimate

that 1.2mln Tpa of coal would be sufficient to produce ~1.56 mln tons of urea

per year (not a small amount). China Blue’s HKSE filing went on to say:

YCC: No control – 49% equity

16 July 2015

Chemicals

China BlueChemical


“The completion of the aforesaid transactions (YCC and SHCC) will not only enable the Company (CB) to secure LT coal supply and diversify into sources of key raw materials through strategic partnership, but also provide the company with opportunities to expand its urea production capacity that will enjoy significant cost advantages and market competitiveness. The Directors consider the transactions are of strategic

value to China BlueChemicals.”

China Blue’s 2009 Annual Report discussed the above acquisitions of a non-

controlling 49% stake in YCC and a controlling 51% stake in Shanxi HuaLu

Chemical in the following terms:

“We secured positive advances in our development strategy of building a large-scale Urea production (center) based on coal resources through our successful equity participation in Shanxi Hualu Yangpoquan Mining Co and control in Shanxi Hualu Coal Chemical Company.”

On 12-June 2014, China Blue filed a statement with the HKSE regarding

“Enforcement Action Against the Assets of an Associate of the Company”. The

filing went on to say:

China BlueChemical Ltd. (the ‘‘Company’’) has been informed by the Intermediate People’s Court of Xinzhou City, Shanxi Province (‘‘Xinzhou Court’’) that an enforcement action (the ‘‘Enforcement Action’’) has been commenced and an auction announcement … putting all assets … on auction on 2 July 2014 to satisfy a debt of Yangpoquan Coal for the amount of Rmb 302,678,614.57 owed to the Industrial and Commercial Bank of China (‘‘ICBC Hequ Branch’’) as Yangpoquan Coal Company has failed to satisfy the debt in the manner as demanded by ICBC.

In its 1H14 Results Announcement, dated 28-August, and with regards to the Enforcement Action against Yangpoquan Coal Company, CB went on to say:

During the current interim period, … all assets of Yangpoquan Coal, including mining rights, machineries and equipment, real estate, stock of raw coal and office supplies are to be foreclosed through auction in order to satisfy … the debts of Yangpoquan Coal in the amount of Rmb 302,678,000 as owed to ICBC. Due to the failure of the auction originally scheduled for 15 August 2014, a second auction is scheduled to be held on 4 September 2014. Should the auction prove successful at the base price (80% of appraised value) … the fair value less cost of sales would be Rmb 277,258,000. Accordingly, an impairment of Rmb 375,972,000 is

recognized and presented (1H14 results) as “share of losses/profits of associates”.

As it turned out both the second (YCC) auction scheduled for 04-September, and a third (YCC) auction scheduled for 26-September 2014, failed. In a filing dated 26-December 2014 to the HKSE, China Blue reported the failed third auction – three months after the fact. In the auction failure notice of 26-December 2014, China Blue went on to say: “The Company (CB) will follow up and monitor the Enforcement Action and will make further announcement(s) if and when appropriate.”

To the best of our understanding, there have been no further follow up announcements made to the HKSE regarding the YCC auction process. And therefore, as per our estimates, CB could possibly have another Rmb 277 mln of YCC asset write-offs to come assuming no value can be attributed to the YCC assets that are still pending an auction outcome.

Forgot to mention the debt

Waiting on additional follow

up

16 July 2015

Chemicals

China BlueChemical


CNOOC Tianye POM asset On 19-January 2006, China BlueChemical acquired 90% and control of Inner Mongolia Tianye Chemical Industry Ltd. for Rmb 964.6 mln. Production capacity acquired was 200k tpa of methanol and 520k tpa of urea. In 2005, the Tianye methanol and urea facilitie(s) converted from residual fuel oil feed stock to natural gas feed stock. (Please note that CFO Quan, was appointed CFO of China Blue in April 2006.)

In 2010, CB constructed a 60k tpa POM facility in Inner Mongolia on the Tiayne Chemical site. Total capex spent on the project was Rmb 1.7bn. Since 2011, CB’s POM production facility has consistently run at sub-55% utilization rate due to a material oversupply of POM in the China market. The feedstock for POM is methanol and in this case, as supplied by the Tiayne Inner Mongolia methanol facility to China Blue’s newly constructed POM facility.

On 31-Dec. 2014, CB booked an impairment loss on its POM asset of Rmb 1.05bn. At YE13, CB had booked an impairment loss of Rmb 122.7mln on its POM asset. In total, and as of 31-December 2014, CB had booked an impairment charge on its POM asset of Rmb 1.18bn against a total capex of Rmb 1.70bn. Might we see another Rmb 520mln write off on this asset?

As per CB management, a final decision on whether to fully-exit its POM business should be made by end-May 2015. A decision to exit the POM business would entail (at the very least) compensation costs for employees released, and we suspect additional asset impairment charges. The Company has yet to file any follow up notice to the HKSE regarding this particular issue.

In the company’s 1H14 Results announcement as filed with the HKSE (August 2014), we did not sense any additional or heightened risk surrounding CB’s POM asset. There was the annual statement about “(China’s) POM markets remained dominated by an excess of supply over demand” and maybe an overly optimistic “Our POM production volume experienced a significant increase as production line A was in good operating condition and production line C resumed operations in April 2014”.

Hegang HuaHe Coal Chemical Ltd (HuaHe Chemical)

On 16-July 2010, China BlueChemical acquired an 80% equity interest in

Hegang Huahe Coal Chemical Ltd for an agreed price of Rmb 81.8mln. In its

2010 Annual Report, CB describes the ownership of the asset as follows:

“Upon completion of the equity transfer, the company (CB) has a direct

interest in 80% of the equity in Huahe Chemical. The Group (CB) has elected to

measure the Non-Controlling Interest (“NCI”) in Huahe Chemical at the NCI’s

proportionate share of Huahe Chemical’s identifiable net assets.”

Nothing about this presentation suggests that China BlueChemical acquired an

80% controlling interest in Huahe Cemicals. To the contrary, the language used

in the 2010 Annual Report and the language used in the 16-July 2010 filing to

the HKSE, leads us to believe that control of the asset was not in the hands of

China BlueChemical. We note in a 16-July 2010 China Blue filing to the HKSE:

“Huahe Chemical has obtained approval to construct a 520k Tpa urea project in Hegang City, Heilongjiang Province and acquired a coal

exploration right in Xinhua District, Hegang City, Heilongjiang Province.”

The sale of the 80% “equity transfer agreement” of Hegang Huahe Coal Chemical Ltd to China Blue was done by China National Chemical Engineering Group Corporation (“CNCEC”), a company incorporated in China which is an industrial engineering group directly administered by SASAC; hence an SOE.

Oversupplied POM – sub 55%

utilization rates

Pending – we should hear

end August when CB reports

1H15 results

80% non-controlling?

Government to government –

oh my

16 July 2015

Chemicals

China BlueChemical


In its 2011 Annual Report, CB noted: 1) that the company had capexed Rmb 397.7mln into its Huahe urea project; and 2) that progress of the exploration and development work of the upstream ancillary coal resource … (had) significantly fallen behind (schedule) of the downstream coal-chemical project.

In its 2012 Annual Report, CB noted that 1) the company had capexed Rmb 638.6 mln into its Huahe urea project; and 2) that CB’s interest in “CNOOC Huahe Coal Chemical Co. Ltd” had increased to 100% from 80%. It seems as if CB finally took full control of Huahe Coal Chemicals sometime in 2012. CB management has suggested to us that the 20% residual owner of the Huahe Coal Chemical Company was unable to meet a capital call in 2012 and was fully diluted away to China BlueChemical.

