The 2012 results are in line with expectations Guannong Co., Ltd. announced its 2012 results today, achieving operating income of 1.07 billion yuan, an increase of 12.7% over the previous year, and net profit of 249 million yuan, an increase of 53% over the previous year, and a combined earnings of 0.69 yuan per share, which is basically in line with our expectations. The company achieved investment income of 385 million yuan in Luo Potassium, an increase of 21% over the previous year. In 2012, the company plans to distribute a cash dividend of 2.1 yuan (tax included) for every 10 shares. The company calculated fixed asset impairment losses for the fruit and vegetable business during the reporting period, totaling about 40.19 million yuan, reducing the company's EPS by about 0.11 yuan. The main reason for the downgrade is that international and domestic inventories are high, and potash fertilizer prices are under pressure. Currently, potash stocks in major international consumption areas (including China) are high, while inventories of North American potash producers have been rising for 5 consecutive months, and are higher than the average inventory value for the past 5 years. After the Spring Festival, purchases of potash fertilizer in the domestic market remained sluggish, putting continued pressure on the price of potash fertilizer. India continues to reduce its potash subsidies. In the 2013-14 fertilizer year, India's total subsidy for domestic fertilizer was basically the same as the previous year, but the single-ton subsidy for potash fertilizer was still reduced. In addition, the exchange rate of the Indian rupee against the US dollar is still low, so it is expected that India's imports of potash fertilizer will remain low this year. The recent sharp decline in international food prices may affect downstream affordability of potash fertilizer prices. Recently, with the gradual elimination of the effects of the US drought in 2012, US grain inventory data was higher than expected, leading to a sharp decline in futures prices for major agricultural products, soybeans, corn, and wheat, which may affect downstream affordability of potash fertilizer prices. Valuation and recommendations We believe that the domestic potash market will remain weak and consolidated in 2013, and that the company's investment income in Luo Potash will be affected and reduced, and the company's rating will be lowered to “prudent recommendation.” Considering that losses in the company's main business (fruits and vegetables, lint, sugar, etc.) exceeded expectations, we slightly raised the company's profit forecasts for 2013-14 to 0.76 yuan and 0.83 yuan respectively (increases of 6% and 5%). The current stock prices corresponding to 2013-14 PE are 21x and 20x, respectively. Risk 1. Demand for potash fertilizer is weaker than expected; 2. Downside risk in market valuation centers.