Buy China Bluechemical

Deutsche Bank Markets Research

Rating Company Date 21 January 2016 Buy China BlueChemical Recommendation Asia Hong Kong Change Reuters Bloomberg Exchange Ticker Price at 20 Jan 2016 (HKD) 1.59 Energy 3983.HK 3983 HK HSI 3983 Price target - 12mth (HKD) 2.60 Chemicals ADR Ticker ISIN 52-week range (HKD) 3.62 - 1.59 CBLUY US16936K1007 HANG SENG INDEX 19,237

Reinstating Buy rating on compelling Vitus Leung Johnson Wan valuation and new potential Research Analyst Research Analyst (+852) 2203 6158 (+852) 2203 6163 Reinstating Buy – compelling valuation with 7% yield and new direction likely [email protected] [email protected] China Blue Chemical is the only Chinese fertilizer company that we believe merits a Buy rating. Conditions in the industry offer few signs of promise, with utilization rates falling further as capacity expands in an oversupplied market, Key changes but CBC’s valuation is now at an extreme level of 0.4x P/B. Its operations are Rating NA ↑ Buy far stronger than its peers and it has a clear competitive advantage and export Target price NA ↑ 2.60 capability and generates a ROIC of 7-8%. CBC considers diversifying into (HKD) higher-margin chemical production. The stock also offers a 7% dividend yield. Source: Deutsche Bank

Strong cash supports higher dividend payout and potential new growth engine Price/price relative CBC has a net cash position of RMB3.4bn, which CBC could use to lift its dividend payout in the near term, but we believe CBC will utilize its idle cash to 6.0 fuel long-term growth. With CNOOC having discovered vast gas resources in 5.0 the South China Sea, there is an opportunity for CBC to move into higher- 4.0 margin chemical market, such as monoethylene glycol (MEG). If it happens, it 3.0 will improve returns as a MEG plant could achieve 7-13% ROA vs. current the 2.0 ROA of 4-5%. We have not yet factored in MEG’s potential into our model. 1.0 1/14 7/14 1/15 7/15 Beneficiary of China onshore gas price cut China BlueChemical Gas feedstock is the key cost for CBC. The cut in onshore gas price will benefit HANG SENG INDEX (Rebased)

CBC’s Tianye methanol plant, while strengthening its bargaining power on Performance (%) 1m 3m 12m Fudao I fertilizer plant’s long-term gas contract negotiation with CNOOC. The Absolute -22.1 -31.2 -41.5 NDRC lowered the onshore gas tariff by RMB0.7/cm in Nov 2015. We factored in a potential 30% hike for Fudao I urea production gas cost in our model. HANG SENG INDEX -11.6 -16.3 -19.7 Source: Deutsche Bank Compelling valuation: 50% below -1 SD of historical P/B CBC’s stock price fell by 40% in the past year on soft fertilizer fundamentals and asset write-downs. CBC trades at 0.4x 2016E P/B, 50% below -1 SD of the mean, and is 75% discount to global peers. We derive our HK$2.6 target price using DCF, assuming a WACC of 8.3% and a terminal growth rate of 1%. Our TP implies a 0.6x 2016E P/B, still below -1 SD of the mean. Key risks to our rating are: gas costs, volatility of fertilizer prices, and any asset write-down.

Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 10,723.6 10,796.9 9,931.4 10,182.5 10,645.4 EBITDA (CNYm) 3,305.8 2,699.6 2,004.6 2,222.1 2,506.2 Reported NPAT (CNYm) 1,647.1 105.3 772.0 857.9 1,028.0 Reported EPS FD(CNY) 0.36 0.02 0.17 0.19 0.22 DB EPS growth (%) – -93.6 633.2 11.1 19.8 Price/Book (x) 1.3 0.7 0.4 0.4 0.4 PER (x) 10.5 132.3 8.0 7.2 6.0 EV/EBITDA (x) 4.5 4.1 2.0 2.3 2.1 DPS (net) (CNY) 0.14 0.12 0.10 0.10 0.10 Yield (net) (%) 3.7 4.0 7.5 7.5 7.5 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

______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.

21 January 2016

Chemicals China BlueChemical

Model updated:20 January 2016 Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E

Running the numbers Financial Summary Asia DB EPS (CNY) 0.36 0.02 0.17 0.19 0.22 Reported EPS (CNY) 0.36 0.02 0.17 0.19 0.22 Hong Kong DPS (CNY) 0.14 0.12 0.10 0.10 0.10 BVPS (CNY) 3.1 3.0 3.0 3.1 3.2 Chemicals Weighted average shares (m) 4,610 4,610 4,610 4,610 4,610 China BlueChemical Average market cap (CNYm) 17,372 13,934 6,177 6,177 6,177 Enterprise value (CNYm) 14,772 11,097 4,109 5,093 5,249 Reuters: 3983.HK Bloomberg: 3983 HK Valuation Metrics Buy P/E (DB) (x) 10.5 132.3 8.0 7.2 6.0 Price (20 Jan 16) HKD 1.59 P/E (Reported) (x) 10.5 132.3 8.0 7.2 6.0 P/BV (x) 1.25 0.74 0.45 0.43 0.42 Target Price HKD 2.60 FCF Yield (%) 7.8 4.9 nm 2.6 6.9 52 Week range HKD 1.59 - 3.62 Dividend Yield (%) 3.7 4.0 7.5 7.5 7.5

Market Cap (m) HKDm 7,330 EV/Sales (x) 1.4 1.0 0.4 0.5 0.5 EV/EBITDA (x) 4.5 4.1 2.0 2.3 2.1 USDm 939 EV/EBIT (x) 6.0 6.0 3.7 4.0 3.5

Company Profile Income Statement (CNYm) China BlueChemical Limited, a subsidiary of CNOOC Sales revenue 10,724 10,797 9,931 10,182 10,645 Group, is principally engaged in the development, Gross profit 4,049 3,541 2,882 3,123 3,429 production, sales, and export of urea and phosphate EBITDA 3,306 2,700 2,005 2,222 2,506 fertilizers and chemical products. Depreciation 797 828 866 926 986 Amortisation 28 28 28 24 18 EBIT 2,480 1,844 1,110 1,272 1,502 Net interest income(expense) 8 -1 -26 -23 -26 Associates/affiliates -10 -478 0 0 0 Exceptionals/extraordinaries -123 -1,260 0 0 0 Other pre-tax income/(expense) -9 8 0 0 0 Price Performance Profit before tax 2,347 113 1,084 1,249 1,476 Income tax expense 554 16 238 275 325 6.0 Minorities 146 -8 73 116 124 5.0 Other post-tax income/(expense) 0 0 0 0 0 Net profit 1,647 105 772 858 1,028 4.0

3.0 DB adjustments (including dilution) 0 0 0 0 0 2.0 DB Net profit 1,647 105 772 858 1,028

1.0 Cash Flow (CNYm) Jan 14Apr 14 Jul 14 Oct 14Jan 15Apr 15 Jul 15 Oct 15 Cash flow from operations 3,094 1,738 1,372 1,659 1,929 China BlueChemical Net Capex -1,742 -1,052 -1,500 -1,500 -1,500 HANG SENG INDEX (Rebased) Free cash flow 1,352 687 -128 159 429 Margin Trends Equity raised/(bought back) 0 0 0 0 0 Dividends paid -692 -645 -553 -461 -461 32 Net inc/(dec) in borrowings 31 1,996 481 -800 0 28 Other investing/financing cash flows -321 554 -15 -566 0 24 Net cash flow 370 2,592 -215 -1,668 -32 20 Change in working capital 727 -327 -368 -265 -227 16 12 Balance Sheet (CNYm) 8 Cash and other liquid assets 2,934 5,526 5,311 3,643 3,610 13 14 15E 16E 17E Tangible fixed assets 10,811 9,909 10,542 11,116 11,630 EBITDA Margin EBIT Margin Goodwill/intangible assets 1,225 1,060 1,046 1,022 1,004