Let us not jump to conclusions. Although on paper, it seems as if CB now controls its Huahe Chemical subsidiary, the vertically integrated coal-to-urea project is still not quite vertically integrated. The start-up date for this urea project continues to be pushed back without a detailed explanation from management. The initial start-up date of this “integrated” project was set for 2H12; which was pushed back to 2H14; which was again pushed back to 4Q14 – but only the urea production facility, as the upstream coal mining operation was pushed back to June 2016; which in itself was just recently pushed back to sometime in 2017e.

What is the issue that is plaguing the start-up of the upstream side of this “vertically integrated” urea project?

Is Huahe, just another HuaLu (YCC) in the making? CB ultimately never had control of YCC and eventually had to write-off the asset. Does CB have control of the Huahe upstream (coal mine) asset: We get the feeling that controlling the asset does not necessarily go hand in hand with owning / controlling the mining rights to the project.

CB tells us that Huahe Coal Chemicals will be purchasing coal from third parties to produce urea, until 2017e when CB expects the upstream side of the facility to come on-stream.

In its 2013 Annual Report, China Blue noted that it had capexed Rmb 1.34bn in its Huahe urea project during the reporting period (2013). In its 2014 Annual Report, CB noted that it capexed Rmb 696.1mln in its Huahe urea project during the reporting period (2014). In our discussions with management, Capex to Huahe for 2015e should be Rmb 180 mln to the urea-project and Rmb 100 mln to the associated upstream coal-mining project.

In total, we estimate that CB has invested Rmb 3.4bn into its vertically integrated Huahe urea project. That is a lot of capex – particularly if CB only has partial control (HuaLu) of the coal asset that is designed to feed this “vertically integrated” coal-to-urea project.

Guizhou Jilin Chemical Company

On 17-March 2009, CB entered into an acquisition agreement with two other

parties and acquired a 45% equity stake in Guizhou Jilin Chemical Company

(CB 2009 Annual Report). It appears that CB’s total investment into the

Guizhou Jilin project was Rmb 105.8 mln. In its 2009 Annual Report, CB noted:

“(In addition), we acquired 45% equity interests of Guizhou Jinlin Chemical Co., Ltd. through capital increases, which laid the foundation for an integrated production base of phosphoric ore mining and phosphate fertilizer production in Guizhou.”

Taking control - maybe

16 July 2015

Chemicals

China BlueChemical


It is not clear to us whether CB acquired 45% of the project or if there are (2)

additional partners that hold part of this 45% equity interest. Control and 55%

of this company / project is in the hands of the Guizhou provincial government.

According to CB management, the Company holds 45% equity in phosphate

mining rights located in Guizhou province. Included in the phosphate ore are

rare earth metals that would need to be extracted from the phosphate ore and

run as a stand-alone rare-earth mining project. In addition to the two mining

projects (1 phosphate and 1 rare-earth project), the provincial government of

Guizhou wants CB to produce and distribute phosphate fertilizers. CB has

suggested that 1) the Capex requirement for the three projects as estimated by

the Guizhou government is excessive, particularly from the perspective that

China Blue has no control of any of the project(s); and 2) the Company had

invested about Rmb 200mln in the project(s) so far.

Do we smell another possible write-off of an asset that CB would like to have

control over, but does not? CB’s initial investment (Rmb 105.8mln) into this

project was in March 2009, only a few months before CB’s non-controlling

equity investment (July 2009) into the Yangpoquan Coal Company (YCC).

Asset write-offs are non-cash events across the P&L. Notwithstanding, and we

believe more so in China than other parts of the world, the Chinese are

incredibly hesitant to take asset write-offs. As an example, we point at both

CNOOC Ltd. and COSL, which are both “sister companies” to China

BlueChemical. In the local culture, the write-down of an asset is an

acknowledgement of having made a bad investment decision in prior years; in

other cultures, the asset-write down is a non-cash expense that can reduce

operating expenses (depreciation and amortization) and increases a company’s

future ROEs. Let’s look forward CNOOC Group, not backwards.

In summary: We suspect there could be additional asset write-off in the wings,

starting as early as end-August 2015, when China BlueChemicals will report its

1H15 results. We suspect that there is the potential that CB might have to

write off as much as another Rmb 997 mln on the above assets, not including

its HuaHe Coal Chemical project. We suspect that China Blue over-reached in

its investment decisions 2009 – 2014e, in trying to buy growth.

In our base case model we assume:

No additional asset write-offs on any CB assets (including the above assets) 2015-21e;

The Tianye POM asset continues to operate at sub 50% utilization rates (into perpetuity);

Ramp up of the HuaHe Chemical project beginning 2H15, with a utilization rate of 50% in 2015 and 100% in 2016. We assume that this project is vertically integrated during 2017e.

We have not modeled in any of the Guizhou Jilin Chemical project.

Excessive Capex – no control

– what to do?

It's a cultural thing

16 July 2015

Chemicals

China BlueChemical


CB’s Share price

Correlated to

China Blue’s share price seems most correlated with China urea prices and

China coal prices, which makes good sense. We are of the opinion that China

coal prices and therefore by default, China urea prices have minimal upside

potential through 2017e (Figure 19).

The non-correlation to China methanol prices is intriguing. We suspect that the

lack of historical correlation to methanol prices may be due to a lack of

visibility (to HK investors) on methanol prices and China’s methanol market in

general. The correlation and R-Square data below reflects price changes from

01-Jan 2009 to present.

Figure 70: Correlation of CB share price to various commodity prices

China Bluechem share price vs. Correlation R-square

Brent Oil prices 13.2% 1.7%

Henry Hub gas prices 4.5% 0.2%

China Thermal coal 15.9% 2.5%

China Anthracite coal 15.0% 2.3%

China Urea prices 25.9% 6.7%

China MAP prices 6.8% 0.5%

China DAP prices -12.7% 1.6%

China Methanol prices 4.7% 0.2%

Source: Factset, Bloomberg Finance LP, Deutsche Bank

Figure 71:CB share price vs. Hang Seng Index Figure 72: CB share price vs. Brent oil prices

0

5,000

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15,000

20,000

25,000

30,000

0.00

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China BlueChemical Hang Seng Index

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8.00US$/bblHKD

China BlueChemical Brent



16 July 2015

Chemicals

China BlueChemical


Figure 73: CB share price vs. Henry Hub gas prices Figure 74: CB share price vs. China coal price

0.0

1.0

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China BlueChemical US Henry Hub

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China Blue Chemical Thermal Coal Anthracite Coal


Source: Factset, CEIC, China Customs, China Coal Resources www.100ppi.com, Deutsche Bank Note: Anthracite coal represents Shanxi Jincheng prices and thermal coal prices represent Qinhuangdao Thermal Coal 5000 Kcal

Figure 75: CB share price vs. China urea prices Figure 76: CB share price vs. China DAP and MAP prices

0.0

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China Blue Chemical Urea, 46% or Above

0.0

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China Blue Chemical DAP MAP Source: Factset, Bloomberg Finance LP, Deutsche Bank


Figure 77: CB share price vs. China methanol price Figure 78: CB share price vs. Chinese urea listed shares

0.0

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China BlueChemical China Methanol

0.00

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9.00

12.00

15.00HKD

China BlueChemical Luxi Chemical Sinofert

Anhui Liuguo Hubei Yihua China XLX

Source: Bloomberg Finance LP; Deutsche Bank

Source: Bloomberg Finance LP; Deutsche Bank

16 July 2015

Chemicals

China BlueChemical


Key risks

China BlueChemicals

Global urea and methanol prices are driven the price of coal in China.

