Incident: The company released its semi-annual report for 2023. During the reporting period, the company achieved operating income of 8.476 billion yuan, or -36.48% year-on-year, and net profit of 114 million yuan, or -95.13% year-on-year. In Q2 of '23, the company's operating income was 4,596 million yuan, -32.82% year on year, +18.43% month on month, and net profit to parent was 2074 million yuan, -99.33% year on year, -93.01% month on month.
The volume and price of glyphosate and silicone fell sharply, and the company's H1 performance in '23 was under pressure. In H1 in '23, the export volume of the company's agrochemical raw materials, agrochemical preparations, cyclic silicones, silicone intermediates, silicone rubber, and special monomer segments was 18581.18, 79520.44, 36212.8, 22858.92, 36785.32, 8627.93 tons, compared to -35.87%, +7.79%, -21.84%, -38.79%, -15.08%, -8.07%. The export unit prices were 3.39, 2.43, 1.61, 1.49, 1.95, respectively 13,600 Yuan/ton, compared to -47.88%, -37.07%, -42.31%, -42.11%, -29.2%, and -35.77%. The volume and price of the company's glyphosate and silicone products fell sharply, putting pressure on H1 performance in '23.
Glyphosate sales have improved month-on-month, and prices have steadily rebounded. In Q2 of '23, the export sales volume of the company's agrochemical raw materials and agrochemical preparations segments was 13913.91 and 48515.48 tons, respectively, +198.12% and +56.48% month-on-month. The export unit prices were 2.87 and 24,500 yuan/ton, respectively, -41.98% and +1.87%. The export sales volume of products in the agrochemical sector has increased markedly. According to data from Baichuan Yingfu, the average glyphosate market prices since Q1, Q2, and Q3 in '23 have been 42,600, 2.75, and 33,400 yuan/ton, respectively. In July '23, the operating rate of the industry increased to 71.48%, +15.48 pct compared to the operating rate in June. Since Q3 '23, as glyphosate prices and industry operating rates continue to pick up, the company's profit situation in the agrochemical sector is expected to gradually improve in the future.
Seize the cost advantage of silicone integration, and buck the trend and expand to show leadership. The company currently has a silicone monomer production capacity of 350,000 tons/year, and the terminal conversion rate of silicone deep-processing products is over 40%. Silicone products are in a leading position in the industry. In addition, the company has a complete “silicon ore - industrial silicon - silicone monomer - silicone deep processing product” industry chain. Methylene chloride, a by-product of glyphosate production in the agrochemical sector, can be used as a raw material for silicone monomers, and the advantages of integrated industrial chain collaboration are obvious. Currently, prices of silicone products are declining, and the bottom of the industry cycle is under pressure. In March '23, the company issued an announcement that it intends to raise no more than 1.8 billion yuan from specific investors, including the controlling shareholder Transanhua Chemical, to be used for the Kaihua Synthetic New Material Relocation and Upgrading Project and the 35,600 tons/year high-purity polysilicon project. As a leader in the silicone industry, the company's expansion against the trend further demonstrated its leading strength.
Investment suggestions: We expect the company's net profit to be 893/11.71/1.42 billion yuan in 2023-2025, respectively, EPS of 0.78/1.02/1.24, and corresponding PE of 14/10/9 times. Considering that the company is a leader in the silicone industry, the complete industrial chain layout will help the company move through the industry cycle and continue to enhance its competitive position in the industry. Combined, the agrochemical sector is expected to recover.
First coverage, giving a “buy” rating.
Risk warning: The progress of projects under construction falls short of expectations; downstream demand growth falls short of expectations; raw material prices have risen sharply;