Associates/investments 1,042 551 551 551 551 Growth & Profitability Other assets 2,524 2,893 3,156 3,400 3,645 Total assets 18,536 19,939 20,607 19,733 20,440 6 14 Interest bearing debt 31 2,090 2,571 1,771 1,771 4 12 Other liabilities 3,004 3,100 2,994 2,407 2,424 2 10 Total liabilities 3,035 5,190 5,565 4,178 4,195 0 8 -2 Shareholders' equity 14,156 13,600 13,818 14,215 14,782 6 -4 Minorities 1,345 1,150 1,223 1,339 1,463 -6 4 -8 2 Total shareholders' equity 15,501 14,749 15,041 15,555 16,245 -10 0 Net debt -2,903 -3,436 -2,740 -1,872 -1,839 13 14 15E 16E 17E Key Company Metrics Sales growth (LHS) ROE (RHS) Sales growth (%) nm 0.7 -8.0 2.5 4.5 Solvency DB EPS growth (%) na -93.6 633.2 11.1 19.8 EBITDA Margin (%) 30.8 25.0 20.2 21.8 23.5 0 70 EBIT Margin (%) 23.1 17.1 11.2 12.5 14.1 -5 60 Payout ratio (%) 39.2 525.4 59.7 53.7 45.0 50 ROE (%) 12.0 0.8 5.6 6.1 7.1 -10 40 Capex/sales (%) 16.2 9.7 15.1 14.7 14.1 30 -15 Capex/depreciation (x) 2.1 1.2 1.7 1.6 1.5 20 -20 10 Net debt/equity (%) -18.7 -23.3 -18.2 -12.0 -11.3 -25 0 Net interest cover (x) nm nm 42.3 55.7 58.9

13 14 15E 16E 17E Source: Company data, Deutsche Bank estimates

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

Vitus Leung +852 2203 6158 [email protected]

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Chemicals China BlueChemical

Investment thesis

Outlook

In an environment of industry oversupply, weak pricing and muted demand, we would only recommend stocks with a clear cost advantage, deep valuation discounts, a superior ROIC and export capability. China BlueChem (CBC, 3983 HK) is our only Buy recommendation on these criteria. To add to these strengths, we are positive on its plans to enter higher-value-added chemical products, utilizing the gas resources of its fellow subsidiary CNOOC. CBC has a strong cash position and we see the potential for CBC to lift its dividend payout. We expect CBC to pay a DPS of RMB0.10 in both 2015E/2016E, which represents a payout of 60%/54%, giving a dividend yield of 7%. CBC trades at a compelling valuation, and we believe that most negatives (such as the gas contract price negotiation with CNOOC for Fudao I and massive asset write-down) have been largely priced in. The share price fell by 40%/65% in the past 12/24 months, and at the current level the stock is on 0.4x 2016E P/B, 50% below -1 SD of the mean, and at a 75% discount to global peers. We, therefore, rate China BlueChemical (CBC) as a Buy with a target price of HK$2.6/share. In a global context, urea fundamentals will continue to be soft as capacity is expected to outgrow demand. We expect the utilization to decline by 2% points by 2020E compared with 2015, and sluggish urea prices will continue in years to come. China’s fertilizer demand is forecast to grow at 1% per annum in 2015E-2020E and zero after 2020E, where nitrogen fertilizer (i.e., urea) demand could drop due to the shifting consumption to potash and phosphate. Abundant gas resources found by fellow-subsidiary CNOOC Ltd. could help CBC get into chemical segments, such as monoethylene-glycol (MEG). This is the upcoming catalyst to watch for in 2016, in our view. Moreover, we believe that China onshore gas price cut of RMB0.7/cm will strengthen the company’s position in the gas contract negotiation with CNOOC Ltd. and that the cut will result in cost savings for the Tianye methanol plant.

Valuation

CBC trades at 0.4x and 7.2x 2016E P/B and P/E, respectively, which are 50% and 20% below -1 SD of the historical mean, reflecting the upcoming headwinds, in our view. We derive our HK$2.6 target price using DCF, assuming a WACC of 8.3% and a terminal growth rate of 1%. Our target price implies a 0.6x 2016E P/B, which is below -1 SD of the historical mean.

Risks

Key risks to our rating are: 1) a higher-than-expected increase in the natural gas price contract for the Fudao I urea plant; 2) volatility in fertilizer and methanol prices; 3) further asset write-downs (such as interest in Western Potash); and 4) any policy and initiative issued by the NDRC for the 13th Five- Year Plan.

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Potential catalyst: searching for new growth

New abundant natural gas discovery in South China Sea presents new investment opportunity

Considering the vast gas discovery in western South China Sea by fellow subsidiary CNOOC Ltd., we believe that there is ample opportunity for CBC to head into natural gas-syngas-MEG products. We believe that a move into the high-value-added product segment is positive for CBC, and that it is likely to improve its margins and to help utilize its cash for better returns.

Figure 1: CNOOC new discoveries in western South China Sea in 2014/15 Project Type Remark 2014 - New discovery Weizhou6-13 New discovery Lingshui17-2 New discovery First large size gas discovery The Lingshui17-2-1 well discovery encountered the gas pay zone with a total thickness of 55 meters

Lingshui13-2 New discovery Lingshui25-1 New discovery Wenchang19-6 New discovery Weizhou12-10 New discovery 2015 - new discovery and appraisal wells Block - Weizhou 12 Wushi16-9-5 Appraisal 2015 1Q Wushi16-9-4 Appraisal 2015 2Q Wushi16-1W-2D Appraisal 2015 3Q Wushi17-5-1 Wildcat 2015 3Q Wushi17-5-2D Appraisal 2015 3Q Block Lufeng 14 Lufeng14-4-2 Appraisal 2015 1Q Block Yulin 35 Weizhou6-8-4D Appraisal 2015 3Q Block Lingshui 11 Lingshui 25-1-2 Appraisal 2015 3Q Source: CNOOC, Deutsche Bank

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Chemicals China BlueChemical

Figure 2: CNOOC gas fields near Hainan Figure 3: CNOOC large gas field discovery Lingshui 17-2

Hainan Province

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

Currently, about one-third and one-sixth of CNOOC’s reserves and production, Figure 4: CNOOC’s China reserves respectively, in China is gas. In gas production, more than 50% comes from and production in 2014 western South China Sea projects. Hence, we believe that, unlike other Reserves % Total commodities, the transportation of gas is very costly whether through long- Oil mbbls 1,692 68% distance pipelines or being liquefied as LNG. Therefore, having a nearby Gas bcf 4,757 32% demand may make better economic sense. Total mboe 2,485 Production % Total According to estimates from Speers & Associates Inc, CNOOC’s Dongfang 13- Oil kbbl/day 627 85% 2 (DF-2) gas field should begin production in 2018E. For Lingshui 17-2 (LS17-2), Gas mmcf/day 643 15% CNOOC targets gas production of the 100bcm deepwater to start in 2018/19E; Total kboe/day 734 the initial production is expected to be 3bcm per annum with a plateau China gas production by region Of which production of 7bcm per annum after 2020. Bohai mmcf/day 138 21% Western mmcf/day 342 53% In our view, if CBC penetrates high-end, value-added gas-based chemical South China products, it would create a win-win situation for CNOOC group by: 1) solving Sea the capacity expansion bottleneck for CBC; and 2) providing new consumption Eastern South mmcf/day 137 21% for a nearby gas field. CBC completed a feasibility study on a new chemical China Sea plant and we believe this plan could potentially be brought to the board East China mmcf/day 27 4% Sea meeting. Total mmcf/day 643 Source: Deutsche Bank Unlike CBC’s polyoxymethylene (POM) investment (which is a niche market product), MEG is a scalable market, and relies heavily on imports. China MEG demand grew at a 10% CAGR between 2009 and 2014, and we expect it could continue to grow at 7% CAGR between 2014 and 2017. Moreover, with new capacity additions in China, the import dependency could lower from 67% of the total demand in 2014 to 52% by 2017.

