DMF is a new product from Heart to Heart and currently has a production capacity of 200,000 tons. As DMF prices fell sharply, the contribution to the company's performance declined. Therefore, we adjusted the company's profit forecast. The company's net profit attributable to the parent in 2023-2025 is estimated to be 1.38 billion, 1.52 billion, and 1.83 billion dollars, up 6%, 10% and 21% over the previous year. Adjust the target price to HK$6, corresponding to the predicted price-earnings ratio of 46 times and 4.3 times in '22 and 23. There is room for a 57% increase from the current price. Buy the rating.
Report summary
Increase production capacity, expand scale, and consolidate the leading position in the industry. In '23, China Heart to Heart Fertilizer will have several projects completed and put into operation one after another, which will be the driving force for performance growth. The second phase of the 100,000 ton DMF project at the Jiangxi base was successfully put into production in January, increasing the Group's DMF production capacity to 200,000 tons/year. Heart to Heart will further increase the market share of Southern Chemicals and enhance brand influence. There are 700,000 tons of urea under construction in Xinxiang, Henan. The new production capacity will be put into operation in the first half of the year, consolidating the leading position of Heart to Heart Urea. Furthermore, the company plans to build a million-ton ecological fertilizer project in Dayushan Economic Development Zone in Huludao, Liaoning. The project is mainly divided into three phases, with an investment of about 300 million yuan in the first phase. The proposed construction includes a compound fertilizer production line, steam boilers, safety facilities, living ancillary facilities, etc., with an additional capacity of 550,000 tons of compound fertilizer, which will be put into operation by the end of the year.
The price trend of urea was stable in the first quarter, and the peak demand season began in March. The price of urea rose sharply in '22 and went out of a wave pattern one after another. Overall, it has been fluctuating at a higher position. It is expected that urea prices will fall slightly in '23, making it difficult to break through last year's high. As of mid-March '23, the price of urea was 2,700 yuan/ton, consistent with the price at the beginning of the year. In the first two months of 23 years, downstream demand was weak, agricultural demand did not start, industrial demand recovered slowly, and the daily production of urea remained high. Therefore, in a situation where supply and demand were weak, urea prices continued to fluctuate weakly. The weather warmed up after entering March. As spring farming and preparation work progressed one after another, the urea industry also officially entered the peak season of the year, supporting the rise in urea prices.
In order to enhance the Group's long-term development advantages, the shareholding of Cryogenic Energy was increased by 9.8%. From December 15, 2022 to December 29, 2022, China Heart to Heart Fertilizer acquired a total of 10.76 million shares of cryogenic energy through the open market, equivalent to about 9.8% of the issued share capital of cryogenic energy, at a total cost of about RMB 240 million. Currently, China Heart to Heart Fertilizer holds about 48% of the shares of Cryogenic Energy. Cryogenic Energy's main business is the production and sale of synthetic gases, air separation gases, electronic special gases, and energy gases. We believe that cryogenic energy is an extremely high-quality asset, and listing on A-shares is beneficial to corporate financing and development.
Adjust the target price to HK$6 and buy the rating. The company's net profit is expected to be 1.38 billion, 1.52 billion and 1.83 billion in 2023 to 2025, up 6%, 10% and 21% year-on-year. Adjust the target price to HK$6, corresponding to the predicted price-earnings ratio of 46 times and 4.3 times in '22 and 23. There is room for a 57% increase from the current price. Buy the rating.
Risk warning: industry competition intensifies; the epidemic intensifies; prices fall short of expectations