This is because China’s coal-to-urea production is the world’s marginal

cost production. Any material increases / decreases in China coal

prices should lead to an increase / decrease in global urea and

methanol price. DB forecasted China and global coal prices are in

Figure 19.

The introduction of new policy issues for better or worse by the NDRC.

For instance, the introduction of a VAT tax on fertilizer transactions

could slow demand for fertilizers in China. An introduction of the VAT

tax would not directly affect the P&L of fertilizer companies – VAT

taxes are eliminated from P&L revenues and operating costs prior to

reporting. In December 2012, the NDRC restricted natural gas as a

feedstock into any new urea and methanol expansion projects. If the

NDRC were to relax this restriction, China Blue’s capex / growth

prospects should improve.

Global commodity prices are driven by global supply and demand. At

the margin, China has been the marginal buyer for most commodities

worldwide including urea and methanol. Any prospects of an

improving / decelerating China economy would have both short-term

and long-term implications for the global price of urea and methanol.

Are we finished with the asset write-offs?

If the POM business is closed down 2H15, we estimate that there

could be another Rmb 527mln write-off of the POM asset. If the POM

asset is not written down, does this mean that the POM market is

improving and therefore might the write-off from 2014 be reversed

back into the P&L and Balance Sheet.

In July 2009, China Blue invested Rmb 677.6 mln and acquired i) a

49% non-controlling stake in Yangpoquan Coal Company (YCC) for

Rmb 637 mln; and ii) a 51% controlling stake in Shanxi HuaLu

Chemical Company (SHCC) for Rmb 40.6 mln. To date, China Blue has

written off Rmb 476 mln of this investment.

In March 2009, CB acquired a 45% equity stake in Guizhou Jilin

Chemical Company. It appears that CB’s total investment into the

Guizhou Jilin project was Rmb 105.8 mln. Management has told us

that 1) the Capex requirement for this project as estimated by the

Guizhou government is excessive; 2) they do not have control of this

project, which is in the hands of the Guizhou provincial government;

and 3) to date CB has invested a total of Rmb 200mln in the project.

China Blue’s pre-2006 Board and senior management team have

largely been replaced with Mr. YANG Yexin’s (2006-14) resignation as

CEO on 29-Dec 2014. China Blue’s new CEO is Mr. WANG Hui, who

most recently served as a Director of Shandong Haihua Company

Limited (000822 CH).

16 July 2015

Chemicals

China BlueChemical


Future capex / future growth remains compromised by the

government’s 01-December 2012 policy statement, which prohibited

the use of natural gas as a feedstock for any new urea capacity

expansion. Future capex is evidently also compromised by

management’s decision not to pursue additional urea, methanol and /

or phosphate investments Whether China Blue will be allowed to

expand into Natural Gas-to-Syngas-to-MEG or Natural Gas-to-Syngas-

to-Olefins isn’t really the question. More to the point, the question is

whether China Blue could compete with China’s traditional chemical

producers (Sinopec and subsidiaries; PetroChina and subsidiaries;

CNOOC Group; Shell Oil PLC; Dow Chemical and BP). Maybe yes.

Restructuring of China’s fertilizer industry – China currently does not

impose a VAT tax on domestic fertilizer transactions. In a March 2015

meeting with IHS Chemicals, “SOE Reform” for China’s fertilizer

industry was most associated with: 1) the introduction of a 13-17%

VAT tax on China’s fertilizer chain; and 2) decreasing subsidies on the

rail and electricity cost inputs. We have yet to hear more on this topic.

When we mentioned this notion to Sinofert, management ignored the

question. When we mentioned this notion to China Blue’s

management, the first time around the question was ignored; the

second time around, we were told that a new VAT tax on fertilizers

was a real possibility. We would think about this “real possibility” not

in terms of an additional expense to CB’s P&L but rather as an

increase in the cost of fertilizers to farmers and therefore a possible

slow-down in fertilizer demand in China.

Delays in new MTO plant additions: Any delays or cancellations in new

methanol to Olefins (MTO) capacities will reduce the demand for

methanol as a feedstock. This will particularly be the case if soft oil

price continues to prevail in the coming few years, which will affect

the cost competitiveness of olefins, produced using methanol and coal

compared to olefins produced using naphtha (oil product).

16 July 2015

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Global urea

Urea market overview

The world is awash in urea with China coal and US shale gas being the

principal culprits for global over supply. It was pointed out to us recently that

certain provincial government(s) in China that hold abundant coal reserves

have provided subsidized coal to non-urea producers (coal companies;

electricity companies) in exchange for a commitment from these companies to

use the coal to develop new industries (Urea and/ or Methanol) to support

employment and local GDP growth opportunities.

China has more urea capacity and production (Figure 79 through Figure 83)

than any other country worldwide. In 2015E, the urea capacity in China and

rest of world were 113.6 and 129.1 mln TPA, respectively. China accounts for

46.8% of global urea capacity and 40% of global urea production.

China holds ~40% of global urea capacity and production. Saudi Arabia holds

only ~15% of global oil capacity and production. China is a Super-Major in

global (fertilizer) urea markets.

Figure 79: Global urea capacity vs. apparent demand

0

50,000

100,000

150,000

200,000

250,000

300,000

World capacity World apparent demand(thousand tons)


The world is awash with urea

16 July 2015

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Figure 80: Asia urea capacity vs. Asia apparent demand

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000 Asia capacity Asia apparent demand

(thousand tons)


Figure 81: China urea capacity vs. China apparent demand

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000 China capacity China apparent demand

(thousand tons)


16 July 2015

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Figure 82: China urea capacity vs. rest of the world (ROW)

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

China Rest of World'000 tons


Figure 83: The world’s largest producers of urea

Top-10 Urea Capacity Classification by Region

('000 tons) % share ('000 tons) % share

1 China 113,604 43.6% Asia 162,606 65.6%

2 India 24,564 11.0% Middle East 23,935 10.0%

3 Indonesia 8,880 3.9% CIS 15,601 6.7%

4 Russia 8,474 3.7% Europe 12,482 5.9%

5 United States 6,525 3.1% N America 10,671 5.0%

6 Pakistan 6,314 3.0% Africa 9,242 3.3%

7 Qatar 5,577 2.6% Latin America 7,582 3.2%

8 Egypt 6,000 2.4% Oceania 587 0.3%

9 Iran 5,509 2.1%

10 Canada 4,146 2.0% Total 242,706 100.0%

Total of top-10 189,593 77.3%

Remaining countries 48,144 19.8%

Total 242,706 97.2%


Urea demand and supply

Urea is the most commonly used nitrogen fertilizer that has a relatively high

nitrogen content of 46%. Nitrogen improves crop yields and plant growth.

Worldwide urea consumption grew at 4.6% CAGR (2010-13). According to

Fertecon worldwide urea consumption has started to slow as more efficient

application processes become available. Fertecon expects urea demand to

grow at 1.9% CAGR 2013-20E, which in our opinion almost guarantees an

over-supply of global urea for years to come.

Slowing demand due to

improved technology

16 July 2015

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Figure 84: Global urea consumption

60,000

90,000

120,000

150,000

180,000

000 tons

Source: Fertecon, Deutsche Bank

Asia is the largest consumer of urea worldwide. China accounts for 54% of

Asia’s urea consumption.