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Figure 5: China MEG supply Figure 6: China MEG demand

12.00 120% 18.00 80.0% CAGR (2014-17E): 7% 16.00 70.0% 10.00 100% 14.00 CAGR (2009-14): 10% 60.0% 8.00 80% 12.00 50.0% 10.00 6.00 60% 40.0% 8.00 30.0% 4.00 40% 6.00 20.0% 4.00 2.00 20% 2.00 10.0%

0.00 0% 0.00 0.0% 2009 2010 2011 2012 2013 2014 2015E2016E2017E2018E2019E 2009 2010 2011 2012 2013 2014 2015E2016E2017E2018E2019E

Production Total Capacity Utilization rate (%) - RHS Import Production Import as % of demand - RHS

Source: Deutsche Bank estimates Source: Deutsche Bank estimates

Capex estimate In order to build 600kton per annum syngas-based MEG capacity, we believe the investment would be c.RMB6.0bn.

 MEG plant construction usually takes about 24-30months.

 600kton of MEG production could potentially use 0.9-1.2bcm of gas, depending on the hydrogen content.

 According to CBC, there is 300kton per annum of MEG demand in the Hainan province. Gas-based MEG is feasible  The Chinese government issued a Natural Gas Usage Policy “天然气利用政策” in October 2012. According to policy category 4 (Prohibition usage) – No# 2 & 3, using natural gas as feedstock for new methanol or methanol downstream product capacity is prohibited.

 However, the government allows using syngas as feedstock: Policy category 1 (Priority usage) – No# 7 states: natural gas can be used as feedstock for hydrogen manufacturing capacity (with the capability to haul production to the end user); Policy category 1 (Priority usage) – No# 4 states: natural gas is allowed for use in the petrochemical industry to yield better environmental and economic value in substitute for coal.

 Also, the policy highlighted Policy category 2 (Allow usage) – No#7: the petrochemical sector is allowed to use natural gas as feedstock for hydrogen.

 Therefore, CBC describes the potential project as the Syngas-to-MEG project. Economics of MEG – Enhancing ROIC According to our scenario analysis, if MEG stays at the RMB5,000/ton level, a potential MEG plant may be able to achieve a ROIC of 7-13%, depending on the hydrogen content of the gas compared with CBC’s current ROA of 4-5% in 2015-17E. We believe that a MEG plant could enhance CBC’s returns and profile. Conversely, if MEG price drops to RMB4,100/ton, our analysis shows that the potential return of the MEG plant would be limited to 0-6%.

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Figure 8: Scenario for a MEG plant Figure 7: Sensitivity analysis on MEG Assumptions Unit Remark average selling price to ROA

Capacity 000 ton p.a. 600 Gas-to-MEG (cm-ton) capex RMBm 6000 1,500 2,000 Debt component % 70% MEG ASP 4,100 6% 0% (RMB/ton) RMBm 4200 4,600 10% 4% Interest rate % 3.5% 5,100 13% 7% Interest Exp RMBm 147 5,600 16% 10% SG&A As % of Sales 8.7% Current expense 6,100 20% 14% Other opex As % of Sales 1.0% Current expense Source: Deutsche Bank Depreciation years 25 Depreciation RMBm 240 Tax rate % 25% MEG ASP RMB/ton 5100 Gas price RMB/cm 1.64 Hainan on-share non- residential gas price Scenario analysis Gas-to-MEG cm-ton 1500 2000 conversion Sales RMBm 3,060 3,060 COGS RMBm 1,476 1,968 Gross Profit RMBm 1,584 1,092 Gross Margin % 52% 36% SGA RMBm (267) (267) Other expenses RMBm (31) (31) EBITDA RMBm 1,285 793 DD&A RMBm (240) (240) PBT RMBm 1,045 553 Tax RMBm (261) (138) Profit RMBm 784 415 ROA % 13% 7% Source: Deutsche Bank

Figure 9: China MEG price (RMB/ton)

11000

10000

9000

8000

7000

6000

5000

4000

3000 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 China MEG (RMB/ton)

Source: Bloomberg Finance LP, Deutsche Bank

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Lack of opportunity from existing products

The fertilizer supply and demand imbalance situation is set to continue. We believe that the fertilizer market fundamentals will likely remain soft in years to come. On the other hand, methanol demand is on the uptrend, with new methanol-to-olefin commencing in 2015-2017E. However, China’s methanol utilization rate has been low since the last coal price boom led the capex cycle in the last decade. Hence, the oversupplied situation in urea, phosphate and methanol prevent CBC from expanding its traditional business beyond 2015.

Figure 10: CBC capacity across segments (‘000 ton) '000 ton (year-end) 2011 2012 2013 2014 2015E 2016E 2017E Urea 1,840 1,840 1,840 1,840 2,360 2,360 2,360 % change 0% 0% 0% 0% 28% 0% 0% Methanol 1,600 1,600 1,600 1,600 1,600 1,600 1,600 % change 0% 0% 0% 0% 0% 0% 0% Phosphate 500 1,000 1,000 1,000 1,000 1,000 1,000 % change 0% 100% 0% 0% 0% 0% 0% POM 60 60 60 60 Asset write-down % change 0% 0% 0% 0% N/A N/A N/A Source: Company data Deutsche Bank estimates

Figure 11: China methanol operating rate to remain low 80.0 60.0%

70.0 50.0% 60.0 40.0% 50.0

40.0 30.0%

30.0 20.0% 20.0 10.0% 10.0

0.0 0.0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Domestic Demand Total Capacity Production Operating Rate (%) - RHS Source: IHS Chemical, Deutsche Bank estimates

Beneficiary of onshore gas price cut

CBC consumes 3.8bcm of gas per annum and gas raw material represents 37% of CBC’s cost of sales, in our view. CBC sources gas from CNOOC Ltd. (88% of total gas supply) and PetroChina (12% of total gas supply). The pricing differs according to source and usage as shown below. Gas cost from CNOOC Ltd. supply is not affected directly by the gas price cut announced by the NDRC in November 2015.

However, we believe that policy change may make it easier for CBC to negotiate a better price for one 20-year contract (supplying Fudai Phase I) that expires in 2016. The onshore gas price cut will likely lower the Tianye methanol gas cost, which uses c.160mcm per annum. We believe this could partially offset the gas price increase from Fudao I gas; we factored in a 30% increase in our model from a low base. In aggregate, we expect flat overall gas cost in our earnings model.

