Affected by the decline in product prices in the first half of 2019, the company's revenue and net profit declined compared with the same period last year. However, we are optimistic about the improvement of supply and demand in the long-term pesticide industry, the company continues to layout new production capacity, improve product structure, and long-term performance growth is expected. Maintain the company's 2019-2021 EPS forecast of 1.21, 1.51 and 1.86 yuan, maintain the target price of 24.2 yuan and "buy" rating.
The performance declined in the first half of 2019 compared with the same period last year, mainly due to the decline in the price of pesticide products. In the first half of 2019, the company realized operating income of 2.568 billion yuan,-7.62% compared with the same period last year, and realized net profit of 250 million yuan,-35.15% compared with the same period last year.
Corresponding to the second quarter of 2019, the company achieved operating income of 1.335 billion yuan, year-on-year-2.32%, month-on-month + 8.25%; net profit 130 million yuan,-28.92%, month-on-month + 8.26%. The decline in the company's performance compared with the same period last year was mainly due to the decline in pesticide prices; the sales income of the company's pesticide business in the first half of the year was 2.475 billion yuan,-10.27% compared with the same period last year.
The weakening demand for pesticides is a drag on short-term profitability and is optimistic about the improvement of long-term supply and demand. The company's first-half gross profit margin fell 5.44pcts to 26.78% year-on-year, and net profit margin fell 4.13pcts to 9.98%. We believe that although weak demand leads to weaker pesticide prices in the short term, in the long run, with the tightening of supply and demand in the industry, product prices are expected to rise, and the company's profitability is expected to improve.
Projects under construction are growing steadily, and we look forward to the completion of production capacity to release performance. In the first half of 2019, the company made steady progress in projects under construction, with a capital expenditure of 141 million yuan. The project under construction at the end of the period increased by 105 million yuan compared with the beginning of the period, of which the Anhui Red Sun Public works increased by 31.52 million yuan, the 20,000 ton tetrachloropyridine production line increased by 18.71 million yuan, and the 3000 ton glyphosate project increased by 10.49 million yuan. The company is expected to release its performance after the construction capacity is put into production.
It is proposed to build 20,000 tons of glyphosate and 10,000 tons of prochloraz to improve the product structure. The company intends to raise no more than 1.8 billion yuan by issuing convertible bonds and invest in projects of 20, 000 tons of glyphosate and 10, 000 tons of prochloraz, with planned investments of 1.67 billion yuan and 520 million yuan respectively At present, the company has obtained the project land through bidding, the project construction period is 12 months, and the 10,000-ton prochloraz project has been approved by EIA. The company can improve the product structure through the layout of new production, and is expected to further expand its market share by virtue of its cost advantage in the future.
The second phase of the employee stock ownership plan is in preparation to ensure the long-term development of the company. The company launched the second phase of the employee stock ownership plan, which is aimed at no more than 15 Supervisors and no more than 113key employees of the company, and plans to raise no more than 35.5 million yuan to buy shares under the employee stock ownership plan. Following the completion of the first phase of the employee stock ownership plan in February 2019, this plan is expected to further promote the formation of a community of interests for the long-term development of the business.
Risk factors: declining global demand for pesticides; falling product prices; and lower-than-expected capacity release.
Investment suggestion: under the background of long-term good supply and demand in the pesticide industry, the company continues to layout new production capacity, improve product structure, and long-term performance growth is expected. The net profit forecast of the company from 2019 to 2021 is 702 million / 876 million / 1.083 billion yuan, and the corresponding EPS is 1.21 1.51 and 1.86 yuan respectively. Maintain the target price of 24.2 yuan (corresponding to 20 times PE in 2019) and "buy" rating.