Figure 85: Global urea consumption mix (2013) Figure 86: Asia’s urea consumption mix (2013)

Europe11%

Asia67%

Africa3%

Middle East2%

Oceania2%

North America9%

Latin America6%

Bangladesh2%

China 53%

India27%

Indonesia5%

Pakistan5%

Thailand2%

Other 6%



Similarly, in terms of urea imports, Asia (36%) accounts for the largest share of

urea imports, followed by Europe (19%). According to Fertecon, total urea

imports worldwide were 46 mln tons in 2013, with imports expected to grow

at a 1.7% CAGR 2013-20E (Figure 87 through Figure 89). Fertecon expects

urea imports to Asia to reach 44% of global trade by 2020E, while they expect

North American imports to decline to 9% (2020E) from 15% in 2013.

CAGR 2010-13: 4.6%

CAGR 2010-13: 1.9%

16 July 2015

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Figure 87: Global urea imports mix (2013) Figure 88: Global urea imports mix (2020E)

Europe19%

Asia36%

Africa7%

Middle East1%

Oceania5%

North America15%

Latin America17%

Europe

20%

Asia44%

Africa6%

Middle East1%

Oceania4%

North America9%

Latin America16%



Figure 89: Global urea imports

0

10,000

20,000

30,000

40,000

50,000

60,000

000 tons


In 2013, India was the largest importer of urea followed by the USA with an

imports share of 16.4% and 13.9%, respectively, while China was self-

sufficient with only 0.1% of worldwide urea imports. However, by 2020E

Fertecon expects China to emerge as a one of the top five urea importing

nations with an import share of 5.9%, driven by the high domestic production

costs which would make imports cheaper for the farmers in China.

CAGR 2010-13: 4.1%

CAGR 2013- 20E: 1.7%

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Figure 90: The world’s largest urea importers Figure 91: Share of urea imports of the largest importers

as a % of total global imports

0

2,000

4,000

6,000

8,000

10,000

12,000

Australia Thailand Brazil China United States

India

000 tons

Urea imports 2013 Urea imports 2020E

3.8%

5.3%

8.2%

0.1%

13.9%

16.4%

2.9%5.0%

5.6% 5.9%6.7%

21.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Australia Thailand Brazil China United States

India

000 tons

Imports share 2013 Imports share 2020E



Since the shale boom the gas supply from USA has amplified by ~15x over the

past 10 years; adding pressure on the global natural gas prices. This had

benefited US producers via low production costs. The US Energy Information

Administration (EIA) expects shale gas production to grow at a CAGR of 3.5%

over next 20years making US a net exporter of gas by 2020E. On the other

hand, coal prices in China are expected to remain flat through 2020E driven by

the firm demand from the industrial sector. In China majority (~60%) of urea is

produced using coal as a feedstock, while other large urea exporting nations

such as Russia and Ukraine uses natural gas as a feedstock. Thus and as a

result of the falling gas prices, importing urea will become more cost efficient

than using locally made urea for the farmers in China.

Figure 92: US Gulf gas and China coal prices Figure 93: Gas and coal price forecasts

0

50

100

150

200

250

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2010 2012 2014 2016E 2018E 2020E

Coal $/tonGas $/mm BTU

US Gulf gas China coal

2014 2015E 2016E 2017E 2018E 2019E 2020E

Price forecasts

US Gulf gas ($mmBtu) 4.4 3.7 3.7 4.0 4.3 4.5 4.7

W. Europe Gas ($/mmBtu) 8.2 7.6 7.5 7.5 7.6 8.2 8.6

Russian Gas ($/mmBtu) 3.4 2.5 3.0 4.0 4.3 4.3 4.4

Ukrainian Gas ($/mmBtu) 8.5 8.7 7.8 8.0 8.2 8.4 8.6

Chinese Coal ($/t) 150.0 152.0 158.0 165.0 172.0 178.0 184.0

Change in prices Y/y

US Gulf gas 15.8% -15.9% 0.0% 8.1% 7.5% 4.7% 4.4%

W. Europe Gas -22.0% -7.2% -1.3% 0.0% 1.3% 7.9% 4.9%

Russian Gas -17.1% -26.5% 20.0% 33.3% 7.5% 0.0% 2.3%

Ukrainian Gas -22.7% 2.4% -10.3% 2.6% 2.5% 2.4% 2.4%

Chinese Coal -2.6% 1.3% 3.9% 4.4% 4.2% 3.5% 3.4% Source: Fertecon, Deutsche Bank Note: Coal prices are for China’s Anthracite coal

Source: Fertecon, Deutsche Bank Note: Coal prices are for China’s Anthracite coal

CAGR 2014- 20E: Gas: 0.1% Coal: 3.5%

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Figure 94: Urea cost curve for 2015

593

154

607

207

195

27

2

182

28

265

37

50

66 Source: Fertecon, Deutsche Bank

Markets have been flooded with Chinese exports in 2015, putting downward

pressure on global urea prices. Effective 01-January 2015, China’s urea export

tax was reduced to a flat rate of Rmb 80 /ton for the full year.

Prior to 2015, urea exports from China were divided into a “High Season” and “Low Season” with a high/ low export tax defining the two seasons. In 2014, the “High Season” urea export tariff was applied from January to June and November to December; while the remaining months of the year were designated as “Low Season” / lower tariff export months. The “High Season” export tariff was applied during China’s planting season(s) in order to retain / suppress domestic supplies / prices. The “Low Season” export tax enabled producers to export at least some their surpluses.

In 2014, China’s urea export tariff was set at a rate of 40 RMB/ton during “Low

Season” (Jul to Oct) and “40 RMB/ton + 15% of the urea price/ ton” during

“High season” (Jan to Jun & Nov to Dec). The average price of urea in China

(2014) was Rmb 1,734/ ton or US$ 281.4/ ton (Figure 19). Prior to 2014, the

differential between “High season” and “Low-season” tariffs existed but was

not necessarily equal to the 2014 differential. Similarly, and prior the 2014 the

“High-season” vs. “Low-season” months were not always consistent.

Under the new urea export policy, China producers are able to ship urea to

overseas market at the same rate throughout the year and thus potentially

reduce volatility of global supply and urea price

Consultants Fertecon have an interesting read on China’s urea exports over the

coming years (Figure 95 and Figure 96). Fertecon evidently expects China coal

prices to rise through 2020e while global natural gas prices remain depressed

due to US shale gas and (we assume) abundant associated gas in certain parts

of the world (Africa and the Middle East). As a result, Fertecon sees China’s

coal-to-urea production becoming less competitive globally over the coming

years.

From oversupply China to

oversupplying the world

16 July 2015

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Figure 95: Top five urea exporters in 2013 Figure 96: Top five urea exporters in 2020e

8.5

5.3 5.3

3.43.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

China Russia Qatar Oman Saudi Arabia

mln tons

Urea exports

5.35.0

4.44.2 4.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Qatar Russia Egypt Saudi Arabia Iran

mln tons

Urea exports



It is estimated that the top 10 urea exporting nations account for more than

70% of global urea supply. In 2013, Middle East (37%) and Europe (27%)

accounted for the largest share of exports However, by 2020E it is expected

that Africa will emerge as the second largest export region with a market share

of 20%, while Middle East will continue to dominate the exports market with

39% market share Figure 87- Figure 88). Nevertheless, the exports from Middle

East countries such as Iran, Egypt and Algeria can be constrained by the gas

supplies and potential government interventions, while Russian urea supplies

can be interrupted by political tensions as well.

