Core views:
The company is a leader in fertilizer supply and distribution, and has a complete industrial chain
The company is a leader in fertilizer supply and distribution, covering the entire industrial chain of resources, R&D, production, distribution and agrochemical services. According to data from the company's official website, the company controls 7 manufacturers and has 6 shares. All manufacturers have an annual fertilizer production capacity of more than 10 million tons. The company is the producer with the largest variety and most complete range of chemical fertilizers in China. The products cover all kinds of nitrogen fertilizer, phosphate fertilizer, potash fertilizer, compound fertilizer and formula fertilizer, micro fertilizer, controlled release fertilizer, organic fertilizer, biological fertilizer and other new types of fertilizers.
Due to the slump in the fertilizer industry, the company's performance has declined somewhat. Since 2012, the company's revenue has continued to decline. Among them, in the first half of 2016, the company achieved revenue of 9.032 billion yuan, a year-on-year decrease of 46.32%; the net profit loss for Gimu was 432 million yuan. At the same time, the company is actively optimizing the main business structure, reducing the main share of nitrogen fertilizer, and increasing the main share of compound fertilizer accordingly.
Fertilizer industry: Focus on the agricultural product cycle, the global pattern is prominent regionally, and the country is showing positive signals on the demand side: the global agricultural product cycle continues to bottom out, and the performance of fertilizer giants is declining. In terms of agricultural product cycle analysis, the phenomena we have observed are: ① The sown area of major crops is stabilizing, and the yield growth rate is on a downward trajectory: ② The cultivation yield of major crops is declining, and the difference in fertilizer costs for different crops is obvious; ③ agricultural product prices are declining, and futures contract prices are increasing and hydration. Overall, the planting area of global agricultural products has gradually returned to the average value. Yield has been in a downward channel in recent years, which has affected global fertilizer demand to a certain extent; the continued decline in cultivation yield of major crops has also dragged down the growth in demand for chemical fertilizers; the continued decline in agricultural product prices has also suppressed the level of prosperity in the fertilizer industry. Whether the agricultural product cycle will show signs of recovery in the future is yet to be further observed and confirmed.
Overview of the global supply and demand pattern: regionality is prominent, and East Asia is an important supply and demand variable. ① Urea: New production capacity is slowing down, and demand is concentrated in Asia, especially East Asia; ② phosphate fertilizer: diammonium production capacity will still expand, the supply and demand pattern is prominent regionally, and East Asia is an important supply variable; ③ Potash fertilizer: regional mismatch between supply and demand, and new active factors have emerged in reshaping the pattern.
Domestic pattern: Overall oversupply, positive signs for the industry are showing. The continuous accumulation of new production capacity+declining operating rate intuitively reflects the pattern of oversupply in the industry, but the supply-side margin of increase began to slow down in 2015. Urea: The government's goal of capacity removal is clear, and policies help supply-side reforms; cost differentiation among production enterprises with different processes, electricity and natural gas price reforms have accelerated the process of capacity removal. Phosphate fertilizer: Diammonium accounts for a relatively large share of exports. The industry's “6+2" conference combined production restrictions and tariff adjustments (export tariffs for monoammonium and diammonium were lowered from 100 yuan/ton to zero tariffs) was a favorable factor for the industry. Overall, although the domestic fertilizer industry is still in a state of oversupply, we also see positive factors: for example, the ongoing process of capacity removal, rhythmic coordination of relevant policies, and joint measures within the industry. Based on this, we have reason to expect the fertilizer industry to gradually pick up.
In response to industry upgrades, the company is actively transforming into an agricultural service enterprise
Profit forecasting and valuation
The company's 2015 EPS was 0.03 yuan. Affected by the slump in the fertilizer industry, we expect the company to lose performance in 2016. As global agricultural product prices bottomed out and the fertilizer industry continues to remove production capacity, the company's performance is expected to improve. We expect the company's EPS to be -0.05 yuan, 0.01 yuan, and 0.04 yuan respectively in 2016-2018, corresponding to the closing price of H shares of HK$1.06 on December 29, 2016 (corresponding to RMB 0.95), 2017-2018 PE is 95X and 24X, respectively, giving it a “prudent increase in holdings” rating.
Risk Reminder
1. Expected loss of performance in 2016; 2. The market environment for Hong Kong stocks and A-shares is different; 3. Market risk differences; 4. Exchange risk between Hong Kong dollars and RMB; 5. Prices of agricultural products have declined sharply; 6. The fertilizer industry's capacity removal process has fallen short of expectations; 7. Short-term valuations are too high.