The 2012 results are in line with expectations Guannong Co., Ltd. announced the 2012 results today, achieving operating income of 1.07 billion yuan, an increase of 12.7% year on year, and net profit of 249 million yuan, an increase of 53% year on year, or 0.69 yuan per share, which is basically in line with our expectations. The company achieved an investment income of 385 million yuan in Luo Potash, 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 accrued 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 high international and domestic stocks, and potash prices are under pressure. Currently, potash stocks in major international consumption areas (including China) are high, while the inventories of North American potash producers have been rising for 5 consecutive months and higher than the average inventory value for the past 5 years. After the Spring Festival, domestic market procurement of potash fertilizer was still sluggish, putting pressure on potash fertilizer prices. India's potash subsidies continue to decline. In the 2013-14 chemical fertilizer year, India's total subsidy amount for domestic chemical fertilizer was basically the same as compared to the same year, but the one-ton subsidy for potash fertilizer was still reduced. In addition, the exchange rate of the Indian rupee against the US dollar is still low. It is expected that India's imports of potash fertilizer will remain low this year. The recent sharp drop in international food prices may affect downstream potash prices. Recently, with the gradual elimination of the effects of the 2012 US drought, while US food inventory data were higher than expected, futures prices for major agricultural products such as soybeans, corn, and wheat all fell sharply, which may affect the downstream's ability to withstand potash prices. Valuation and recommendations We believe that the domestic potash market will remain weak and consolidated in 2013. The company's return on investment in Luo Potash will be affected and reduced, and the company's rating will be downgraded 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 forecast for 2013-14 to 0.76 yuan and 0.83 yuan, respectively (increases of 6% and 5%). The current stock price for 2013-14 PE is 21x and 20x, respectively. Risk 1. Potash demand is weaker than expected; 2. Downside risk at the center of market valuation