AsiaPhos NRA Report: Collaboration with Customer Shows Competitive Advantage

• Steady share price despite poor results. AsiaPhos reported a net loss of S$0.55m for 3Q16 on revenue of S$9.24m for 3Q16, thus bringing 9M16 net loss to S$1.1m. Rainy weather led mining to cease in late 2Q and resume in late October 2016. Hence, rock production likely fell year-on-year, leading to the poorer than expected results. On the other hand, we are encouraged that AsiaPhos’ share price has remained steady, suggesting that the negative performance has already been priced in. We maintain our Overweight rating on AsiaPhos and retain our forecasts and valuation in this update, pending review when it releases its 4Q16 results.
• 4Q16 outlook remains weak. The average selling prices of both phosphate rock and P4 fell by 13.6% and 16.8% respectively from 2Q16. Thus, upstream and downstream gross margins retreated to 24.6% (2Q16: 25.2%) and 12.2% (16.5%) in 3Q16. The good news is that operating expenses remain well controlled, with general and administrative costs rising by only 4% year-on-year. P4 production rose by 1,370 tonnes from 2Q16 as the company stepped up both production and marketing activities. However, an industrial accident occurred on 24 October, leading to the temporary cessation of P4 production. While AsiaPhos is selling the phosphate rocks originally reserved for P4 production, we reckon that the company’s 4Q16 outlook may remain weak.
• Considering more cooperation agreements with other industry participants? In November, AsiaPhos announced that it has signed a MOU with Mianyang Aostar Phosphorus Chemical Industry Co., Ltd, to cooperate by 1) enhancing communication of information with each other in relation to the market for P4 with the aim of establishing reasonable pricing, 2) selling up to 100,000 tonnes of phosphate rocks to the latter in 2017 and 3) explore the purchase of electricity at preferential rates. This MOU is interesting as it will allow AsiaPhos to leverage on its larger neighbour’s resources for mutual benefit. AsiaPhos has a bargaining advantage as Mianyang Aostar purchases phosphate rock from the company. We will not be surprised if AsiaPhos makes more agreements with other industry players.

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