Key points of investment
Incident: The company released its 2020 semi-annual report. It achieved revenue of 3,361 million yuan in the first half of the year, an increase of 7.81% over the previous year. Guimu's net profit was 138 million yuan, an increase of 36.10% over the previous year. After deduction, Fumo's net profit was 117 million yuan, an increase of 29.41% over the previous year. In the second quarter, the company achieved total operating income of 1,503 million yuan, down 6.18% year on year and 19.32% month on month. The company's net profit returned to its mother was 75 million yuan, up 22.75% year on year and 19.05% month on month.
Commentary:
The compound fertilizer price spread widened and increased performance, and the company's gross margin increased significantly from month to month. Prices of compound fertilizers and single fertilizers have fluctuated downward since 2019. In the first half of 2020, the average price of chlorine-based compound fertilizer market fell 8.7% year on year, the average price of sulfur-based compound fertilizer market fell 10.3% year on year, and the price of the three major single fertilizers used as raw materials fell even more significantly. Among them, the market price of potassium chloride fell 16.1% year on year, potassium sulfate fell 8.2% year on year, urea fell 13.2% year on year, and monoammonium phosphate fell 10.9% year on year. Thanks to the decline in single fertilizer prices, the gross margin of the company's compound fertilizer products expanded. In the first half of this year, the gross margin of sulfur-based compound fertilizer reached 16.6%, an increase of 0.73 pct over the previous year, and the gross margin of chlorine-based compound fertilizer reached 17.61%, an increase of 1.06 pct over the previous year. In the first half of the year, the company's sales volume increased by about 14% year on year. The widening price spread and the increase in sales increased the company's performance.
Looking at a single quarter, the trend of compound fertilizer price spreads widening in the second quarter was even more obvious. The average price of chlorine-based and sulfur-based compound fertilizer Q2 markets in Shandong was 1,898 yuan/ton and 2,133 yuan/ton, respectively, with changes of -1.1% and 0 from Q1.
2%, while the average price of the raw material potassium chloride Q2 was -8.4% month-on-month, potassium sulfate was +1.4% month-on-month, urea -2.3% month-on-month, and monoammonium phosphate -5.4% month-on-month. The company's gross sales margin in Q2 reached 20.47% in a single quarter, an increase of 5 over Q1.
87 pct At present, the company's gross sales margin has returned to the level of 2018. In the future, the price of single fertilizer will weaken due to the marginal influence of supply-side reforms, and the three major elemental fertilizers will all be invested in new production capacity. There is limited room for price increases. Compound fertilizer companies will have stronger pricing power, and the company is expected to benefit from the advent of the compound fertilizer boom cycle.
Cash flow was plentiful, and the cost rate continued to decrease during the period. The net cash flow from the company's operating activities in the first half of 2020 was 891 million yuan, an increase of 336.07% over the same period, mainly due to an increase in payments received in the current period compared to the same period, and a decrease in inventory purchases at the beginning of the consumption period. The company's three expenses are well controlled. With the exception of R&D, the cost rate for the period has continued to decline since 2017. In the first half of this year, the company's sales expense ratio was 5.48%, the management expense ratio was 3.02%, and the financial expense ratio was -0.34%, down 0.64 pct, 0.72 pct, and 0.33 pct respectively from 2019. In terms of sales, the company began building a horticultural fertilizer brand in the first half of the year, adopting a sales strategy centered on online sales. In the first half of the year, horticultural fertilizer achieved net sales of more than 9 million yuan. In terms of marketing, the company continues to strengthen CCTV advertising, adhering to the exclusive title “Avenue of Stars”. In the first half of the year, advertising promotion expenses reached 72.64 million yuan, an increase of 23.5% over the previous year. As a To-C end product, continuous promotion of compound fertilizer will help the company sink its brand influence to dealers and end users, driving sales growth.
Risk warning: Prices of single and compound fertilizers have changed drastically, food prices have fluctuated greatly, and the macroeconomy has declined.
Profit forecast: Considering the decline in single fertilizer prices and the expansion of the compound fertilizer industry's gross profit, we adjusted our profit forecast. The estimated net profit returned to the mother in 2020-2022 was 217 million yuan, 415 million yuan, and 503 million yuan respectively (the forecast values before adjustment were 157 million yuan, 336 million yuan, and 425 million yuan respectively). The corresponding PE was 32/17/14 times, maintaining the purchase rating.