occurrences

The company released its 2019 annual report: in 2019, the company achieved a total sales volume of 1.51 million tons of agricultural fertilizer, a year-on-year decrease of 100,000 tons; achieved operating income of 22.951 billion yuan, a year-on-year decrease of 0.20%. Profit attributable to shareholders was 616 million yuan, an increase of 33.72% over the previous year.

Brief review

Significant increase in profit margins in production and distribution segments led to increased performance

As a national agricultural fertilizer leader with integrated production and distribution, the company internally divides revenue according to the three divisions of basic fertilizer, distribution, and production. Among them, the basic fertilizer division buys and sells simple fertilizers such as nitrogen, phosphorus, and potassium for the company, and the distribution division purchases and sells compound fertilizer and new fertilizers through distribution channels. The production division mainly produces chemical fertilizer and calcium feed by the company itself. Among them, products sold by the production division to the distribution division are deducted as internal set-off in settlement.

During the reporting period, the company's nationwide distribution network was relatively stable, and the revenue and profit of the Basic Fertilizer Division were basically the same as in 2018. Meanwhile, the production division achieved segment profit of 265 million yuan, an increase of 230% over the previous year, and the distribution division achieved segment profit of 108 million yuan, an increase of 57% over the previous year, contributing to an increase in the company's performance. The increase in the performance of the two divisions was mainly due to:

(1) The production division mainly spent production enterprises to continuously strengthen basic work, reduce costs and increase efficiency, and improve operational efficiency. As a result, the efficiency increased year on year; (2) The company's production and sales volume of high-end compound fertilizer, differentiated nitrogen fertilizer, and novel phosphate fertilizer continued to expand, with a total sales volume of 763,900 tons, an increase of 31.87% over the previous year. The adjustment of the business structure increased profits and revenue.

Demand for agricultural fertilizer is relatively rigid, and the company is expected to benefit from the recovery in the phosphate fertilizer industry chain and the global spread of COVID-19 since 2020, but agricultural demand is generally more rigid and less affected by the pandemic, and some governments have increased food security inventories under the impact of the epidemic, boosting demand for grain cultivation. On the other hand, among major fertilizer varieties, after experiencing a decline since 2018, the price of phosphate fertilizer has basically bottomed out before the outbreak of the epidemic in 2020.

At present, there has been a marked improvement in supply and demand throughout the industry. On the supply side, on the domestic side, due to the continuous promotion of supply-side reforms in the industry, domestic phosphate fertilizer production has been declining continuously since 2016. Among them, according to the company's annual report, domestic phosphate fertilizer production fell by about 4.6% year on year in 2018, and continued to decline by about 3.75% year on year to 16.727 million tons in 2019; overseas, large overseas phosphate fertilizer companies have no large-scale phosphate fertilizer capacity expansion plans other than Morocco's OCP. On the demand side, global demand for phosphate fertilizer is growing in countries or regions with rapid population growth, such as Brazil and India, and improvements in supply and demand are expected to drive the global and domestic phosphate fertilizer industry to bottom out and rebound.

Sinochem Fertilizer has a complete industrial chain of phosphate ore → phosphate fertilizer → phosphorus compound fertilizer, and phosphate ore production ranks among the highest in China, so it is expected to benefit from the warming of the industry.

Production and sales of new compound fertilizers continue to expand, and it is expected that performance will increase

The company's strategy favors the production and market development of high-end compound fertilizer, differentiated nitrogen fertilizer, and novel phosphate fertilizer. Production and sales have continued to grow in recent years. At the end of 2019, the company's Fuling base launched the “Phase I Project with an Annual Output of 200,000 Tons of Fine Phosphate and New Special Fertilizer”. The planned product plan includes an annual output of 200,000 tons of high-quality fine phosphate, 700,000 tons of new special fertilizer, and 900,000 tons of phosphogypsum comprehensive utilization capacity. While targeting new fertilizers with high added value, the project made full use of the company's own resource endowments to provide the company's future growth.

We expect the company's net profit for 2020-2022 to be 747, 848, and 981 million yuan, respectively. The corresponding PE will be 6.4, 5.6, and 4.9 times, respectively. It will be covered for the first time and given a “increase in holdings” rating.