Figure 97: Global urea exports mix (2013) Figure 98: Global urea exports mix (2020e)

Europe27%

Africa6%

M. East37%

Asia24%

N. America3%

L. America3%

Europe

20%

Africa20%

M. East39%

Asia13%

N. America4%

L. America4%



Fertecon’s forecasts for global urea capacity, utilization and prices through

2020 are presented below:

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Figure 99: Global urea capacity

0

50,000

100,000

150,000

200,000

250,000

300,000

000 tons


Figure 100: Global urea capacity utilization

82%

84%85% 81%

77%

73%71% 70%

71% 72% 72%

60%

65%

70%

75%

80%

85%

90%

Urea capacity utilization %


Figure 101: Global urea prices

200

250

300

350

400

450

500

550

$/ ton

Middle East granular FSU/Yuzhnyy Prilled US Gulf NOLA granular

Source: Fertecon; Deutsche Bank

CAGR 2010-13: 5.0%

CAGR 2013- 20E: 3.6%

16 July 2015

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China urea exports

In 2014, China exported 13.6 mln tons of urea up by 64.7% from 2013 (Figure

102, while India, Vietnam and the USA continue to be the main export

destinations for the country (Figure 103). Unlike other major urea exporting

nations, China mostly uses Anthracite coal to produce due to its abundant

supply. However, most urea exporters in eastern regions of the country are

now increasingly using thermal coal as a feedstock for urea. In 2013 China is

the largest exporter of urea, and is expected to supply more than 10 mln tons

of urea to the market in 2015e.

Figure 102: China urea exports

44.4%

-60.2%

-12.9%

284.3%

-17.0%-22.5%

107.9%

-49.3%

95.2%

19.0%

64.7%

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

350.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Growth %000 Tons

Urea exports Urea exports growth %

Source: CEIC, Deutsche Bank

Figure 103: Top five urea export destinations of China (2013)

0

500

1000

1500

2000

2500

3000

3500

India Vietnam United States Mexico South Korea

Urea exports 000 tons


China produces a mix of granular and prilled urea. As evident in Figure 104, the

share of granular urea as percentage of total exports has grown.

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Figure 104: Urea exports by type

61.7%

73.6% 70.7%

91.8%

79.4%

57.0%

38.3%

26.4% 29.3%

8.2%

20.6%

43.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013

Prilled urea Granular urea Source: Fertecon, Deutsche Bank

Figure 105 presents some of the differences between prilled and granular urea.

Prilled urea tends to absorb more moisture and as a result is not as popular in

the humid southern tropics as is the granular form of urea. Prilled urea has

greater demand from countries in northern climates.

Figure 105: Characteristics of prilled and granular urea

Prilled urea Granular urea

General

Prilled, Free Flowing, Treated against

caking, 100% free from harmful

substances

Free Flowing, Treated against caking,

100% free from harmful substances

Nitrogen 46% min 46% min

Moisture 0.3% max.0.5% max.

Biuret 1% max 1.4% max

Granulation 1 - 4 mm 90-94 % min 2 - 4 mm 90-94 % min

Melting Point 132 Degrees Celsius 133 Degrees Celsius

Colour Pure White Prilled Standard White or Pure White

Radiation Non - Radioactive Non - Radioactive

Free Ammonia 160pxt ppm max. 160pxt ppm max.

Source: Fertilizer News, Deutsche Bank Note: Biuret is a chemical compound which is the result of concentration of two molecules of urea and is a problematic impurity in urea-based fertilizers.

China’s consumption of urea (Figure 106 and Figure 107) is broad based with

high consumption rates in the south and southeast. Given its close proximity to

the principal urea consuming provinces in China, Hainan Island is an ideal

location to produce urea in China. Most of CNOOC Ltd’s natural gas

production comes from East (Liwan) and West (LiuHua 17-2) South China Sea.

16 July 2015

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Figure 106: Province-wise urea consumption (2013) Figure 107: Urea consumption in South Central province

(2013)



Figure 108: Major coal deposits & urea producing / consuming areas

Xinjiang

Inner Mongolia

Shanxi

Shaanxi Henan

Hubei

Major coal deposits

Shandong

Hunan

Guangdong

Major urea producing provinces

Major urea consuming provinces


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Figure 109: Top five urea producing provinces in 1Q14. Figure 110: Contribution of main urea producing

provinces to total China urea production in 1Q14.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Shandong Shanxi Henan Xinjiang Hubei

Urea mln tons

Shandong14%

Shanxi13%

Henan12%

Xinjiang8%

Hubei6%

Others47%



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Global methanol

Lots of potential growth

Current and future market for methanol

According to IHS Chemical Consultants, the global demand for methanol is

expected to grow at a robust 11-year CAGR of 6.0% over 2013-24e to reach

109.3 mln MT from 60.8 mln MT in 2013 (Figure 111)

Figure 111: Global methanol demand

38.0 40.0 41.0 42.0

50.055.0 58.0 60.7

109.3

0

20

40

60

80

100

120

mln Tons

7-year CAGR 6.9%

11-year CAGR 6.0%

Source: IHS Chemicals, Deutsche Bank

China’s increasing demand for methanol as a feedstock for olefins (MTO) and

gasoline blending should drive global demand 2015-2024e. According to IHS,

China’s demand for methanol should grow steadily 2013-24e at an 11-year

CAGR of 8.4% vs. 3.1% for the rest of the world (ROW) (Figure 112). Due to the

growing methanol demand out of China, the country is expected to account for

61.9% of global demand by 2024e vs. 49.4% in 2013.

The world is awash in

methanol

MTO and gasoline blending

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Figure 112: Global methanol demand: China vs. ROW

8.010.0 11.0

14.0

20.023.0 26.0

30.0

67.7

30.0 30.0 30.028.0

30.032.0 32.0 30.7

41.6

0

10

20

30

40

50

60

70

mln Tons

China methanol demand ROW methanol demand

7-year CAGR:ROW: 0.3%

China: 20.8%

10-year CAGR:ROW: 3.1% China: 8.5%


Figure 113: China’s demand for methanol to account for ~2/3rds of global

demand by 2024e

21% 25% 27%33%

40% 42% 45% 49%62%

79% 75% 73%67%

60% 58% 55% 51%38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2024e

China Rest of world


Roughly, ~50.6 mln MT of new methanol capacity is due on line globally 2013-

24e (Figure 114). China is expected to add 8.0 mln MT of new capacity by

2019e. China and the US should be the main contributors to new methanol

capacity worldwide. North America’s methanol industry has gained

momentum with a growing abundance of cheap shale gas supplies. North

America is expected to account for ~34% or 17 mln MT of new capacity

additions 2014-24e.

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Figure 114: Global methanol capacity

7.8%

9.5%

8.0%

5.6%

7.6%

6.2% 6.4%

1.0%

2.6%

1.8%

3.3%

0.5%0.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

40,000

60,000

80,000

100,000

120,000

140,000

160,000

000 MT

Methanol capacity Capacity growth %


According to IHS, China will steadily add new methanol capacity through

2017e but maintain capacity (0% growth) thereafter (Figure 115). As a result,

China’s share of global methanol capacity will decline to 47.8% by 2024e from

51.7% in 2013. China’s LT methanol capacity is expected to reach 70.9 mln MT

by 2024E (vs. 50.5 mln MT in 2013) an 11-year CAGR of 3.1% (2013-24e).

