Performance is in line with expectations
Guannong shares achieved operating income of 1.1 billion yuan in the first three quarters of 2015, an increase of 35% over the same period last year. The net profit was 153 million yuan, down 12% from the same period last year, and earnings per share was 0.18 yuan, which was in line with our expectations.
Trend of development
In response to the rising cost, Luo potassium raised the factory price. After the preferential policy of first levying and then returning value-added tax on potash fertilizer was cancelled, because the deduction of resource-based potash fertilizer was less, it increased the tax burden of Luo potassium. We estimate that the cost of tax burden will directly increase by more than 300 yuan / ton. With the adjustment of railway freight, the total cost will be increased by 400 yuan / ton. Since September 1, Luo potassium has raised its ex-factory price to cope with the rise in cost prices, thus transferring some of the costs to downstream circulation and consumers.
China Investment Luo potassium plans to expand production by 300000 tons to enhance the scale effect. Luo potassium plans to increase the production capacity of 300000 tons of potassium sulfate based on the original production capacity of 1.2 million tons of potassium sulfate, and plans to put into production in December of 16 years, with a total capacity of 1.5 million tons of potassium sulfate after it is put into production. We believe that after it is put into production, it will enhance the economies of scale and boost the level of profitability.
Profit forecast
Due to the decline in gross profit margin of our main agricultural products, we cut EPS15% to 0.21 yuan in 2015 and EPS15% to 0.23 yuan in 2016.
Valuation and suggestion
To maintain a neutral rating, the current share price corresponds to 50x and 45x respectively for 2015-2016 Pamp E. The target price will be reduced by 23% to 12 yuan, corresponding to 52x for 16-year Pmax E.
Risk
Fertilizer demand growth did not meet expectations; extreme weather; valuation center moved down.