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Figure 12: Gas consumption for products by plant Product Plant Gas consumption (mcm) Gas field Contract tenure 2014 2013 2012 2011 Urea Fudao Phase I 383 389 362 392 Yacheng 13-1 (CNOOC) 1996—2016 Fudao Phase II 858 856 772 889 Dongfang 1-1 (CNOOC) 2003—2023 Tianye 288 331 303 251 Changqing (PetroChina) Annual contracts Subtotal 1,529 1,576 1,437 1,532 Methanol Hainan Phase I 975 925 1,047 1,023 Dongfang 1-1 (CNOOC) 2006—2026 Hainan Phase II 1,141 1,183 1,164 1,167 Ledong (CNOOC) 2010—2025 Tianye 162 203 166 150 Changqing (PetroChina) Annual contracts Subtotal 2,278 2,311 2,377 2,340 Total 3,807 3,887 3,814 3,872 Source: Company data, Deutsche Bank

MTO capacity and low utilization rate delay hits 2015 methanol demand

In 2015, methanol prices dropped by 26%. The drop was mainly driven by lower commodities prices (including coal and oil prices) and the delay of new methanol-to-olefin (MTO) capacity on a low operating rate of 60%.

However, we expect that methanol prices could potentially recover in 2016 with more new demand on methanol-to-olefin capacity. According to the leading methanol company Methanex (MEOH), there could be 3.6mtons and 4.8mtons of new MTO/MTP capacity in 4Q15 and 1H16, respectively, adding to existing capacity of 10.2mtons and lifting MTO/MTP capacity by 82%.

Figure 13: China chemical product prices YTD Urea % DAP % Methanol CFR % Methanol % (RMB/ton) Change (RMB/ton) Change (US$/ton) Change Hubei Change (RMB/ton) 2015 YTD 1,638 2% 2,972 7% 275 -26% 1,960 -19% 2014 1,611 -15% 2,782 -6% 372 -7% 2,424 -6% 2013 1,889 -13% 2,959 -9% 399 7% 2,573 -3% 2012 2,170 3% 3,246 -1% 372 2% 2,644 -1% Source: Bloomberg Finance LP, Deutsche Bank

Figure 14: China Ethylene capacity by process shows significant MTO capacity growth 2010 2011 2012 2013 2014 2015E 2016E 2017E Total Capacity 15.11 15.78 16.51 17.62 19.24 21.55 23.77 26.28 Ethane 0.02 0.02 0.02 0.02 0.02 0.00 0.00 0.00 Propane 0.40 0.42 0.45 0.49 0.54 0.59 0.58 0.56 Butane 0.35 0.38 0.42 0.48 0.52 0.57 0.57 0.55 Naphtha 10.73 12.29 11.59 12.42 13.57 14.16 14.06 14.01 Gas Oil 1.98 1.80 2.09 2.08 2.42 2.34 2.32 2.36 Methanol to Olefins (MTO) 0.00 0.01 0.05 0.22 0.35 1.06 1.83 1.83 MTO Growth N/A N/A 400% 330% 63% 202% 74% 0% Coal to Olefins 0.05 0.20 0.24 0.26 0.45 1.17 2.02 3.40 Other 0.13 0.13 0.13 0.13 0.20 0.88 0.97 0.93 Source: IHS Chemical, Deutsche Bank estimates

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Key assumptions and financials

Income statement

CBC generates its revenue and earnings primarily from three key products: 1) urea; 2) phosphate; and 3) methanol. In 2014, CBC’s gross profit breakdown was 45%, 12%, and 43% spilt between urea, phosphate and methanol, and registered gross margins of 35%, 13% and 35%, respectively. We expect 2015E gross margin to decline further to 20% vs. 25% in 2014 due to drop of methanol prices.

Looking forward, we expect urea ASP to lower by 3% in 2016E due to the weakening in domestic demand with imbalance supply situation to continue. However, we see upside potential for methanol and expect ASP to improve by 6%. We expect phosphate ASP to be flat in 2016E. We believe CBC’s overall GPM will improve from 20% in 2015E to 23% in 2017E. Thereby, we forecast CBC ROIC to improve from 7.3% in 2015E to 8.3% in 2017E.

Earnings assumptions

Figure 15: Key assumptions 2012 2013 2014 2015E 2016E 2017E Urea Capacity (ton) 1,840,000 1,840,000 1,840,000 2,360,000 2,360,000 2,360,000 Capacity Growth (%) 0% 0% 0% 28% 0% 0% Production volume (tpa) 1,857,661 2,022,592 1,972,450 2,036,000 2,258,000 2,452,000 Total sales volume (tpa) 1,880,718 2,033,183 1,955,571 2,003,239 2,226,799 2,417,679 Sales volume Growth (%) 1% 8% -4% 2% 11% 9% Overall ASP (RMB/t) 2,170 1,807 1,734 1,778 1,719 1,732 ASP Growth (%) -1% -17% -4% 3% -3% 1% Methanol Capacity (ton) 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 Capacity Growth (%) 0% 0% 0% 0% 0% 0% Production Growth (%) 1% -1% 0% 1,568,044 1,568,044 1,568,044 Total sales volume (tpa) 1,568,567 1,548,891 1,518,760 1,568,044 1,568,044 1,568,044 Sales volume Growth (%) 5% -1% -2% 3% 0% 0% Overall ASP (RMB/t) 2,225 2,315 2,162 1,800 1,916 2,031 ASP Growth (%) -2% 4% -7% -17% 6% 6% Phosphate Capacity (ton) 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Capacity Growth (%) 0% 0% 0% 0% 0% 0% Production volume (tpa) 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Total sales volume (tpa) 510,518 726,845 950,438 850,000 850,000 850,000 Sales volume Growth (%) 29% 42% 31% -11% 0% 0% Overall ASP (RMB/t) 2,955 2,659 2,639 2,850 2,850 2,907 ASP Growth (%) 0% -10% -1% 8% 0% 2% Source: Deutsche Bank

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Chemicals China BlueChemical

Figure 16: Income statement (RMBmn) P&L (RMB mn) 2012 2013 2014 2015E 2016E 2017E

Revenue 10,739 10,724 10,797 9,931 10,182 10,645 Cost of Goods Sold 7,433 7,500 8,111 7,944 8,010 8,221 Gross Profit 3,306 3,223 2,686 1,987 2,172 2,424 GPM (%) 31% 30% 25% 20% 21% 23% Selling & Distribution 218 347 425 367 377 383 General & Administrative 431 476 518 457 468 479 EBIT 2,746 2,480 1,844 1,110 1,272 1,502 EBITDA 3,408 3,183 1,439 2,005 2,222 2,506 Interest expense (14) (3) (9) (82) (76) (62) One-off expenses/income (132) (123) (1,260) - - - Other non-core income/exp 7 (8) (461) 55 53 36 Profit before tax 2,608 2,347 113 1,084 1,249 1,476 Income tax (624) (554) (16) (238) (275) (325) Effective tax rate (%) 24% 24% 14% 22% 22% 22% Profit after tax 1,984 1,793 97 845 974 1,152 Minority income (173) (146) 8 (73) (116) (124) Net income 1,810 1,647 105 772 858 1,028 EPS (RMB/share) 0.393 0.357 0.023 0.167 0.186 0.223 Growth (%) -9% -9% -94% 633% 11% 20% DPS (RMB/share) 0.150 0.140 0.120 0.100 0.100 0.100 Payout (%) 38% 39% 525% 60% 54% 45% Weight No# of shares (mn) 4,610 4,610 4,610 4,610 4,610 4,610 Source: Company data, Deutsche Bank

