盐湖股份(000792)

Core earnings break even; challenging market ahead but valuation holding up

We expect a challenging operating environment for QSLI, particularly for itschemical integration project, which overhangs QSLI's performance. The companyshowed signs of improvement in operations QoQ in 2Q17 and reached operationalbreakeven; if we strip out one-off items (i.e., asset impairment), QSLI's coreearnings entered positive territory with a profit of RMB23mn in 2Q17 vs. a loss ofRMB210mn in 1Q17, thanks to an improved transportation situation with higherpotash sales volume QoQ. 2H17 should see an improvement HoH, with highersales volume of potash/lithium, while the potential debt-to-equity swap may bethe next catalyst for the share price; however, shaky market conditions plusdifficult financials with higher DD&A charges could offset the positives. We see abalanced risk-reward profile and keep our Hold rating and TP of RMB11.66/share.

Debt-to-equity swap plan to support share price; 1H17 net gearing at 114%

The potential restructuring of debt should support QSLI's valuation, with tworestructurings planned: 1) QSLI has proposed a debt-to-equity swap; and 2) a newbond issuance. EBIT broke even at RMB174mn in 1H17, while operating cash flowwas RMB401mn, down 27% YoY. We see limited balance sheet improvement,with a net gearing of 114% in 1H17 (vs. 115% in 1H16/125% in FY16). On the otherhand, QSLI signed a debt-to-equity swap MOU with Qinghai SASAC and CCB,forming a deleveraging fund of RMB20bn to facilitate the debt-to-equity swapprocess. The details of the plan are still under negotiation. As per our analysis,the debt-to-equity swap will likely be accretive for both ROE and EPS; under ourscenario 1, which uses our TP as an exercise price, FY18E ROE is enhanced by+1.9%pts and EPS by +135% (see our analysis table for details).