Commodity prices rise, profit inflection point is expected to come

Raw material supply chain companies include the value of commodities in revenue, and there is a high correlation between revenue and commodity prices; on the profit side, with the improvement of comprehensive service capacity and in-depth industrial chain operation, supply chain business profits may be more flexible in the price rise cycle. Since June, industrial products in South China have continued to rise, with large increases in the prices of energy, chemical products and iron ore, while Xiamen ITC accounts for a relatively high proportion of related business.

With a low base, 2023Q3 is expected to have an inflection point in earnings growth. Since 2022, the inventory cycle between China and the United States has declined for about 1.5 years, and inventory growth is at an all-time low compared with the same period last year. The year-on-year decline of PPI, the leading indicator of inventory, narrowed in July-August, and the year-on-year growth rate of inventory in China rebounded in August. We expect China to usher in an upward inventory cycle, and Xiamen ITC profits are expected to grow rapidly in 2024-2025.

Industry clearance, Xiamen International Trade market share is expected to increase

On the one hand, under the volatility of commodity prices, small private enterprises may shrink or even withdraw.

Looking back on the steel trade crisis in 2012, the number of steel traders in the country has shrunk from 200000 in 2012 to about 100000 in early 2015. With the downward fluctuation of commodity prices since 2023, a large number of steel trading enterprises have entered the stage of bankruptcy liquidation. Small and medium-sized supply chain enterprises may enter a new round of liquidation stage because of the lack of effective risk management system and mechanism. While Xiamen ITC actively increased its market share during the commodity downturn, the operating volume of 23H1 iron ore / steel / coal / energy increased by 20%, 30%, 70% and 17% compared with the same period last year, and the overall supply chain revenue is still growing positively.

On the other hand, some central enterprises are subject to regulatory constraints and may withdraw from the commodity supply chain business. The SASAC of the State Council has comprehensively carried out a special crackdown on false trade in central enterprises, forbidding central enterprises to deviate from their main business and engage in financing trade business. We believe that due to the characteristics of flexible organizational structure, marketization of business transformation and strong capital and credit background, local state-owned enterprises are expected to continue to increase their market share, and there is still much room for improvement from the bulk supply chain CR4 (50% +) of the United States and Japan.

Low valuation, high dividend, value supported

The valuation of head bulk supply chain companies is historically low, with a PE of about 6 times at the end of September 2023, implying a higher return on investment. Although the historical profit growth rate of Xiamen International Trade is not as fast as that of Xiamen Xiangyu and Zhejiang Merchants Zhongtuo, and the valuation level is relatively low, the business resilience shown since the first half of the year has performed well among similar companies.

If commodity prices rise in the future, Xiamen ITC is expected to achieve a revaluation. From the perspective of dividend, the dividend ratio in 2022 is 39.86%, which is significantly higher than the 32.26% in 2021, and the dividend yield is 6.92%. The expected dividend yield of the head raw material supply chain company in 2023 is about 7%, which is strongly supported by the value.

Downgrade earnings forecast and maintain "buy" rating

Based on the fact that the decline in 23H1 commodity prices affects the company's revenue and profit to a certain extent, we downgrade our profit forecast and estimate the 23-25 net profit of 28.61,41.57 and 5.42 billion yuan (the previous values are 36.20,44.19 and 5.284 billion yuan respectively),-20%, + 45% and + 30% of the same period last year, maintaining the "buy" rating.

Risk tips: reduced risk of consumer demand for commodities, risk of falling commodity prices, increased risk of bad debts of receivables, risk of exchange rate and interest rate fluctuations.