Incident 1: The company publishes its 2022 annual report. During the reporting period, the company achieved revenue of 8.349 billion yuan, an increase of 28.76% over the previous year; achieved net profit of 1,844 billion yuan, an increase of 125.91% over the previous year; and achieved net profit of 1,865 million yuan after deduction, an increase of 133.10% over the previous year. In Q4 '22, the company achieved revenue of 1,249 million yuan, a year-on-year decrease of 26.11% and a decrease of 33.15% over the previous year; it achieved net profit of 156 million yuan, a decrease of 46.67% from the previous year and a decrease of 67.31% from the previous month.

Incident 2: The company released the first quarter report of 2023. During the reporting period, the company achieved revenue of 1,353 million yuan, a year-on-year decrease of 50.25% and an increase of 8.28% over the previous year; it achieved net profit of 124 million yuan, a decrease of 80.86% over the previous year and a decrease of 20.54% from the previous month.

Comment:

The company's performance was impressive in '22, but since the second half of the year, the industry's performance has been under pressure for a short time under the price of original drugs. The company's overall performance in '22 was impressive. The increase in revenue was mainly due to a sharp rise in the volume and price of glyphosate series and amide series products.

The company's operating income excluding trade business increased 46.35% year-on-year in '22. Among them, pesticide, chemical, and steam products achieved revenue of 5889 million, 15.3, and 671 million yuan respectively, up 50.7%, 58.2%, and 13.6%, respectively. Gross margins were 35.13%, 28.80%, and 16.72%, respectively. The year-on-year changes were +7.29, -4.01, and +4.76pct, respectively. The trade business achieved revenue of 140 million yuan, a decrease of 84.0% from the previous year, and gross margin was 5.05%, +3.28pct over the previous year. The company's gross sales margin reached 32.03% in '22, an increase of 7.98 pct over the previous year. In terms of sales, the company sold 11.37, 12.55, and 2,5404 tons of pesticides (100 percent off), and steam in '22, respectively, with year-on-year changes of +4.8%, +3.6%, and -8.65%, respectively. In terms of price, according to Baichuan Yingfu data, the market price of glyphosate in '22 was 62,300 yuan/ton, an increase of 22.7% over the previous year. However, the overall price of crop protection products declined rapidly after the third quarter of '22. The average price of glyphosate in Q4 '22 and Q1 Q1 was 518 and 42,600 yuan/ton, respectively, down 35.1%/14.7% and 41.9%/17.8%, respectively. Therefore, the company's performance in Q4 '22 and Q1 in '23 was temporarily under pressure.

Vigorously promote the construction of secondary and tertiary production bases, and future growth can be expected. In terms of herbicides, the company is one of the first four glyphosate manufacturers to pass environmental inspection in China. Currently, the production capacity of glyphosate original drug is 70,000 tons/year, and the capacity utilization rate in '22 is 88.3%. Among them, the glycine route has a production capacity of 30,000 tons/year and the IDAN route has a production capacity of 40,000 tons/year of refined promethacloxate. In terms of pesticides, the company currently has a production capacity of 50,000 tons/year diazephosphate and 15,000 tons/year. In addition, the company set up a subsidiary, Jiangneng Gongtong, to provide public engineering support services for the company's park. The company also cooperated with Wengfu Group to build a third production base, and plans to invest 22 billion dollars in the phosphorus-chemical recycling integrated industry chain project. In the future, the company will make every effort to promote the construction of secondary and tertiary production bases, vigorously promote mergers, acquisitions and restructuring of single product champions and enterprises that extend the chain, and implement incremental projects at base 998, such as a heating center and 100,000 tons of intelligent formulations, according to the plan, which can be expected in the future.

The flame retardant business continues to gain strength, creating new profit growth points. China's flame retardants have developed into the second largest polymer material modification additive after plasticizers. Among them, organophosphorus flame retardants balance flame retardant efficiency and environmental protection. They are currently the fastest growing flame retardants in the market, and have huge potential for development. Compared with mainstream manufacturers, the company has many years of experience in treating phosphorus-containing wastewater, has mature wet oxidation technology, and has ways to utilize hydrochloric acid resources. Environmental protection advantages are remarkable. Currently, the organophosphorus flame retardant products developed by the company mainly include TCPP and BDP, which can be widely used in fields such as polyurethane and engineering plastics, with broad market prospects. In terms of production capacity, the company's 20,000 tons/year phosphorus oxychloride plant, 10,000 tons/year BDP plant, and 30,000 tons/year TCPP plant have entered the normal production stage. On October 25, '22, the company announced that it plans to implement the “Flame Retardant Phase II Project”, which includes 50,000 tons/year TCPP production capacity and 15,000 tons/year BDP production capacity, which is expected to give full play to the advantages of the phosphorus chemical products industry chain and create new profit growth points for the company.

Profit forecasts, valuations and ratings: Due to the sharp drop in pesticide prices, as we lowered the company's profit forecast for 23-24 and added a profit forecast for 25 years, the company's net profit for 23-25 is expected to be 8.36 (down 58.4%) /9.36 (down 55.6%) /1,045 million yuan respectively. The company is one of the high-quality glyphosate manufacturers in China. It is optimistic about the continued expansion of pesticide production capacity and maintains the company's “increase in holdings” rating.

Risk warning: pesticide demand falls short of expectations, risk of cost fluctuations, environmental protection and production safety risks.