Figure 115: China’s methanol capacity

14.0%

17.0%

13.0%

7.4%

10.4%

4.9%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

000 MT

Methanol capacity Capacity growth %


In Northeast Asia, China is the only producer of methanol while Taiwan, South

Korea and Japan depend 100% on methanol imports. Despite the steady

growth in China’s methanol capacity, production levels remained low resulting

lower plant utilization levels (Figure 116 and Figure 117). In 2004, China’s

methanol capacity stood at 5.5 mln MT with production at 4.4 mln MT or a

utilization rate of 79%. By 2014 however, China’s total methanol capacity is

expected to have grown to 57 mln MT, with production of 29.1 mln MT or an

estimated utilization rate of 51.1%. According to IHS the reason for lower

utilization rates is due to reduced or ceased operations at most of small,

ammonia swing units and high cost anthracite based production units.

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Figure 116: China’s methanol production vs. capacity Figure 117: China’s excess or (deficit) capacity and

utilization in methanol plants

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

mln Tons

Methanol production Methanol capacity

2004-20e CAGR:Production : 14.8%Capacity : 17.1%

79%

71% 69%74%

61%

41%46% 48%

51% 52% 51%55%

59% 59% 59% 58% 57%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

mln Tons

Excess or (deficit) capacity Utilization %

100,000

120,000

140,000

160,000

mln Tons



Based on IHS data it is evident that a similar situation prevails outside China

where plant utilization rates stand below 70% (Figure 118 through Figure 121).

Methanol looks well supplied globally and over supplied in China.

Figure 118: Global methanol production vs. capacity Figure 119: Global excess or (deficit) capacity in

methanol plants

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

mln Tons



88%85%83%

78%

72%

62%64%64%63%62%61%65%67%66%64%66%64%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

10,000

20,000

30,000

40,000

50,000

60,000

mln Tons




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Figure 120: ROW’s methanol production vs. capacity Figure 121: ROW’s excess or (deficit) capacity in

methanol plants

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

mln Tons



89%88%87%

80%77%76%77%78%75%73%72%

77%77%73%

69%73%70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

5,000

10,000

15,000

20,000

25,000

mln Tons




China’s end demand for methanol comes from methanol to olefins (MTO) and

for blending with gasoline. Over the past three years, the demand from these

two segments has grown at a CAGR of 232% and 21.2%, respectively (Figure

121). As further evidence (Figure 123 and Figure 124), these two end markets

are expected to account for approx. 6.8% and 20.9% of total methanol demand

in 2014e. Formaldehyde (28%), gasoline blending (20.9%) and Dimethyl Ether

(19.7%) accounted for most of the methanol demand in 2014e. Albeit

formaldehyde accounts for majority of methanol demand, its share is gradually

declining, primarily due to sluggish growth in China’s housing market.

Figure 122: China - Methanol demand from end-product segments

mln MT 2011 2012 2013 2014e

CAGR (2011-

14e)

Formaldehyde 7.5 8.2 8.7 9.2 7.0%

Gasoline blending 3.9 5.7 6.5 6.8 21.2%

Dimethyl Ether (DME) 6.0 5.7 6.3 6.5 2.5%

Acetic Acid 2.3 2.3 2.6 3.0 9.5%

Methylamine 1.1 1.1 1.2 1.2 4.0%

MTBE 1.2 1.3 1.5 1.7 12.7%

MTO/ MTP 0.1 0.3 1.4 2.2 231.8%

Others 1.8 1.9 2.0 2.2 7.2%

Total demand 23.8 26.6 30.1 32.8 11.4%

Y/y demand growth % 17.7% 12.1% 13.2% 9.0% Source: IHS Chemicals, Deutsche Bank

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Figure 123: Demand for methanol from end products

(2004)

Figure 124: Demand for methanol from end products

(2014e)

Formaldehyde, 45.4%

Gasoline blending,

10.2%Dimethyl Ether

, 1.7%

Acetic Acid, 7.2%

MTBE, 9.0%

MTO, 0.0%

Others, 26.5%

Formaldehyde, 28.0%

Gasoline blending,

20.9%Dimethyl

Ether , 19.7%

Acetic Acid, 9.0%

Methylamine, 3.8%

MTBE, 5.1%

MTO, 6.8%

Others, 6.8%



China’s demand for methanol from MTO is expected to outstrip its demand

from formaldehyde by 2016e (Figure 125).

Figure 125: MTO demand to surpass formaldehyde demand by 2016e

0

2000

4000

6000

8000

10000

12000

14000

2014e 2015e 2016e 2017e

000 MT

MTO/MTP Formaldehyde Gasoline Blending Dimethyl Ether


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Figure 126: Methanol end market demand in China

0

10

20

30

40

50

60

70

80

mln MT

Formaldehyde Gasoline blending Dimethyl Ether (DME) Acetic Acid

Methylamine MTBE MTO/ MTP Others


Methanol to Olefins (MTO) demand

The production of olefins using methanol as the feedstock is a relatively new

derivative of methanol demand in China. There are currently three MTO

facilities in operation in China, which collectively use a total of ~4.5 mln MT of

methanol as a feedstock. We expected an additional 3.1 mln MT of MTO

(olefin capacity) in China 2015-16e (Figure 127). With these new capacity

additions, methanol demand should increase by another 9.3 mln MT 2015-16e.

(Note: 3 tons of methanol is required to make 1 ton of olefins).

Figure 127: Current and new MTO production capacity

Company Location

Olefins capacity

(000 MT)

Methanol

Consumption

(000 MT) Start-up date

Currently in operation

Zhongyuan PC Puyang, Henan 200 600 Q4 2011

Fund Energy Ningbo, Zhejiang 600 1,800 Q1 2013

Nanjing Wison Nanjing, Jiangsu 300 900 Q4 2013

Shandong Shenda Tengzhou, Shandong 400 1,200 Q4 2014

Total 1,500 4,500

MTO projects scheduled to come online

Shandong Hengtong Tancheng, Shandong 300 900 Q1 2015

Zhejiang New Energy Jiaxin, Zhejiang 600 1,800 Q2 2015

Jiutai Energy Erdos, Inner Mongolia 600 1,800 Q3 2015

China Coal Mengda Inner Mongolia 600 1,800 Q3 2015

Fund Energy Changzhou, Jiangsu 385 1,150 Q3 2015

Jiangsu Sailboat Lianyungang, Jiangsu 600 1,800 Q4 2015 / 2016

Total 3,085 9,250 Source: IHS Chemicals, Deutsche Bank

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Methanol for gasoline blending (China)

In 2013, China used 6.5 mln MT of methanol for gasoline blending. By 2024e,

China is forecast to use 13 mln MT of methanol for gasoline blending, a CAGR

of 6.5% (2013-24e). As reported by IHS Chemicals, China is the only market

with systematic blending of methanol into the gasoline pool. Nonetheless,

neither the central government nor any of the provincial governments has

mandated methanol-into-gasoline blending. Since 2009, 10 provincial

governments have issued their own methanol-blending fuel standards (Figure

128). These standards have been issued in an attempt to better manage local

markets rather than mandating a specific gasoline-methanol blend for the area.

The “Provincial standards” below are not mandatory. Since March 2015 and in

Shanxi Province only, marketing companies can freely set the sales price of

methanol-blended gasoline.

Figure 128: Standard of vehicle "Methanol Gasoline" and "Methanol Fuel" (by

province)

M5 M10 M15 M25 M30 M50 M85 M100

Shanxi

Sichuan

Shaanxi

Heilongjiang

Liaoning

Xijiang

Fujian

Zhejiang

Guizhou

Hebei

Ningxia

Methanol Gasoline Gasoline Fuel

Source: Standardization Administration of PRC, NDRC, Deutsche Bank

In late 2009, the central government released national standards for M100 and

M85 blending with gasoline. Similarly, these National methanol-standards are

also not mandatory. Since late 2009, the central government has released no

additional methanol blending standards.

