AsiaPhos Limited - NRA Capital Research 2017-09-13: Phosphorus Plant Hits Full Capacity

ASIAPHOS LIMITED SGX: 5WV

AsiaPhos Limited - Phosphorus Plant Hits Full Capacity

AsiaPhos reported net profit of S$0.8m in 2Q17, compared to S$0.4m in 2Q16. The downstream business was the star performer, selling 117.4% more P4 than a year ago or 5,000 tonnes in 2Q17.
As production capacity is about 20,000 tonnes per annum, the company has achieved 100% capacity production in 2Q17.
Growth was due to the company’s initiatives to market to new customers and higher industrial demand.

Demand for industrial phosphates appears to be growing, driven by the environmental protection and electric vehicle (EV) sectors. A 2014 survey indicates that about 20% of China’s arable land is contaminated and the government has stepped up monitoring and remediation efforts since 2016, spurring demand for phosphate compounds to treat contaminated soil.
As for EVs, the Chinese government aims to grow the number of EVs on its road from 1m today to 5m by 2020, which has in turn spurred demand for Lithium Iron Phosphate (LiFePO4) batteries commonly used in PRC EV models.
Long term, China aims to phase out fossil fuel powered vehicles, following similar legislation by U.K. and France.
The PRC Lithium ion battery market has grown at a CAGR of 50% since 2011.

Currently, AsiaPhos is selling P4 to customers in the electric vehicle and environmental protection sectors. We reckon that there is scope for the downstream business to expand given the robust demand.
Recently, the company has announced that it plans to construct a 20,000 tonnes per annum Sodium Hexametaphosphate (SHMP) plant over eight months at a cost of RMB 7m. We expect the plant to be completed in late 2018 and generate more than S$30m of revenue on full utilization by est. 2021.

AsiaPhos has also announced that it will be splitting its assets and operations between the upstream and downstream businesses. Upon completion of the restructuring, AsiaPhos will wholly-own a Hong Kong subsidiary that will in turn wholly-own a PRC subsidiary that houses the downstream business.
We reckon that this restructuring will allow AsiaPhos to take advantage of a larger variety of M&A and fund-raising opportunities.

We are encouraged by the momentum in the P4 business with the company commencing year-round production. The first half performance provides evidence of a turnaround in 2017.
Our updated model factors in the expansion of the downstream business over time and values AsiaPhos at S$187.9m or S$0.167 per share, yielding upside of 85%.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-09-13

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