1H23 performance is in line with market expectations
Hubei Yihua announced 1H23 results: revenue of 9.095 billion yuan, down 18.2% year on year; net profit of 252 million yuan, corresponding to profit of 0.24 yuan per share, down 84.9% year on year, in line with market expectations. The sharp decline in the company's performance was mainly due to the continued decline in prices of products such as urea, diammonium phosphate, and PVC in the first half of the year. At the same time, some subsidiaries arranged to stop production and maintenance every year, resulting in a decline in production and sales volume. 1H23's net cash flow from operating activities was 1,074 million yuan, a year-on-year decrease of 35.5%.
By product, 1H23's urea achieved revenue of 1,454 billion yuan, down 21.3% year on year. The combined decline in urea prices led to a decline in gross margin of 10.8ppt to 29.3%; PVC achieved revenue of 2.16 billion yuan, a year-on-year decrease of 34.2%. Affected by sluggish demand in downstream real estate, gross margin fell 22.9 ppt to -8.1%; diammonium phosphate achieved revenue of 2.3 billion yuan, down 10.1% year on year, and gross margin fell 13.0ppt to 12.4% due to falling product prices.
The 2Q23 company achieved revenue of 4.377 billion yuan, a year-on-month decrease of 21.7%/7.2%; net profit for the same period was 32 million yuan, a year-on-month decrease of 97%/85%. The sharp decline in profit was mainly due to declining product prices and falling operating rates. 2Q23 gross profit margin was 10.1%, a decrease of 16.4/2.8ppt over the same period.
Development trends
Prices of phosphate fertilizer and urea have bottomed out and rebounded since August, and it is optimistic that the company's profit is expected to recover. According to Baichuan News, the current average market prices of urea and diammonium phosphate are 2,455/3,581 yuan/ton, respectively. Compared with the low in early August, they have recovered 60/350 yuan/ton respectively. Looking ahead, as the price of single fertilizer stabilizes, the sentiment of downstream dealers and compound fertilizer manufacturers is expected to improve. Coupled with the arrival of the peak fertilizer season in August-October, prices of products such as urea and diammonium phosphate are expected to continue to pick up. The company has a production capacity of 1,60,000 tons of urea and 1.26 million tons of diammonium phosphate, and is optimistic that quarterly profits will gradually recover.
The large capital expenditure plan is expected to continue to strengthen the company's cost advantage. According to the company's announcement, in July 2023, the company completed a fixed capital increase of 1,584 million yuan for the 350,000-ton ammonia alcohol relocation project, with an estimated total investment of 3.57 billion yuan; in July 2023, it was increased by 595 million yuan in Yichangbang Puyi Chemical New Materials; in August 2023, it was announced that it plans to invest 5.2 billion yuan for 200,000 tons/year of refined phosphoric acid, 650,000 tons/year of ammonium phosphate relocation and upgrading of supporting equipment. We are optimistic that as the above projects are completed and put into operation one after another, the company's layout in the entire urea and phosphorus chemical industry chain may have more cost advantages.
Profit forecasting and valuation
Due to the decline in the prices of urea and diammonium phosphate 1H23, we lowered our 2023/24 net profit by 27%/30% to 11.4/1.22 billion yuan. The current stock price corresponds to 10.4 times the 2023 price-earnings ratio and 9.7 times the 2024 price-earnings ratio. Due to lowering the profit forecast but considering that the company's profit is expected to improve quarterly, the target price was lowered by 12% to 15 yuan, corresponding to the price-earnings ratio of 13.9/13.0 times in 2023/24, maintaining an outperforming industry rating. Currently, the stock price has 33% room to rise compared to the target price.
risks
The operating rate of urea fell short of expectations, the launch of additional production capacity intensified competition, and terminal demand fell short of expectations.