Key Views
Comprehensive agricultural service providers, mainly in the seed industry, are backed by the strong resources of central enterprises. Since 2011, the company has embarked on a path of seed and agrochemical business expansion centered on mergers and acquisitions with the financial advantages of Nongfa Group, the actual controller, and the background of central enterprises. Currently, the company has 12 holding companies, and its business covers the crop seed industry, pesticides, fertilizers and comprehensive agricultural services. In 2015, the company achieved the phased goals of being number one in the country in the wheat seed industry, sixth in the country in the rice seed industry, and ninth in the country in the corn seed industry, ranking fourth in the country in its overall strength. In terms of revenue composition, fertilizer trade is the company's main source of revenue. In 2019, the company achieved operating income of 5.136 billion yuan, of which the fertilizer trade/seed/pesticide business accounted for revenue respectively
73.87%/11.78%/6.33%; Judging from the gross profit composition, the seed business is the company's main source of gross profit. In 2019, the company achieved gross profit of 286 million yuan. Among them, the fertilizer trade/seed/pesticide business accounted for 9.99%/47.50%/24.91% respectively.
The inflection point of the major planting cycle has arrived, and the seed industry has ushered in a boom cycle
The seed business is the company's main source of profit. We believe that an inflection point in the seed industry has already occurred, and the company is expected to usher in a profit inflection point. On the supply side of corn: In the context of accelerated inventory removal, under the influence of the soybean revitalization plan, domestic corn planting area did not recover but declined further in 2019, and the State Reserve inventory & planting area both bottomed out. At the same time, the threat of meadow gnats to corn production cuts is still there, and the corn supply side is under pressure. Looking at the demand side, the national breeding sow inventory first changed month-on-month in October 2019, and achieved positive year-on-year growth for the first time in June 2020. With the rapid release of production capacity for breeding sows, demand for breeding corn will gradually increase. The intensification of the conflict between corn supply and demand will support the rise in corn prices and drive the accelerated destruction of stocks of other grain crops such as wheat and rice. China's planting industry will usher in a major inflection point of economic reversal.
On the wheat side: On the supply side, during the Spring Festival this year, some of China's major wheat-producing regions experienced the most serious rust disease in the past ten years. Subsequent extreme weather such as cold spring, hot and dry winds, and even overcast and rainy weather led to a decline in winter wheat production by a certain margin.
In this summer's grain purchases, the total amount of wheat purchased in the main production areas was only 42.857 million tons, a year-on-year decrease of 9.283,000 tons. Looking at the demand side, against the backdrop of rising corn prices, demand for wheat replacement will continue to rise, driving inventory removal to an accelerated pace, and I am optimistic that wheat prices will rise in the future. The company, as the absolute leader in domestic wheat seeds, will benefit significantly.
Fertilizers & Pesticides: Thanks to rising food prices, agricultural demand is expected to recover
China is a major producer and marketer of compound fertilizer. In 2013-2018, the amount of compound fertilizer applied in China stabilized at around 22 million tons. At the same time, it showed a slight increase, with CAGR +1.97%.
Over the past few years, due to low food prices and the tightening of environmental policies, the industry's small to medium production capacity has been cleared at an accelerated pace. Against the backdrop of bullish prices for major food crops such as corn and wheat, increasing farmers' enthusiasm for planting will boost demand for agricultural materials in terms of both volume and price. Huaken Company, which is controlled by the company, is one of the four domestic companies that have the right to import and operate chemical fertilizers, and is expected to fully benefit from the recovery in agricultural demand. At the same time, since the RMB has clearly appreciated against major international currencies since this year, the company's fertilizer import business will generate a certain amount of exchange income, increasing the company's profits.
Investment advice:
We expect that in 2020-2022, the company's operating income will be 56.50/65.18/7.832 billion yuan respectively, net profit of 5500/9700/143 million yuan respectively, and the corresponding EPS will be 0.05/0.09/0.13 yuan respectively. The current stock price corresponding to PE will be 99/56/38X respectively, covered for the first time, and given a “buy” rating.
Risk warning:
The risk of natural disasters, the risk of the spread of the epidemic, and the risk of seed sales falling short of expectations.