Figure 17: Key performance ratios Ratio 2012 2013 2014 2015E 2016E 2017E ROA 11.7% 9.8% 0.6% 4.0% 4.2% 5.1% Net income margin 17% 15% 1% 8% 8% 10% Asset turn over 64% 60% 56% 49% 50% 53% Equity Multiplier 119% 119% 127% 136% 132% 126% ROE 12.8% 10.9% 0.7% 5.2% 5.6% 6.5% Invested capital 12,063 12,598 11,314 12,302 13,683 14,406 ROIC 17.9% 15.4% 13.2% 7.3% 7.6% 8.3% Net Debt (2,564) (2,903) (3,436) (2,740) (1,872) (1,839) Equity 14,627 15,501 14,749 15,041 15,555 16,245 Net gearing (%) -18% -19% -23% -18% -12% -11% Source: Deutsche Bank

Deutsche Bank AG/Hong Kong Page 11

21 January 2016

Chemicals China BlueChemical

Balance sheet

Asset write-down and potential impairment Since listed in 2006, CBC had made significant investment in phosphate plants in Dayoukou, POM plant in Tianye, and in coal base urea plants in Shanxi - Yangpoguan (YPQ) and Helongjiang - Hegang. However, due to weak demand in niche POM product and dispute with local partners in YPQ, CBC had completely written down these investments during 2012-2014 fiscal for a sum in excess RMB1.98bn.

On the other hand, CBC acquired a 19.9% interest in Western Potash Corp (WPC) in Canada in 2013 for a total sum of C$32mn at C$0.71/share. With the sluggish potash prices and struggling WPC stock price, there could be impairment on WPC investment. However, the investment size of WPC is much smaller than the POM plant and YPQ investments. Hence, the current valuation of 0.4x 2016E P/B and the deep valuation discount to historical average is not justified, in our view.

Strong cash balance supports higher dividend payout With the company’s strong cash balance and operating cashflow, we believe that CBC could lift the dividend payout level to match a more stable DPS. Hence, we forecast CBC to pay DPS of RMB0.10 in both 2015E/2016E, representing a dividend payout of 60% and 54%, respectively.

Figure 18: Balance sheet (RMBmn) Balance sheet (RMB mn) 2012 2013 2014 2015E 2016E 2017E Cash and cash equivalents 2,564 2,934 5,526 5,311 3,643 3,610 Inventories 1,633 1,366 1,228 1,589 1,682 1,809 Trade and other receivables 577 739 894 796 947 1,065 Other current assets 4 49 6 6 6 6 Total Current Assets 4,778 5,087 7,654 7,701 6,277 6,489 PP&E 9,997 10,811 9,909 10,542 11,116 11,630 Intangible assets 125 125 16 6 0 0 Mining rights 478 476 474 472 470 467 Investments 776 1,042 551 551 551 551 Other long term assets 1,050 994 1,335 1,334 1,318 1,302 Total long term assets 12,427 13,449 12,286 12,906 13,455 13,951 Total Assets 17,205 18,536 19,939 20,607 19,733 20,440 Short-term borrowings 0 0 139 800 0 0 Trade/bill payable 405 418 430 432 425 428 Other payables 1,753 1,919 1,597 1,490 1,476 1,490 Others 146 330 727 727 161 161 Total Current Liabilities 2,305 2,667 2,894 3,449 2,062 2,079 Long-term borrowings 0 31 1,951 1,771 1,771 1,771 Other long-term liabilities 274 337 345 345 345 345 Total long-term liabilities 274 368 2,296 2,116 2,116 2,116 Total Liabilities 2,578 3,035 5,190 5,565 4,178 4,195 Shareholder's Equity 13,209 14,156 13,600 13,818 14,215 14,782 Minority interests 1,417 1,345 1,150 1,223 1,339 1,463 Total equity 14,627 15,501 14,749 15,041 15,555 16,245 Total Liabilities and Equity 17,205 18,536 19,939 20,607 19,733 20,440 Source: Company data, Deutsche Bank

Page 12 Deutsche Bank AG/Hong Kong

21 January 2016

Chemicals China BlueChemical

Cash flow statement

Capex We expect CBC to spend RMB1.5bn on Capex across 2015E-2017E, mainly driven by Helongjiang – Hegang coal base urea project in 2015/2016E and major overhauls in 2016E for Fudao I urea plants reconfiguration. Afterward, we expect maintenance Capex of RMB1.0bn per annum. We have not yet factored in any potential chemical project in our model.

Figure 19: Cashflow statement (RMBmn) Cashflow statement (RMB mn) 2012 2013 2014 2015E 2016E 2017E EBITDA 3,451 3,183 1,439 2,005 2,222 2,506 Change in working capital -277 727 -327 -368 -265 -227 Other non cash items 32 -243 1,303 0 0 0 Cash tax -634 -581 -675 -238 -275 -325 Finance cost 1 8 -1 -26 -23 -26 Net operating cash flow 2,572 3,094 1,738 1,372 1,659 1,929 Capex -1,538 -1,742 -1,052 -1,500 -1,500 -1,500 Investments -7,337 -7,752 -12,462 0 0 0 Disposals 7,414 7,542 12,625 0 0 0 Others 37 26 18 -14 -24 -18 Net investment cash flow -1,424 -1,927 -870 -1,514 -1,524 -1,518 Share issuance 0 0 0 0 0 0 Net proceeds from borrowings -425 31 1,996 481 -800 0 Dividends -738 -692 -645 -553 -461 -461 Others -190 -137 373 -1 -542 18 Net financing cash flow -1,352 -797 1,723 -73 -1,803 -443 Net changes -204 370 2,592 -215 -1,668 -32 FX & other adjustment 0 0 0 0 0 0 Beginning cash balance 2,767 2,564 2,934 5,526 5,311 3,643 Ending cash balance 2,564 2,934 5,526 5,311 3,643 3,610 Source: Deutsche Bank

Deutsche Bank AG/Hong Kong Page 13

21 January 2016

Chemicals China BlueChemical

Consensus

Our 2015E EPS is below consensus by 11%, but in line with the consensus in both 2016E and 2017E. Our below-consensus 2015E earnings mainly reflect that we forecast higher gas costs and lower methanol prices.

Figure 20: DB estimates vs. consensus 2015E 2016E 2017E DB estimates RMB/share 0.167 0.186 0.223 Bloomberg Consensus RMB/share 0.188 0.186 0.226 Variance -11% 0% -1% Source: Bloomberg. Deutsche Bank

Figure 21: Consensus estimates movement 0.45 5.0

0.40 4.5 4.0 0.35 3.5 0.30 3.0 0.25 2.5 0.20 2.0

0.15 1.5

0.10 1.0 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16

2015E Consensus EPS 2016E Consensus EPS CBC share price (RHS)

Source: Bloomberg Finance LP, Deutsche Bank

Page 14 Deutsche Bank AG/Hong Kong

21 January 2016

Chemicals China BlueChemical

Sensitivity

Earnings and target price to ASP and natural gas costs CBC’s earnings and target price are highly sensitivity to fertilizer/methanol prices, with high operating leverages. Based on our calculation, 2016E earnings beta on product ASP changes are 2.9x, 1.8x, and 2.3x for urea, DAP, and methanol, respectively. For every 5% change in urea, DAP, methanol ASP, CBC’s target price is changed by +19.6%, +13.5%, and +16.9%, respectively. Conversely, natural gas cost is the key feedstock for urea and methanol production, we expect CBC to consume c.3.7bcm of natural gas in 2016E. According to our calculation, for every 5% increase in gas cost, CBC’s 2016E earnings will change by -11.7%, and target price by -15.4%.

