Key points of investment
Stanley: Transforming agricultural service providers and opening up new space for growth
The company specializes in the production and sale of compound fertilizer. Its business scope also includes grain storage, agricultural information consulting, agricultural technology promotion, agricultural trade, etc. At present, the competition of compound fertilizer companies has changed from a traditional price war to a competition in terms of brand, channel, cost, service, and scale. The company has the following competitive advantages: 1) Precise marketing brings considerable benefits. Since listing, the company has spent an average of about 170 million dollars on advertising every year, and with accumulated brand awareness, the company's advertising efficiency has continued to improve. Although advertising expenses were reduced in 2018-2019, the revenue corresponding to every 1 yuan of advertising investment was as high as 53 yuan, 1.7 times that of 2017. 2) Sales-based talent system with a complete incentive mechanism. The proportion of the company's sales staff is increasing year by year, and employee expenses are linked to revenue growth, and per capita income is rising year by year. 3) Production capacity and channels are spread all over the country, breaking through the traditional sales radius. The company already has 12 major production bases in the country, covering major grain-producing regions in East China, Central China, North China and Northeast China, with transportation cost advantages. 4) Introducing new agrochemical services. The company established Stanley Agricultural Service Co., Ltd., a wholly-owned subsidiary, to develop the planting industry chain and build an agricultural service platform. The earthworm soil surveying laboratory cooperated with Agsource in the United States effectively solved the problem of random fertilization. 5) New products continue to be introduced, providing impetus for market expansion. The company continues to step up the development of new fertilizers, and with the help of an efficient agrochemical marketing network, new products are rapidly introduced to the market, providing continuous support for the company's revenue growth. 6) Abundant cash flow and capital strength to “transform into an agricultural service provider”. The company's fixed asset investment was mainly concentrated before 2015. The year-on-year growth rate of depreciation and amortization has slowed in recent years, which is expected to lead to marginal improvements in performance.
Compound fertilizer industry logic: Multiple factors resonate, industry reversal accelerates 1) Stopping falling and stabilizing staple food prices will drive a recovery in planting area. Since 2015, domestic staple food purchase prices have been falling all the way down, suppressing agricultural production enthusiasm. In February 2020, the lowest purchase price of rice stopped falling and stabilized. Early indica rice, mid to late indica rice, and Japonica rice were 121 yuan/ton, 127 yuan/ton, and 130 yuan/ton respectively, which is expected to raise farmers' expectations and enthusiasm for planting income and drive up planting area. Furthermore, in order to ensure food security, many parts of the country have stepped up measures to encourage planting and promote farmers' return to agriculture, which will also drive a recovery in planting area and demand for compound fertilizer. 2) After five years of elimination of the supply side, concentration is expected to increase at an accelerated pace. Since 2015, the conflict between oversupply and demand in the compound fertilizer industry has been highlighted. Profits have continued to deteriorate, compounded by factors such as cancellation of preferential policies and stricter environmental protection, which has prompted the continuous withdrawal of old production capacity in the industry. Since 2017, the industry has withdrawn a total of 17.75 million tons of production capacity, the industry's operating rate has returned to a reasonable level, and CR4 has also increased to 21.6%. The concentration is expected to increase further in the future. 3) The price of single fertilizer declined, and the pressure on the cost side reversed. In the past 2-3 years, simple fertilizers such as urea and ammonium phosphate have ushered in a sharp rise along with supply-side reforms, which has accelerated the decline in the profitability of the compound fertilizer industry. In 2020, new production capacity for elemental fertilizers such as urea and phosphate fertilizer will be put into operation. Prices are expected to decline, reducing the pressure on compound fertilizers.
Profit forecast: The company's revenue is estimated to be 6.732 billion yuan, 7.083 billion yuan, and 8.621 billion yuan respectively in 2020-2022, net profit attributable to 157 million yuan, 336 million yuan, and 425 million yuan respectively. PE is 36.5 times, 17.1 times, and 13.5 times respectively, covering the “buy” rating for the first time.
Risk warning: The price boost of agricultural products fell short of expectations, the rise in single fertilizer prices brought cost pressure, environmental protection and production safety risks, and the risk of changes in agricultural policies.