Incidents: 1. Since July 1, 2019, the price of yellow phosphorus has risen 26% from 15,100 yuan/ton to 19,100 yuan/ton; 2. The company released its 2019 semi-annual report, achieving revenue of 1,542 billion yuan, +11.77% over the same period last year; achieving net profit of 26.37 million yuan, -2.25% year on year.

Prices in the yellow phosphorus industry chain are expected to continue to rise. As the national “three phosphorus” special investigation and rectification work continues to advance, the phosphorus chemical industry is facing increasing pressure on safety and environmental protection. Since July 2019, due to the impact of centralized environmental protection and remediation of the yellow phosphorus industry in southwest Yunnan, Guichuan and other regions, the industry has stopped production capacity of 770,000 tons, and the operating rate of yellow phosphorus has dropped sharply by 26.36 pct to 37.11%, driving the price of yellow phosphorus up 9,100 yuan/ton to 2,4,200 yuan/ton. Subsequently, as some yellow phosphorus manufacturers started construction and resumed production one after another, the industry's production capacity recovered to less than 500,000 tons, and the operating rate recovered to 48.90%. Coupled with the off-season demand in the industry, the price of yellow phosphorus gradually fell back to 15,600 yuan/ton. After entering September, against the backdrop of gradual improvement in downstream demand, the commencement of yellow phosphorus enterprises was restricted again 11 years ago. The industry's production capacity stopped again increased to 713,500 tons, the industry's operating rate reached a new low of 34.20%, and the price of yellow phosphorus rose steadily to 19,100 yuan/ton. Downstream yellow phosphorus mainly includes industries such as thermal phosphoric acid, phosphorus trichloride, and detergent. Among them, thermal phosphoric acid is of good quality, and it is difficult to be replaced by wet phosphoric acid in the short term. The market is expected to be stable, moderate and positive in the future. There is still room for development of glyphosate and organophosphorous pesticides. Demand is stable in sectors such as detergents. The operating rate of domestic yellow phosphorus enterprises is low during the traditional peak production season in July-September, industry inventories continue to be low, demand is relatively stable, and prices are expected to continue to rise in the future. Prices of products related to the yellow phosphorus industry chain have also risen. Since July, the price of phosphoric acid has risen 16% from 4,900 yuan/ton to 5,700 yuan/ton, and the price of glyphosate has risen 7% from 23,770 yuan/ton to 25,500 yuan/ton.

Integrated development of the phosphorus industry chain. The company is an integrated enterprise in the phosphorus chemical industry chain, with a production capacity of 180,000 tons of yellow phosphorus, including 144,000 tons of equity production capacity, 720,000 tons of phosphoric acid production capacity, and 95,000 tons of phosphate production capacity. Benefiting from rising prices in the “yellow phosphorus-phosphate-phosphate” industry chain, the company's performance is expected to continue to be released. The company's coal-to-gas power generation project and 220KV high-voltage line project were completed and put into use one after another, effectively reducing the production cost of yellow phosphorus. The completion of the Xuanwei Xiaojing Railway Station construction project effectively improved the logistics and transportation conditions of Xuanwei Phosphoelectric, improved logistics transportation efficiency, and reduced logistics costs. The company's new products, such as semiconductor-grade phosphoric acid, pharmaceutical-grade calcium hydrogen phosphate, and electronic chemicals, were successfully put into production and gradually entered the downstream market. They were unanimously recognized by customers, and the company's extension to high-value-added products in the industrial chain achieved certain results.

Profit forecasts and ratings. On the one hand, the company is optimistic that it will benefit from domestic “three phosphorus” rectification, and on the other hand, it will benefit from a reduction in its own costs, and its performance is expected to enter a stage of continuous release. The company is actively promoting the acquisition of Hanbang Petrochemical (with a PTA production capacity of 2.8 million tons), which will help further enrich the company's product structure and ensure the company's long-term development. Without considering acquisitions for the time being, we expect the company's net profit for 2019-2021 to be 172 million, 220 million and 244 million respectively, CAGR of 32.8%, EPS of 0.26 yuan, 0.33 yuan and 0.37 yuan respectively, and corresponding PE of 23 times, 18 times and 16 times, respectively. Considering the integrated development of the company's phosphorus chemical industry chain, its performance continued to improve. It was covered for the first time, giving it a “buy” rating.

Risk warning: Product prices have declined, new construction projects have fallen short of expectations, and restructuring has fallen short of expectations.