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China agricultural production to support fertilizer demand

China’s continues to produce large volumes of agricultural products to feed its

large population (Figure 129-Figure 130).

Figure 129: Grain production in China Figure 130: Grain consumption in China

0

50,000

100,000

150,000

200,000

250,000

2010/11 2011/12 2012/13 2013/14 2014/15

000 MT

Rice Corn Coarse Grain

0

50,000

100,000

150,000

200,000

250,000

2010/11 2011/12 2012/13 2013/14 2014/15

000 MT

Rice Corn Coarse Grain Source: USDA, Deutsche Bank

Source: USDA, Deutsche Bank

Never-the-less, the arable area in China is falling due to the rise in urbanization

levels. China’s total arable area in 2012 stood at 54.8% down from 56.1% in

2005 (Figure 131). According to latest survey in 2012, China’s arable area

stood at 135 mln hectares, still above it’s government proclaimed “red line” of

120 mln hectares On the other hand the percentage of urban population has

surged from 43% in 2005 to 54% by 2013. Apart from the urbanization effect

the arable land area is also adversely affected by the industrialization, pollution

and the effects from climate changes. As a result, more than 40% of China’s

arable area is at the threat of degradation as reported by Xinhua news agency.

Figure 131: China’s agricultural land as % of total land

area

Figure 132: Total arable land in China

56.1% 56.1%

55.3% 55.3%55.4%

55.6%55.7%

54.8%

54%

55%

55%

56%

56%

57%

Agricultural land (% of land

area)

Agricultural land as % of total land area

5,385

5,317

5,260

5,180

5,200

5,220

5,240

5,260

5,280

5,300

5,320

5,340

5,360

5,380

5,400

2006 2009 2012

'000 K2

Arable land area

Source: World Bank, Deutsche Bank Note: Agricultural area is defined as the land area that is arable under permanent crops and pastures

Source: CEIC, Deutsche Bank Note: China’s total land area is 9.597 mln km²

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Figure 133: Urban vs. rural population mix Figure 134: China’s population growth %

11%20% 17% 19%

26%36%

43%50% 54%

89%80% 83% 81%

74%64%

57%50% 46%

0%

20%

40%

60%

80%

100%

Population mix %

Urban poplulation Rural population

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Urban population growth % Rural population growth %

Source: World Bank, Deutsche Bank


Given the reduction in total arable area and increasing population levels,

China’s per capital arable area is gradually declining (Figure 135). Due to the

scarcity of arable land resources the country’s agricultural imports have

increased overtime. As a result, to secure the food supplies to cater to the

growing agricultural needs, the government of China is taking several

initiatives which will ultimately benefit the fertilizer industry. In addition, the

central governments goal to stay 95% self-sufficient in terms of corn, rice and

wheat should keep the demand for fertilizers fairly stable.

Figure 135: Per capital arable area

0.11

0.10

0.09

0.08 0.08

0.00

0.02

0.04

0.06

0.08

0.10

0.12

1990 1995 2000 2005 2010

Hectares per person

Per capita arable land area Source: World Bank, Deutsche Bank

In Feb-2015, the PRC government released its 12th No. 1 Central Document

which focuses mainly on the modernization of the agricultural sector (Figure

136). In the earlier No. 1 documents the government has primarily focused on

enhancing the agricultural production and farmer’s income levels, through

favorable agricultural prices. As a result, the agricultural product prices in

China have increased well above international prices making them

uncompetitive in international markets and have lead to increased dependence

for imports for domestic consumption.

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In the No. 1 document published in 2013, the government aims for food

security via 100% self sufficiency. However, in the 2014 document they define

food security as 95% self-sufficiency or “basic self-sufficiency” in grains and

“absolute security” in staple grains (wheat and rice). Taking a further step back

in the 2015 document, the government says that the self-sufficiency levels of

the major grains should be “scientifically defined”. However, they continue to

value the self-sufficiency of rice and grains for nation’s food security and

continue to maintain the floor prices for those crops. On the other hand the

government aims for flexibility in pricing for rising agricultural demand for feed

Figure 136: Key highlights of No. 1 Central Document of central government 2015

Focus area Proposed measures

1. Agricultural modernization and national food security - Highlights designation of permanent basic farmland

- High-quality farmland development

- Soil fertility conservation and improvement of farmland

- Innovation in agricultural investment and financing mechanisms

- Projects for medium-large-scale irrigation facilities

- Water-efficient technology

- Breakthrough in environment-friendly production system

2. Intensifying policies with focus on increasing

farmer’s income - Ensuring investment in agriculture

- Improving efficiency and effectiveness of agricultural subsidy policies

- Improving pricing mechanism of agricultural products

3. Developing a new countryside through an integrated

urban-rural development - Improving rural infrastructure and rural public services

- Improving the rural environment

- Channeling investment of social capital into rural development and others

4. Deepening rural reforms to inject new vitality into

rural development - Fostering new-type of agricultural management systems

- Pushing forward the reform of land tenure sytem,rural financial system and

water resources management system

Innovating rural governance

5. Strengthening rule of law in dealing with rural issues

- Dealing with issues such as protection of rural property rights,regulation of

rural market, implementation of pro-farming policies and the rural reform at

large Source: Ministry of Agriculture of China, Deutsche Bank

As evident in Figure 137, the government subsidies to the agricultural sector

have grown over the past few years, however at a declining rate. This suggests

that China is in the path of market liberalization. The subsidies shown in below

figure include direct grain subsidies, subsidies for improved crop strains,

purchasing subsidies for farm machinery and general subsidies for agricultural

materials.

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Figure 137: Government subsidies to agriculture sector

174 309

514

1,030

1,275 1,226

1,439

1,643 1,701

20%

78%

66%

101%

24%

-4%

17% 14%4%

-20%

0%

20%

40%

60%

80%

100%

120%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2005 2006 2007 2008 2009 2010 2011 2012 2013

Rmb '000 mln

Agricultural subsidy Y/y growth %

Source: Wind Information

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Appendix A

Urea cost models

Urea production cost using thermal coal

Figure 138: Thermal coal based urea production cost

Case 3: Thermal coal Case 4: Thermal coal

from self-owned coal mines from third parties

Urea production cost 159 USD / ton 180

992 RMB / ton 1,124

Coal used for feedstock

Coal price (mine-mouth Thermal Coal) 203 RMB / ton coal 270

32 USD / ton coal 43

Coal feedstock consumption 0.77 ton coal / ton urea 0.77

Coal feedstock cost 155 RMB / ton urea 207

Total coal cost per ton urea 155 RMB / ton urea 207

25 USD / ton urea 33

Transportation N/A RMB per km ton 0.17

Distance from coal mine to plant N/A km 300

Transportation cost N/A RMB / ton coal 50

Other related expenses N/A RMB / ton coal 10

Total transportation cost per ton coal N/A RMB / ton coal 60

Total transportation cost per ton urea N/A RMB / ton urea 80

Electricity

Usage per ton urea 950 Kwh / ton urea 950

Electricity tariff 0.45 RMB / Kwh 0.45

Total electricity cost per ton urea 428 RMB / ton urea 428

OPEX

Depreciation 150 RMB / ton urea 150

Staff 100 RMB / ton urea 100

Utilities and production supplies 100 RMB / ton urea 100

R&M 50 RMB / ton urea 50

Transportation fee of urea product 10 RMB / ton urea 10

Urea production cost 992 RMB / ton urea 1,124


Feb 2015 exchange rate 6.25 Source: Deutsche Bank

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Urea production cost using anthracite coal

