The performance was lower than expected
Guannong shares announced its results for the first half of 2016: operating income was 684 million yuan, down 19% from the same period last year; net profit belonging to the parent company was 10 million, down 91% from the same period last year, corresponding to a profit of 0.01 yuan per share. Due to the substantial decline in the profits of the shareholding company Luo potassium, the company's investment income has decreased, and the company's performance has been significantly lower than expected.
Trend of development
The potash market remains in the doldrums, with both volume and price falling. In the first half of 2016, the global potash market continued the downturn of 2015, with high inventories in the three major demand countries of China, Brazil and India, and gradually lower quotations from international suppliers. The downturn in the international market affected domestic import contract negotiations, with a "double drop" in sales and selling prices. The price of the main products of the company's shareholding company, Luokang, fell 26% year on year, and sales volume decreased 24% year on year, resulting in a 92% drop in profits.
The market situation of agriculture-related industries is grim, and the supply and demand of some products have warmed up. The market for cotton processing and white granulated sugar picked up; the market for the fruit and vegetable processing industry was in the doldrums in 2016. The sales volume and prices of tomato products declined compared with the same period last year, and revenue dropped sharply.
Profit forecast
Due to the depressed market conditions in potash and agriculture-related industries, we have lowered our earnings per share forecasts for 2016 and 2017 by 86 per cent and 38 per cent respectively from RMB0.20 and 0.22 to RMB0.03 and RMB0.14 respectively.
Valuation and suggestion
At present, the company's share price corresponds to 283x and 59x respectively in 2016-2017. We maintained a neutral rating, but lowered our target price by 11.76% to 8.5 yuan, which is 5.2% upside from the current share price. The target price corresponds to the 17-year price-to-earnings ratio of 61x.
Risk.
Potash market remains in the doldrums; agricultural products market continues to be under pressure; extreme weather; valuation center moves down.