Figure 22: EPS & TP sensitivity to urea ASP Figure 23: EPS & TP sensitivity to DAP ASP Urea ASP DAP ASP EPS (RMB/share) 2015E 2016E 2017E Price Target EPS (RMB/share) 2015E 2016E 2017E Price Target Base case (RMB/ton) 1,778 1,719 1,732 HK$/share Base case (RMB/ton) 2,850 2,850 2,907 HK$/share -10% 0.117 0.132 0.163 1.58 -10% 0.128 0.153 0.190 1.9 -5% 0.142 0.159 0.193 2.09 -5% 0.148 0.170 0.206 2.25 Base case 0.167 0.186 0.223 2.60 Base case 0.167 0.186 0.223 2.60 5% 0.193 0.213 0.253 3.11 5% 0.187 0.203 0.240 2.95 10% 0.218 0.241 0.283 3.62 10% 0.207 0.219 0.256 3.31 Every +/- 5% change 15.0% 14.6% 13.4% 19.6% Every +/- 5% change 11.8% 8.8% 7.5% 13.5% Source: Deutsche Bank Source: Deutsche Bank

Figure 24: EPS & TP sensitivity to methanol ASP Figure 25: EPS & TP sensitivity to natural gas costs Methanol ASP Gas costs EPS (RMB/share) 2015E 2016E 2017E Price Target EPS (RMB/share) 2015E 2016E 2017E Price Target Base case (RMB/ton) 1,800 1,916 2,031 HK$/share Base case 0.80 0.79 0.79 HK$/share -10% 0.127 0.143 0.178 1.74 -10% 0.212 0.230 0.267 3.42 -5% 0.147 0.165 0.200 2.17 -5% 0.190 0.208 0.245 3.01 Base case 0.167 0.186 0.223 2.60 Base case 0.167 0.186 0.223 2.60 5% 0.188 0.208 0.246 3.04 5% 0.145 0.164 0.201 2.20 10% 0.208 0.229 0.268 3.47 10% 0.123 0.142 0.179 1.79 Every +/- 5% change 12.1% 11.5% 10.2% 16.9% Every +/- 5% change -13.2% -11.7% -9.8% -15.4% Source: Deutsche Bank Source: Deutsche Bank

Target price sensitivity to WACC/terminal growth Our CBC target price is highly sensitive to our WACC and terminal growth assumptions. According to our calculation, every +1% and +0.5% change in WACC and terminal growth will result in -10% and +3% change in target price, respectively.

Figure 26: TP sensitivity to WACC/terminal growth PT sensitivity WACC % HK$/share Base case 2.60 6.3% 7.3% 8.3% 9.3% 10.3% 0.0% 3.14 2.78 2.50 2.27 2.08 Terminal growth (%) 0.5% 3.24 2.85 2.55 2.31 2.11 Base case 1.0% 3.37 2.93 2.60 2.35 2.14 1.5% 3.53 3.03 2.67 2.39 2.17 2.0% 3.72 3.15 2.75 2.45 2.21

Source: Deutsche Bank

Deutsche Bank AG/Hong Kong Page 15

21 January 2016

Chemicals China BlueChemical

Valuation

CBC trades at 0.4x and 7.2x 12-month forward P/B and P/E, respectively, 40% and 12% below -1 SD of the historical mean, reflecting the company’s near- term headwinds, in our view. We derive our HK$2.60 target price using DCF, assuming a WACC of 8.3% and a terminal growth rate of 1%, which is in line with global fertilizer demand growth for urea. Our target price implies a 0.6x 2016E P/B, which is below -1 SD of the historical mean.

Figure 27: DCF valuation

China BlueChem Bloomberg Code 3983 HK Weighted Average Cost of Capital Cost of Equity Cost of Debt Net Debt/Total Capital 20.0% Risk-free Rate of Return (b) 3.9% Pre-tax Cost of Debt (a) 6.0% Market Equity/Total Capital 80.0% Equity Risk Premium (c) 5.6% Tax Rate 25.0% WACC (f) 8.3% Company Beta (d) 0.95 After-tax Cost of Debt 4.5% Terminal growth 1.0% Cost of Equity (e) 9.2% 1 2 3 4 5 6 7 8 9 10 11 DCF Units 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E EBIT HK$mn 1,272 1,502 1,507 1,464 1,457 1,325 1,229 1,093 992 852 747 Tax (275) (325) (326) (317) (317) (290) (271) (242) (222) (192) (171) Tax-Effected EBIT 997 1,177 1,181 1,146 1,139 1,035 958 851 771 660 576 + Depreciation 950 1,004 1,054 1,094 1,134 1,174 1,214 1,254 1,294 1,334 1,374 - Capital Expenditure (1,500) (1,500) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,374) - Working capital (265) (227) (233) (79) (19) (20) (21) (20) (22) (21) (23) Free Cash Flow 182 454 1,003 1,161 1,255 1,190 1,151 1,084 1,043 973 553 Number of Share 2016E 4,610

Price target valuation PT Implied Valuation 2015E 2016E 2017E NPV for CashFlow RMBmn 6,180 P/E 12.8x 11.5x 9.6x Terminal value RMBmn 3,188 P/B 0.7x 0.6x 0.6x Net (debt) / cash RMBmn 1,872 ROIC 7.3% 7.6% 8.3% Minority interest RMBmn (1,339) ROE 5.2% 5.6% 6.5% Equity value RMBmn 9,900 FX: RMB:HKD 1.21 Price target HK$ 2.60

(a) Deutsche Bank estiamtes (b) Deutsche Bank estimates (c) Deutsche Bank estimates (d) Based on Bloomberg 5 years adjusted beta against Hang Seng Index (e) CAPM: cost of equity = Risk-free Rate + (beta x equity risk premium). (f) Weighted average cost of capital equals: (cost of debt*debt/total capital) + (cost of equity*equity/total capital). Source: Deutsche Bank

Valuation cross-check Our DCF-derived target implied valuation is in line with Gordon Growth Model- derived target valuation multiples.

Figure 28: Valuation cross-check on Gordon Growth Model target multiple valuation P/B [ROE-g]/[COE-g] P/E [ROE-g]/[ROEx(COE-g)] 2015E 2016E 2017E ROE 5.2% 5.6% 6.5% Terminal growth 2.0% 2.0% 2.0% COE 9.2% 9.2% 9.2% P/E 8.5x 8.9x 9.5x P/B 0.4x 0.5x 0.6x Source: Deutsche Bank estimates

Page 16 Deutsche Bank AG/Hong Kong

21 January 2016

Chemicals China BlueChemical

Valuation charts

CBC trades at below -1 standard deviation across various valuations, including P/B, P/E, and EV/EBITDA. We believe that it reflects the near-term negatives of the company. However, we believe that the valuation discount is not justified.