Figure 139: Anthracite coal based urea production cost

Case 1: Anthracite Case 2: Anthracite

from self-owned coal mines from third parties

Urea production cost 215 USD / ton 255

1,344 RMB / ton 1,592


Coal price (Mine-mouth Anthracite) 662 RMB / ton coal 882

106 USD / ton coal 141

Coal feedstock consumption 0.77 ton coal / ton urea 0.77

Coal feedstock cost 506 RMB / ton urea 675

Total coal cost per ton urea 506 RMB / ton urea 675


Transportation N/A RMB per km ton 0.17

Distance from coal mine to plant N/A km 300

Transportation cost N/A RMB / ton coal 50

Other related expenses N/A RMB / ton coal 10

Total transportation cost per ton coal N/A RMB / ton coal 60

Total transportation cost per ton urea N/A RMB / ton urea 80

Electricity

Usage per ton urea 950 Kwh / ton urea 950

Electricity tariff 0.45 RMB / Kwh 0.45

Total electricity cost per ton urea 428 RMB / ton urea 428

OPEX

Depreciation 150 RMB / ton urea 150

Staff 100 RMB / ton urea 100

Utilities and production supplies 100 RMB / ton urea 100

R&M 50 RMB / ton urea 50

Transportation fee of urea product 10 RMB / ton urea 10

Urea production cost 1,344 RMB / ton urea 1,592



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Urea production cost using natural gas

Figure 140: Natural Gas based urea production cost

Urea production cost 314 USD / ton

1,960 RMB / ton

Natural gas cost

NG price 1.70 RMB / m3

7.70 USD /mcf

NG consumption per ton urea 700 m3 / ton urea

25 mcf / ton urea

Total gas cost per ton urea 1,190 RMB / ton urea

190 USD / ton urea

Electricity

Usage per ton urea 800 Kwh / ton urea

Electricity tariff 0.45 RMB / Kwh

Total electricity cost per ton urea 360 RMB / ton urea

OPEX

Depreciation 150 RMB / ton urea

Staff 100 RMB / ton urea

Utilities and production supplies 100 RMB / ton urea

R&M 50 RMB / ton urea

Transportation fee of urea product 10 RMB / ton urea

Urea production cost 314 USD / ton urea

1,960 RMB / ton urea


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Methanol cost models

Figure 141: Inner Mongolia coal based methanol cost model

Case 1 Case 2

Inner Mongolia Inner Mongolia

Self-owned coal mines RMB/tonPurchased coal

Coal cost


Coal price (ex-plant) 207 258 RMB/ton coal

Coal price (ex-plant) 34 42 USD/ton coal

Coal consumption per ton methanol 1.40 1.40 ton coal/ton methanol

Coal feedstock cost per ton methanol 289 362 RMB/ton methanol

Coal feedstock cost per ton methanol 48 59 USD/ton methanol

Coal transportation

Transportation cost per ton coal N/A 20 RMB/ton coal

Transportation cost of coal per ton methanol N/A 28 RMB/ton methanol

Electricity

Usage per ton methanol 500 500 Kwh/ton methanol

Electricity tariff 0.35 0.35 RMB/Kwh

Total electricity cost per ton methanol 175 175 RMB/ton methanol

Other OPEX

Depreciation 178 178 RMB/ton methanol

Labor and management overhead 50 50 RMB/ton methanol

Water price 3.50 3.50 RMB/ton water

Water usage 15 15 ton water/ton methanol

Water cost 53 53 RMB/ton methanol

Effluent treatment charges 0.95 0.95 RMB/ton water

Effluent amount 30 30 ton effluent/ton methanol

Effluent treatment cost 29 29 RMB/ton methanol

Steam usage 1.20 1.20 ton steam/ton methanol

Steam price 2.00 2.00 RMB/ton steam

Steam cost 2.40 2.40 RMB/ton methanol

R&M and insurance 40 40 RMB/ton methanol

Other production supplies 50 50 RMB/ton methanol

(e.g. Catalyst replacement and consumables)

Transportation fee of methanol product

Distance 1,889 1,889 km

Transportation cost 0.30 0.30 RMB/ton km

Methanol transportation:

Inner Mongolia to Jiangsu

567 567

RMB/ton

Total production cost per ton methanol 1,432 1,533 RMB/ton methanol

233 249 USD/ton methanol


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Figure 142: Coal based and gas based methanol cot model

Case 3 Case 4

Inner Mongolia Eastern China

Self-owned coal mines RMB/tonPurchased coal

Coal cost


Coal price (ex-plant) 207 530 RMB/ton coal

Coal price (ex-plant) 34 88 USD/ton coal

Coal consumption per ton methanol 1.40 1.40 ton coal/ton methanol

Coal feedstock cost per ton methanol 290 742 RMB/ton methanol

Coal feedstock cost per ton methanol 48 121 USD/ton methanol

Coal transportation

Transportation cost per ton coal N/A 60 RMB/ton coal

Transportation cost of coal per ton methanol

(intra-province : Jiangsu)

N/A 84 RMB/ton methanol

Electricity

Usage per ton methanol 500 500 Kwh/ton methanol

Electricity tariff 0.35 0.65 RMB/Kwh

Total electricity cost per ton methanol 175 325 RMB/ton methanol

Other OPEX

Depreciation 178 178 RMB/ton methanol

Labor and management overhead 50 60 RMB/ton methanol

Water price 3.50 3.50 RMB/ton water

Water usage 15 15 ton water/ton methanol

Water cost 53 53 RMB/ton methanol

Effluent treatment charges 0.95 1.30 RMB/ton water

Effluent amount 30 30 ton effluent/ton methanol

Effluent treatment cost 29 39 RMB/ton methanol

Steam usage 1.20 1.20 ton steam/ton methanol

Steam price 2.00 2.50 RMB/ton steam

Steam cost 2.40 3.00 RMB/ton methanol

R&M and insurance 40 48 RMB/ton methanol

Other production supplies 50 60 RMB/ton methanol

(e.g. Catalyst replacement and consumables)

Transportation fee of methanol product

Distance 1,889 0 km

Transportation cost 0.30 0.30 RMB/ton km

Methanol transportation:

Inner Mongolia to Jiangsu

567 0

RMB/ton

Total production cost per ton methanol 1,433 1,592 RMB/ton methanol

237 263 USD/ton methanol


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The author of this report wishes to acknowledge the contribution made by

Dilini Gunawardane, employee of Copal Amba, a third-party provider to

Deutsche Bank of offshore research support services.

16 July 2015

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

China BlueChemical 3983.HK 2.72 (HKD) 15 Jul 15 6,9,14,15 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law.

9. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by India law.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=3983.HK

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. David Hurd

16 July 2015

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Historical recommendations and target price: China BlueChemical (3983.HK) (as of 7/15/2015)

1

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 15/12/2013: No Recommendation, Target Price Change HKD0.00

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

52 %

39 %

10 %24 %18 %

14 %0

50

100

150

200

250

300

350

400

450

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

16 July 2015

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Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

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Additional Information

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"Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources

believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness.

Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own

account or with customers, in a manner inconsistent with the views taken in this research report. Others within

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index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended

to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon

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liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar

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to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can

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16 July 2015

Chemicals

China BlueChemical


and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation.

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David Folkerts-Landau Group Chief Economist

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Raj Hindocha Global Chief Operating Officer

Research

Marcel Cassard Global Head

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Rating Company Hold China BlueChemical - JRJ

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