Performance review
2022 results are in line with market expectations
The company achieved operating income of 20.713 billion yuan in 2022, an increase of 11.69% over the previous year; total profit of 2,969 billion yuan, an increase of 32.32% over the previous year; and the net profit of the mother was 2,164 million yuan, corresponding to earnings of 2.41 yuan per share, an increase of 37.9% over the previous year, in line with market expectations. The increase in performance is mainly due to rising raw material prices driving up product prices. In 2022, the average prices of the company's fertilizer products urea/diammonium phosphate were 2,370 yuan/ton and 4,284 yuan/ton respectively, up 12%/32% year on year; the average price of fine chemicals was 6,206 yuan/ton, up 7% year on year. Due to poor demand for downstream real estate and oversupply, the average price of PVC fell 14% to 6,669 yuan/ton. The 4Q22 company achieved revenue of 4,542 million yuan, a year-on-month change of +48%/-10%, and the net profit of the mother was 14 million yuan, a year-on-month change of -83%/-97%. The sharp decline in 4Q22 performance was mainly due to the rapid decline in PVC prices and poor sales of urea and diammonium phosphate in the off-season.
The company released the 1Q23 performance report: net profit of the mother was 21-260 million yuan, a year-on-year decrease of 59%-67%; after deducting non-net profit of 196-246 million yuan, a year-on-year decrease of 59%-67%. The decline in performance was mainly due to the continued decline in the prices of diammonium phosphate, urea, and polyvinyl chloride in 1Q23, which led to a decline in profitability.
Development trends
The price spread of diammonium phosphate is expected to gradually rise, and the price of PVC is already lower than the average cost of the industry. According to iFind, the current price difference between diammonium phosphate - phosphate ore - synthetic ammonia - sulfur is 1,068 yuan/ton. Compared with the price difference of 689 yuan/ton at the beginning of the year, it has shown a recovery trend, mainly due to a further decline in synthetic ammonia and sulfur prices. Looking back, we think the phosphate fertilizer price spread is expected to gradually pick up with the peak fall fertilizer season in 3Q23. According to Baichuan information, the PVC industry currently has an average price of 5,895 yuan/ton, and an average gross profit of -229 yuan/ton. Many companies are already in a state of loss. Looking back, we think that with the gradual recovery of the macroeconomy, the price of PVC, a product in the post-real estate cycle, is expected to recover.
In the future, the company will focus on developing the phosphorus and fluoride industry, focusing on new energy sources, and contributing to long-term growth. The company cooperated with enterprises such as Ningde Times and Stanley to plan a total production capacity of 500,000 tons of iron phosphate, 200,000 tons of nickel sulfate, and supporting raw materials and intermediate products. Furthermore, the company plans to use all elements of the park as entry points to develop industrial chains such as lithium batteries, sodium electricity-related cathode materials, electrolytes and core raw materials, and develop the hydrogen energy industry chain using hydrogen, a by-product of caustic soda. We believe that over time, the company is expected to build the new energy business as a driving force for its long-term growth by leveraging its many years of phosphorus-chemical technology and resource advantages.
Profit forecasting and valuation
Due to the decline in PVC, urea prices and the export price spread of ammonium diammonium phosphate, we lowered the company's 2023 profit forecast by 48% to 1.56 billion yuan, and introduced the 2024 profit forecast of 1.74 billion yuan. The company's current stock price corresponds to the price-earnings ratio of 7.9/7.1 times 2023/24. Due to the lower profit forecast but considering that PVC is at the bottom of the cycle, we lowered our target price by 14% to 17 yuan, corresponding to 9.7/8.8 times the 2023/24 price-earnings ratio. There is 23.5% upside from the current stock price, maintaining the “outperform the industry” rating.
risks
Phosphate fertilizer sales fell short of expectations, PVC prices continued to decline, and construction of new energy material projects such as iron phosphate fell short of expectations.