Figure 29: CBC 12-month forward P/B band Figure 30: CBC 12-month forward P/B 8.0 2.00X 7.0 1.75X P/B 6.0 1.50X 0.39x 5.0 1.25X Average 1.00X 4.0 1.21x 0.75X 3.0 0.50X +1 SD 2.0 1.61x

0.25X

16 10 11 12 13 14 15

10 11 12 13 14 15

------

15 10 11 12 13 14 16

10 12 11 13 14 15

------

Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan

Jan -1 SD

Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan Price 0.5X 0.8X 1.0X 1.3X Jan 0.82x

Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank

Figure 31: CBC 12-month forward P/E band Figure 32: CBC 12-month forward P/E 8.0 20.0X 7.0 18.0X P/E- Adjusted 6.0 16.0X 7.2x 14.0X 5.0 Average 12.0X 4.0 12.0x 10.0X 3.0 +1 SD 8.0X 2.0 13.8x

6.0X

12 10 11 13 14 15

10 11 12 13 14 15

------

15 10 11 12 13 14 16

10 12 11 13 14 15

------

- - - - -

- -1 SD

Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan

Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan Price 8X 12X 16X 20X Jan 10.2x

Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank; Note: CBC EPS are adjusted to asset write-down in 2012-14

Figure 33: CBC 12-month forward EV/EBITDA band Figure 34: CBC 12-month forward EV/EBITDA 40,000 14.0x 35,000 12.0x EV/EBITDA 30,000 10.0x 2.1x 25,000 8.0x 20,000 Average 6.0x 15,000 6.3x 10,000 4.0x 5,000 2.0x +1 SD 8.1x

0 0.0x

10 11 12 13 14 15

10 11 12 13 14 15 16

------

- -1 SD

Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan

Jan Jan Jan Jan Jan Jan Jan 4.5x EV 4X 6X 8X 10X Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 17

21 January 2016 Chemicals China BlueChemical

60 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 8.3 3.9 5.6 4.0 4.0 5.9 8.2 12.6 17.5 12.9 22.1 18.6 13.2 44.00 FY17E 59 NA NA NA NA NA NA NA NA NA NA NA NA NA NA 7.6 2.8 4.8 2.8 2.8 3.2 2.5 7.0 7.8 7.0 12.6 44.2 11.8 20.7 12.7 23.7 18.4 12.6 43.00 FY16E ROIC (%) ROIC 58 NA NA 7.3 2.2 4.4 1.7 0.7 7.2 4.6 3.3 2.6 2.1 1.8 5.4 3.6 8.3 2.3 9.2 9.9 8.9 4.9 12.4 10.3 12.1 16.0 40.1 24.1 10.9 41.4 10.0 19.0 11.9 42.00 FY15E 38 35 NA NA NA NA NA NA NA 7.3 3.8 5.9 5.7 0.6 0.7 1.3 0.6 0.5 4.2 0.0 6.0 0.0 6.4 4.4 1.9 3.8 1.8 N/A N/A N/A N/A N/A N/A 10.0 FY17E 37 34 NA NA 7.2 2.5 5.9 5.1 0.4 0.7 1.3 0.6 0.4 7.9 4.2 4.3 0.0 5.8 0.0 9.4 6.5 4.4 4.4 1.7 3.3 3.5 4.5 N/A N/A N/A N/A N/A N/A 10.9 FY16E 33 36 NA NA Dividend yield (%) yield Dividend 7.2 1.7 4.3 4.6 0.3 0.8 1.3 0.5 0.4 7.9 4.1 4.3 0.0 3.8 7.9 4.4 4.2 1.5 3.5 3.3 6.6 N/A N/A N/A N/A N/A N/A 10.9 46.1 10.4 FY15E 30 33 NA NA NA NA NA NA 9.4 6.5 6.7 8.0 7.8 N/A N/A N/A N/A N/A 14.5 16.1 12.1 63.9 19.5 40.5 13.8 21.4 15.4 12.1 19.0 17.1 16.3 14.4 16.6 10.1 FY17E 29 32 NA 5.6 4.5 6.6 5.7 3.8 8.0 9.4 4.3 8.8 7.4 N/A N/A N/A 15.8 13.8 15.8 13.2 36.0 12.6 19.4 50.0 21.6 12.7 16.1 22.5 17.9 16.0 16.1 14.0 13.8 142.8 FY16E ROE (%)ROE 28 31 4.0 8.6 5.2 3.1 5.6 5.1 1.7 3.1 6.2 7.1 N/A N/A N/A 12.1 14.3 14.7 15.4 14.2 33.0 80.3 17.8 10.7 10.9 20.6 14.8 13.7 22.1 15.9 14.4 13.9 10.1 111.6 FY15E 25 NA NA NA NA NA NA N/A N/A N/A N/A N/A N/A 1.50 1.56 0.99 0.78 1.85 1.32 2.66 1.14 1.96 0.86 0.88 0.39 0.42 0.63 0.43 1.29 2.30 1.05 3.20 1.20 28.00 FY17E 24 NA N/A N/A N/A 1.51 1.57 1.72 1.31 1.15 3.73 0.84 3.59 1.40 3.26 0.88 1.28 2.32 0.91 0.95 1.75 0.41 0.44 0.74 0.46 1.39 2.78 1.53 1.26 3.81 1.12 1.73 1.65 27.00 FY16E P/B (x) P/B 23 N/A N/A N/A 0.00 1.57 1.60 1.89 1.41 1.19 3.60 0.91 8.03 1.51 4.20 0.92 1.34 3.23 0.99 1.24 2.07 0.42 0.45 0.87 0.49 1.26 3.23 1.87 1.45 4.57 1.16 1.88 1.82 26.00 FY15E 19 NA 4% 0% 1% 8% 9% -5% -7% -1% 74% 27% 63% 45% 10% 26% 40% 36% 17% 13% 17% 25% 24% 24% 27% 68% 14% -11% -13% -23% 114% 101% 109% FY14-16E EPS CAGR (%) CAGR EPS 14 23 NA NA NA NA NA NA 6.7 3.8 7.0 7.2 7.3 9.9 5.9 5.3 6.2 6.5 3.5 6.0 8.1 N/A N/A N/A N/A 10.5 10.0 11.1 17.1 13.7 10.3 18.8 14.7 11.9 FY17E

13 22 NA 9.5 9.8 6.9 3.4 7.4 7.3 7.5 6.3 7.2 4.3 8.0 10.0 25.1 17.8 13.8 26.6 11.0 22.5 20.4 19.5 21.5 19.6 11.1 11.3 10.3 27.0 10.2 10.2 11.6 11.6 11.1 FY16E P/E (x) P/E 12 21 NA 8.3 5.9 3.5 8.9 4.8 8.9 7.0 8.1 15.1 10.8 28.2 23.2 74.5 11.5 42.0 13.8 30.0 22.1 40.2 30.9 30.5 11.0 10.2 11.6 10.3 30.6 10.6 10.4 20.0 12.6 11.9 FY15E Cover (NR) Companies - 9 9 NA 392 337 870 891 650 613 mn) Cap 4,425 4,957 4,412 4,253 2,284 2,356 2,114 1,672 1,242 1,200 8,724 7,166 5,838 1,359 1,169 5,790 4,125 1,879 (USD (USD 14,720 13,611 11,487 10,904 Market Market 6 NA 9.32 5.39 6.53 7.23 7.73 1.68 1.08 2.63 7.00 9.31 3620 15.87 11.40 20.44 25.48 58.65 11.47 10.80 24.83 93.20 16.30 29.60 68.50 47.25 19.90 17.36 391.60 120.92 352.60 5 5 19-Jan-16 ILS INR INR THB EUR RUB SAR SAR USD USD USD CNY CNY CNY CNY CNY CNY CNY USD QAR USD CAD NOK Share price Share HKD HKD HKD CNY CNY CNY

4 NR NR NR NR NR NR NR NR NR NR NR NR NR NR Sell DB Buy Buy Buy Buy Buy Hold Hold Hold Hold Hold Hold Hold Hold Hold Rating ; Note: Bloomberg consensus estimates Not for k 3 2 POT.N Ticker ICL.TA MOS.N YAR.OL

