Performance preview

1-3Q22 forecasts a year-on-year profit increase of 78.0% to 81.1%, which is in line with our expectation that the company will disclose a forecast of results for the first three quarters of 2022. It is expected to achieve a net profit of RMB 28.5-2.9 billion, an increase of 78.0%-81.1% over the same period last year, of which the net profit in the third quarter was RMB5.2-570 million, down 25% and 31% over the same period last year. The company said that although the prices of 3Q22's main products, such as glyphosate, silicone and industrial silicon, have fallen back from their previous highs, the average price and profitability are still generally better than the same period last year.

Pay attention to the main points

The sharp decline in silicone prices and earnings year-on-year is the main reason for the decline in 3Q22 performance compared with the same period last year, and the bottom of the industry is expected to fluctuate in the short term. Silicone prices and profits have fallen sharply due to the rapid expansion of industry capacity and the slowdown in demand growth at the end of 2022. The average price of 3Q22 silicone fell 41% to 20,000 yuan / ton compared with the same period last year, and the net profit per ton fell 89% to 1707 yuan / ton. Organosilicon is a big drag on the company's performance. Looking forward, Hesheng plans to expand its silicone DMC production capacity by another 200000 tons this year, and Xingfa Inner Mongolia plans to add 200000 tons of DMC capacity in 2023. Even considering the recovery of industry demand growth of about 10% in 2023, we judge that the industry will still show an oversupply and the industry may continue to fluctuate at the bottom.

Downward costs drive the price of glyphosate down and profitability remains high. The third quarter is the traditional off-season of agrochemical, and the demand is relatively weak. On the other hand, the prices of major commodities, including crude oil, continued to fall, and the prices of chemicals as a whole weakened. Against this background, the price of glyphosate has dropped from 64,000 yuan / ton in early July to the current 585000 yuan / ton. However, according to our estimates, the average net profit per ton of glyphosate 3Q22 is still about 200,000 yuan / ton, which is slightly higher than that of 2Q22, mainly due to the decline in the price of major raw materials such as glycine. Looking ahead, we believe that short-term glyphosate profits are likely to remain high and it will be difficult to return to the low levels of 2014-2020. We expect that after 2023, with the commercial promotion of genetically modified crops in China, the demand for glyphosate may see rapid growth; on the supply side, due to industrial policy restrictions, in addition to the 50, 000 tons of new production capacity of Xingfa Group and 25000 tons of technical transformation capacity of Runfeng shares, the possibility of industry expansion is relatively low, and the industry as a whole maintains a tight balance between supply and demand.

Profit forecast and valuation

The profit of 3Q22 glyphosate remains at a high level, and we have raised the profit of 2022amp by 9.6% in 2023 to 3.37 billion yuan respectively. The current share price corresponds to a price-to-earnings ratio of 5.5 times 2023 / 5.1 times earnings. Taking into account the downward shift of the market valuation center, we maintain an outperform industry rating and target price of 25.00 yuan, corresponding to 8.5 times 2022 price-to-earnings ratio and 7.8 times 2023 price-to-earnings ratio, which has 53.8% upside space compared with the current stock price.

Risk.

The price of glyphosate fell sharply and the progress of the new business fell short of expectations.