China XLX

China XLX: to acquire 100% equity interest in Tianli, a coal mine co in Xinjiang, for a total consideration of Rmb 84.5m (~S$17m), of which,
i) Rmb 40m will be payable to the Vendors as the price of the Tianli. A Chinese valuer has estimated Tianli’s NAV at Rmb 40.5m.
ii) Rmb 44.5m will be used to increase the registered capital of Tianli.
XLX will finance the transaction with internal funds and external bank borrowings. Where appropriate, a fund raising exercise from the capital mkt will be carried out.

Tianli holds a coal mining license for approved mining area of 1.343 sq km and has an annual pdtn capacity of ~90k tons.
XLX says the acquisition will allow it to obtain the necessary upstream experience in managing coal mines, and opens future expansion opportunities in Xinjiang with an integrated secured coal suppy, since coal is one of its main raw materials and accounts for ~70% of its urea pdtn cost.

While mgt says it has considered the coal pdtn track record of Tianli, the financials show that Tianli was loss making in FY09-10, and only became profitable in 9M11.
Also, we highlight the sudden drop in net tangible asset value to –Rmb 1.7m in Sep ’11 from Rmb 14.2m in Dec ’10, contrasting with the big jump in net asset value to Rmb 40.5m from Rmb 16.5m over the same period.
Lastly, there was no disclosure regarding the type of coal produced at Tianli. We cannot be certain if this acquisition would help XLX with its raw material procurement, since the co uses mainly anthracite coal in its urea pdtn.

The consideration for Tianli works out to at 8.6x annualized 9M11 P/E, vs XLX’s trailing P/E at 10.2x. Nevertheless, we note that the short and lumpy financial track record of Tianli.
The Street has mostly Buy ratings with TP $0.39 - 0.51.