Core views

Demand for pesticide terminals was sluggish in the first half of 2023. Affected by the Russia-Ukraine conflict, industry inventories were high, and glyphosate prices bottomed out. Faced with an unfavorable situation, the company's operations bucked the trend. In the first half of the year, it achieved operating income of 2,673 million yuan, a year-on-year decline of 48.91%; net profit of 194 million yuan, a year-on-year decrease of 84.03%; net profit of 197 million yuan, a year-on-year decrease of 84.08%; and basic earnings per share of 0.4423 yuan/share, a year-on-year decrease of 84.29%. In the future, with de-inventorying, the company's multi-base layout, and innovative drugs opening up room for growth, downstream demand will gradually recover, and glyphosate prices are expected to bottom out and rebound, driving the company's performance growth.

occurrences

The company released its 2023 semi-annual report

The company released its 2023 semi-annual report on August 17, 2023. In the first half of the year, it achieved operating income of 2,673 million yuan, a year-on-year decrease of 48.91%; net profit of 194 million yuan, a year-on-year decrease of 84.03%; net profit of 197 million yuan, a year-on-year decrease of 84.08%; basic earnings per share were 0.4423 yuan/share, a year-on-year decrease of 84.29%. Among them, revenue for the second quarter was 1,320 million yuan, down 47.45% year on year, and 2.43% month on month; net profit returned to 70 million yuan, down 87.64% year on year, and decreased by 43.31% month on month; net profit after deducting non-return net profit of 77 million yuan, down 87.18% year on year. In the future, along with the release of the downstream demand side, the company's performance is expected to improve.

Brief review

The price of glyphosate, which is the main company, has bottomed out and is expected to rebound due to a recovery in demand

The growth rate of the global economy slowed in the first half of 2023, the pesticide industry experienced cyclical fluctuations, and demand for pesticide terminals was sluggish. At the same time, due to the Russia-Ukraine conflict, domestic and foreign pesticide stocks were high, and prices of pesticide raw materials such as glyphosate bottomed out. The company is one of the four largest glyphosate manufacturers in China. It has a glyphosate original drug production capacity of 70,000 tons/year, of which the glycine route has a production capacity of 30,000 tons/year and the IDAN route has a production capacity of 40,000 tons/year. Faced with an unfavorable situation, the company operated steadily, and the momentum for endogenous growth and epitaxial development increased markedly. Affected by a sharp decline in the market price and sales volume of glyphosate, a major pesticide product, it achieved operating income of 2,673 billion yuan, a year-on-year decrease of 48.91%; net profit attributable to shareholders of the parent company was 194 million yuan, a year-on-year decrease of 84.03%. Subsequently, with the continuous development of de-inventorying and the gradual recovery of domestic and foreign demand sides, the price of glyphosate, the main product, is expected to rebound.

Accelerate the construction of two and three bases, and add new kinetic energy with flame retardants

The company's 998 base flame retardant phase II and heating center phase I all entered the substantial construction stage as scheduled, and on the basis of existing bases, accelerated the construction of the second and third bases in Zhijiang and Guizhou to promote the industrialization of innovative drugs and the layout of the phosphorus chemical recycling industry chain, which is conducive to product structure optimization, industrial layout adjustment, and accumulation of momentum for the company's high-quality development. At present, the company has formed a pattern where the main base in Nantong, the base in Zhijiang, the base in Weng'an, and the four major bases of Unicorn in Nantong are combined.

The company's flame retardant and its supporting intermediates project production line (20,000 tons/year phosphorus oxychloride plant, 10,000 tons/year BDP device, 30,000 tons/year TCPP unit) has entered the normal production stage. In the first half of the year, it achieved an output of 19,921.45 tons, with a sales amount of 160 million yuan. The second phase of the flame retardant project is also under active preparation. It will further build a 50,000 tons/year TCPP production unit, a 50,000 tons/year BDP production unit, and a supporting 25,000 tons/year phosphorus trichloride production unit. It is expected to be put into operation in the third quarter of this year, which is expected to promote the large-scale supply of the company's intermediates, optimize the layout of the industrial chain, and effectively reduce the company's production costs.

JS-T205 innovative drugs have remarkable advantages and good market prospects

The company plans to invest 790 million yuan to build a “New Green Herbicide Original Drug and Formulation Project” in Zhijiang, Hubei, that is, a 500-ton phenyrimidazole (JS-T205) plant, formulation production facility, etc. It has now basically completed pilot optimization, and is progressing smoothly in the early stages. At the same time, the original drug phenyrimidazole has been patented in China, Argentina, Australia, Canada, the United States and Brazil. The efficacy and single consumption of the JS-T205 innovative drug is clearly superior to traditional pesticides such as glyphosate and glyphosate. If it is put on the market, it is expected to be released quickly. The company also actively promotes the development of projects such as the first phase of the heating center project, optimizes the integrated construction of the formulation business platform, promotes the layout of the integrated phosphorus chemical cycle industry chain, continuously promotes the transformation and upgrading of the company, and opens up room for growth for the company's medium- to long-term development.

Profit forecast and valuation: The company is expected to achieve net profit of 598 million yuan, 767 million yuan, and 1,133 million yuan respectively in 2023, 2024, and 2025, respectively. The corresponding EPS is 1.35 yuan, 1.73 yuan, and 2.56 yuan, respectively, and the corresponding PE is 16.45X, 12.84X, and 8.69X respectively. As global inventory removal continues to advance, demand for pesticide terminals gradually recovers, and the value of the company's main business is expected to increase steadily; moreover, the company's multi-base layout is progressing steadily. JS-T205 innovative drugs open up space for medium- to long-term growth and will continue to add new impetus to future performance. According to estimates, the company's revenue and profit growth rate is relatively stable. The compound net profit growth rate for 2023-2025 was 37.6%, and the company's PEG index was less than 1. At the same time, the average PE valuation for comparable companies of the same type was 19.46X, 13.11X, and 10.08X.

Taking into account the company's profit growth rate and valuation situation, the company's current stock price still has good investment value. It was covered for the first time and given a “buy” rating.

Risk Reminder: 1. Safety and environmental risks. Some of the raw materials, semi-finished products or finished products in the company's production process are flammable, explosive, corrosive or toxic substances, and a certain amount of waste water, exhaust gas, and waste residue will be generated during the production process. Improper operation can easily cause safety and environmental accidents. 2. The risk of major product market fluctuations. China's pesticide industry has problems such as repeated construction, overcapacity, and prominent structural contradictions in the industry. There is a risk that competition will increase and prices will drop in some product markets. 3. Risk of industry policy changes. As society's requirements for pollution control increase year by year, the company's production and operation activities will be affected. 4. The risk of fluctuations in the prices of major raw materials. If the price of raw materials rises, it will cause the company's manufacturing costs to rise and may reduce the company's gross profit level of product sales. 5. Risk of exchange rate fluctuations. The company currently has a large total export business, and when the exchange rate fluctuates sharply, it will affect the company's performance.

Sensitivity analysis: If future downstream demand falls short of expectations, raw material fluctuations affect product gross profit margins, and the company's production capacity falls relatively short of expectations, the company's net profit forecast for 2023-2025 is 496 million yuan, 666 million yuan, and 971 million yuan.