Main points of investment:
The company released three quarterly reports, achieving operating income of 8.939 billion yuan (YoY+162.39%) and net profit of 328 million yuan (YoY+134.08%), which is basically in line with our expectations, of which the investment income is 75.11 million yuan, an increase of 138.71% over the same period last year. The main reason is that the company stripped off the non-performing assets Nongyi network. The growth of the main business mainly comes from the rise in the volume and price of the company's products, and the continuous expansion of the trade scale of Huifeng Petrochemical. Q3 realized operating income of 2.89 billion yuan (YoY+96.49%,QoQ+1.44%) in a single quarter, net profit of 94 million yuan (YoY+163.10%,QoQ+9.30%), and 95 million yuan after deduction, which reached a record high in a single quarter. We believe that this is the result of the company's pesticide and trade double main industries. The company forecasts a net profit of 419-506 million yuan for the whole year. Corresponding to Q4 0.91-178 million yuan in a single quarter, the company is expected to continue to benefit from the rise in the volume and price of products brought about by environmental regulation in the fourth quarter, trial production of glyphosate is expected to be put into production in the fourth quarter, and the trade scale of Huifeng Petrochemical is expected to expand again.
Benefiting from stricter environmental regulation, the traditional main business is expected to rise in both volume and price, providing performance safety pads. The company is the leader of prochloraz, octanoyl bromobenzonitrile, fluconazole and other subdivided raw drugs, with a large proportion of domestic production capacity and high voice. In the environment of stricter environmental regulation, the company, as a relatively compliant pesticide enterprise, has benefited from the stock replacement opportunities brought by the withdrawal of small scattered sewage production capacity, and the volume and price of its main products have risen. The company continues to acquire the upstream and downstream enterprises of the industrial chain, actively extend the industrial chain, forming a complete industrial chain of "raw materials-intermediates-crude drugs-preparations", and the production advantages of traditional products are further highlighted. Domestic pesticide exports have continued to grow as a whole, but the overall output has declined due to the impact of environmental protection. Overseas multinational enterprises are expected to replenish inventory for a long time, and the company's pesticide products will benefit in the medium and long term, providing a safety cushion for performance.
Glyphosate dominates the future growth of the company. The company issues convertible bonds to raise 845 million yuan for the technical transformation project of glyphosate, anti-inverted ester and methoxyfenozide. The price of debt-to-equity swap is 7.74 yuan per share, which is significantly higher than the current stock price to reflect the management's confidence in the intrinsic value of the company. Glyphosate benefits from the withdrawal of paraquat and the promotion of genetically modified crops in China, and it is expected to increase the demand for glyphosate. If glyphosate replaces paraquat 1 pear 3 in domestic market share, it will increase the demand for 6300 tons of crude drugs; in the field of genetically modified crops, it is expected to replicate the growth path of wheat straw. At the same time, as the environmental protection and safety regulation raises the entry threshold, the industry expansion may be slower than expected, and prices are expected to remain strong for a long time. The commissioning of the convertible bond project led by glyphosate will open the growth of the company.
Diversified layout-from raw drugs to preparations, from pesticides to warehousing. The company's future is to expand the preparation business, the second is to build warehousing trade business. The proportion of the company's patented products and differentiated preparation products in the preparation is increased, and the dosage of the preparation will strengthen the pesticide business. The scale of warehousing trade has also expanded rapidly, and the company plans to double its production capacity in Phase II. At present, the gross profit margin of this business is low, and the future income and profit flexibility are larger.
Maintain earnings forecasts and maintain "buy" ratings. We estimate that the operating income from 2017 to 2019 is 114.37 yuan, 137.67 yuan and 16.014 billion yuan respectively, and the return net profit is 4.30,5.35 and 607 million yuan respectively. At present, the stock price corresponds to PE as 20X/17X/15X.
Taking into account the expectation of recovery in the lower reaches of the pesticide industry, less downward risk in the industry, and the current tightening of environmental regulation, product prices are expected to form a short-term catalyst, Huifeng Petrochemical has great flexibility in trade scale and strong growth in the future. Maintain a "buy" rating.
Risk hints: the pesticide industry is declining; glyphosate production is lower than expected; Huifeng Petrochemical expansion is lower than expected.