1211.SE 2020.SE AGU.CN Reuters 3983.HK 0297.HK 1866.HK URKAq.L PHORq.L UPLL.BO IQCD.QA MEOH.US AKRN.MM CHMB.BO 000731.SZ 000792.SZ 002470.SZ 002170.SZ 000830.SZ 000422.SZ PTTGC.BK 600096.SS 600426.SS 600141.SS 600470.SS SDFGn.DE , Deutsche Ban Global Fertilizer CompsGlobal Fertilizer Finance LP

: 35 Figure AKron Chambal average Weighted PHOSAGRO + K S Methanex UPL SAFCO GC PTT Uralkali ICL Industries Qatar Industries Corp Potash Agrium Yara Ma'aden Anhui Liuguo Anhui average Weighted (ex-HK/China) Global Mosaic Luxi Chemical Luxi Xingfa Hubei Yihua Hubei Meifeng Sichuan Shandong Kingenta Shandong Yuntianhua Yunnan Hualu-Hengsheng Batian Shenzhen China XLX China average Weighted Listed - A China QSLI Name - Listed HK China BlueChem China Sinofert

Source: Source: Bloomberg comps Valuation

Page 18 Deutsche Bank AG/Hong Kong

21 January 2016

Chemicals China BlueChemical

Company profile

China BlueChem (CBC) is a subsidiary of CNOOC Group, the third-largest oil & gas SOE in China. CNOOC Group holds c.59% of CBC. CBC is a flagship company for CNOOC Group in the fertilizer production business, and CBC relies on its fellow-subsidiary CNOOC Ltd. to supply natural gas feedstock for its urea and methanol plants in Hainan province. CBC also has integrated phosphate plants in Hunan province and urea plants in Inner Mongolia.

Figure 36: Shareholding structure

40.6%

59.4%

CNOOC Public Shareholders Source: Deutsche Bank

Figure 37: Corporate structure

CNOOC Public shareholders

59.4% 40.6%

China BlueChemical Ltd.

Urea Phosphate Fertilizer Chemicals Others CNOOC Fudao (100%) Hubei Dayukou Hainan Basuo Port (73.11%) CNOOC Tianye Chemical CNOOC Kingboard Chemical (83.97%) (92.97%) Chemical (60%) China Blue Chemical Yichang Mining (51%) CNOOC Hualu Shanxi CNOOC Tianye Hainan CNOOC PLastic (100%) Coal Chemical (51%) Chemical (92.97%) CNOOC(Hainan) E&P Gas (100%) CNOOC Huahe Coal CBC (Canada) Holding Corp (100%) Chemical (100%) Source: Deutsche Bank

Deutsche Bank AG/Hong Kong Page 19

21 January 2016

Chemicals China BlueChemical

Figure 38: China BlueChem share price & ROE, and key events 6.5 18% ROE CBC share price 6.0 Dispute with Huahe JV and me related write-downs 15% 5.5 Announcemnt of Dayukou 5.0 chemical acquisition POM asset write-down 12% 4.5

4.0 9% CBC announced M&A deals 3.5 with Hegang Huahe Coal Chemica 6% 3.0 Softening in fertilizer prices 2.5 3% 2.0 Mr. Wang Hui became the new CEO and chairman

1.5 0%

14 08 09 10 11 12 13 15

08 09 10 11 12 13 14 15

------

Jul Jul Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan Jan Jan

Source: Deutsche Bank

Figure 39: Management profile Name Position Age Profile Hui Li Chairman of the 52 Mr. Li Hui is Non-Executive Chairman of the Board of China Bluechemical Ltd. From September 2009 to May Board 2010, Mr. Li was Vice President of Sinochem and General Manager of Sinochem Petroleum Exploration and Production Co., Ltd. Since May 2010, Mr. Li has been the Vice President of China National Offshore Oil Corporation. Mr. Li was appointed as a Non-Executive Director of the company in July 2011. Hui Wang President, CEO, 51 Mr. Wang Hui has been appointed as President, Chief Executive Officer, Executive Director of China Executive BlueChemical Ltd., with effect from 29 December 2014. Mr. Wang served as the Chairman of the board of Director directors of Shandong Haihua Group Co., Ltd. from October 2009 to September 2014. From June 2010 to December 2011, Mr. Wang served as the Deputy General Manager of CNOOC Refinery & Petrochemicals and Sales Division. From March 2010 to October 2014, Mr. Wang served as a director of Shandong Haihua Company Limited (a company listed on Shenzhen stock exchange, stock code: 000822). Changsheng Chief Financial 49 Mr. Quan Changsheng has been appointed as Chief Financial Officer, Vice President, and Company Secretary of Quan Officer, Vice China BlueChemical Ltd with effect from 28 August 2010. Mr. Quan joined the company in March 2006 and in President, July 2007, he was appointed as Board Secretary and Company Secretary. Mr. Quan was also the director of DYK Company Chemical and CNOOC Tianye. He has been appointed the Chairman of Shanxi Hualu Coal Chemical Ltd. since Secretary August 2009. Fan Zhou Executive Vice 53 Ms. Zhou Fan is Executive Vice President of China BlueChemical Ltd. From November 2004 to August 2007, she President was a Deputy General Manager of CNOOC Base Group Ltd. and Party Secretary and Secretary to Disciplinary Committee of CNOOC Nanhai West Corporation. She was appointed as an Executive Vice President of the company in August 2007. Weimin Wang Executive 51 Mr. Wang Weimin served as a Vice President of Hubei Dayukou Chemical in August 2012. He has been served Director of as the Chairman of Hubei Dayukou Chemical Co., Ltd. since November 2012. He was appointed as an Executive China Director of China BlueChemical (Hong Kong) Ltd. in October 2014. BlueChemical (Hong Kong) Ltd Renlin Zhou Chairman of 54 Mr. Zhou Renlin served successively as Executive Deputy General Manager of CNOOC Fudao Limited from April CNOOC Tianye 2010 to July 2012; Chairman of Hainan Basuo Port Limited since May 2010. He was appointed as a Vice Chemical President of the company in August 2012; a Director and Chief Executive Officer of CBC (Canada) Holding Corp Limited in May 2013. He was appointed as the Chairman of CNOOC Tianye Chemical Limited in October 2014. Source: Company data, Deutsche Bank

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure China BlueChemical 3983.HK 1.59 (HKD) 20 Jan 16 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. Vitus Leung

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Historical recommendations and target price: China BlueChemical (3983.HK) (as of 1/20/2016)

5.00 Previous Recommendations

4.50 Strong Buy Buy 4.00 Market Perform Underperform 3.50 Not Rated Suspended Rating 3.00 1 Current Recommendations 2.50 2 Buy 2.00 Hold Security PriceSecurity Sell 1.50 Not Rated Suspended Rating 1.00 *New Recommendation Structure

as of September 9,2002 0.50

0.00 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Date

1. 16/07/2015: Upgrade to Hold, Target Price Change HKD2.67 2. 23/10/2015: 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 500 share-holder return (TSR = percentage change in 450 53 % share price from current price to projected target price 400 350 36 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 22 % 11 % holder return, we recommend that investors sell the 100 17 % 19 % 50 stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: Asia-Pacific Universe 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

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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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Page 26 Deutsche Bank AG/Hong Kong

David Folkerts-Landau Chief Economist and Global Head of Research

Raj Hindocha Marcel Cassard Steve Pollard Global Chief Operating Officer Global Head Global Head Research FICC Research & Global Macro Economics Equity Research

Michael Spencer Ralf Hoffmann Andreas Neubauer Regional Head Regional Head Regional Head Asia Pacific Research Deutsche Bank Research, Germany Equity Research, Germany

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