Another impairment made in FY16 of RMB0.96bn; OpCF at RMB2bnQSLI posted FY16 net income of RMB341mn and EPS of RMB0.18, down 39%and 45% YoY. This is in line with prelim results guidance of a 30-60% drop.
   
QSLI declared a DPS of RMB0.02, implying a payout ratio of 10.9%. The resultscame in higher than we expected due to lower minority interest and higherinvestment income. The sharp decline in net income was driven by 1) a loss inthe chemical segment, and 2) weak potash prices with a loosening in supplydemand.
   
Asset impairment was lower in FY16 at RMB956mn (vs. RMB1.15bnin FY15). Excluding all one-offs, core income would have dropped by 35% YoY.
   
QSLI recorded OpCF of RMB2.02bn in FY16. Hold.
   
Potash sales volume up, but production downQSLI’s potash GPM declined by only 3ppt YoY, despite potash ASP falling22%. The company destocked potash inventory by 12% YoY; its sales volumeincreased by 10% to 4.92mnton and production dropped by 5% YoY. Potashrevenue declined by 14% YoY to RMB6.8bn, with ASP at RMB1,506/t (-15%YoY). Stringent cost control reduced potash unit production cost by 13% YoY.
   
QSLI believes the peak of new addition projects is already over and globalutilization should start to pick up.
   
Chemicals loss narrowed by 28% YoYLosses in the chemicals segment are a key drag on earnings. QSLI recorded aloss of RMB1.11bn, -28% YoY, for chemical integration project phases one andtwo, whereas last year it reported a loss of RMB1.54bn. The improvement wasdue to lower gas costs, the optimization of product structure, and stringentcost control. The company is trying to deleverage in its chemical integratedproject to further lift project profitability going forward.
   
Valuation and risks; maintaining Hold ratingWe maintain our Hold rating with a DCF-based target price of RMB19.1(assuming 7.2% WACC and 2% terminal growth), which implies 1.4x FY17EP/B. We believe the stock has already fairly priced in an earnings recovery as ittrades at 1.3x FY17E P/B for 3.3% FY17E ROE. Key downside risks: sluggishchemical prices and demand could lead to further inventory write-downs andasset impairments in FY17. Key upside risks include: 1) stronger demand forpotash and 2) higher-than-expected potash and chemical prices.