Core viewpoints
The company's revenue grew steadily in 2018, and the decline in gross profit margin was a drag on profits. However, we are optimistic that the company can improve the industrial chain through the layout of new production capacity, and the long-term performance growth can be expected. Due to the short-term decline in product prices and the higher-than-expected increase in raw material costs, we have lowered the company's 20-year return net profit forecast to 702 million yuan and target price to 24.2 yuan (original target price 30 yuan), maintaining the "buy" rating.
Operating income grew steadily and gross profit margin fell as a drag on profits. In 2018, the company achieved revenue of 5.908 billion yuan, + 16.5% compared with the same period last year. Sales of major products such as paraquat, diquat, chlorpyrifos and other major products led to a steady increase in revenue. The company achieved a net profit of 637 million yuan for the whole year,-10.8% compared with the same period last year, which was lower than expected. The decline in the company's profits was mainly due to higher production costs due to the contraction in the supply of raw materials upstream, with the year-on-year gross profit margin falling 2.8pcts to 28.9%.
We believe that in the future, under the policy environment of tighter monitoring in Anhuan, tightening supply and demand is expected to drive product prices up, and the company's gross profit margin can be improved.
Layout of multi-product capacity, long-term performance growth can be expected. In 2018, the company has successfully completed and put into production 10,000 tons of biochemical diquat, 10,000 tons of biochemical VB3, 25000 tons of biochemical pyridine base and 3000 tons of biochemical ammonium phosphine.
At the end of 2018, the company signed the investment framework agreement for Chongqing longevity production base project, which intends to invest 1.68 billion yuan to build 20, 000 tons of biochemical glyphosate project. We are optimistic that the company will improve the integrated industrial chain by actively laying out new production capacity and starting a new base. After the above production capacity is fully released, the company is expected to further increase its market share by virtue of its capacity and cost advantages, and long-term performance growth is expected.
The acquisition of Chongqing Zhongbang has been completed and the industrial chain is effectively coordinated. In 2018, the company completed the acquisition of 100% equity interest in Chongqing Zhongbang with 1.186 billion yuan, with a commitment of no less than 6449 yuan in net profit in 2018-2020 and 68.2 million yuan in net profit in 2018, exceeding the performance commitment. Chongqing Zhongbang has 2jin3-dichloropyridine and ZPT production capacity to form effective coordination with the company's existing industrial chain. We believe that under the background of limited production and tight supply and demand pattern of dichloropyridine leading enterprises, the company's market share is expected to increase.
Risk factors: increased competition in the industry; lower-than-expected capacity release; declining global demand for pesticides.
Investment advice: due to the short-term decline in product prices and higher-than-expected raw material costs, we downgrade the company's 20-year net profit forecast to $702 million (original forecast is $1,499,1356 million), corresponding to EPS of 1.21 yuan 1.51 yuan; we forecast 2021 net profit of 1.083 billion yuan, corresponding to EPS1.86 yuan. According to the industry average valuation level, the company will be given 20 times PE in 2019, lowering the target price to 24.2 yuan (the original target price is 30 yuan), and maintaining the "buy" rating.