Core views

Due to falling global potash prices, the company's third-quarter results declined month-on-month. However, on the one hand, in terms of product prices, we still judge that in today's global context, potash prices are not pessimistic in the long run. On the other hand, from a quantitative perspective, the company has now reached the 3 million tons/year potash production capacity level, and we believe that the company's outstanding management execution will continue to drive the company's future capacity expansion, including cost pressure reduction. Overall, we still think the company has a relatively solid growth logic.

occurrences

Three-quarter report for 2023: The first three quarters achieved total revenue of 2,413 billion yuan, +19.81% year-on-year; net profit of 1,519 billion yuan, or -34.54% year-on-year.

In the third quarter, the company achieved revenue of 869 million yuan, +33.83% year-on-year, and net profit of 278 million yuan, -34.20% year-on-year and -27.03% month-on-month.

Brief review

The fall in potash prices affects the achievement of short-term profits

Since the third quarter, global potash prices have generally shown a continuous downward trend. In terms of domestic prices, according to Zhuochuang data, the average domestic market price of potassium chloride in Q3 was about 2,540 yuan/ton, -368 yuan/ton compared to the previous year, -2,070 yuan/ton; international prices also declined by various margins, such as the average price of 2006 yuan/ton in the Baltic Sea in Q3 and -376 yuan/ton month-on-month. As potash prices fall, it is inevitable that the company's performance will decline month-on-month and year-on-year.

The annual production capacity has reached 3 million tons, and there are plans for continuous capacity expansion in the future

According to the company's official account, on October 27 this year, the company's Dongtai mining area in Laos reached 9116 tons of potash fertilizer in a single day, achieving the single-day target production of 3 million tons/year of production capacity. This also marks that the company has reached the level of 3 million tons of production capacity by the end of 2023, quadrupling the effective production capacity of 1 million tons from 1 million tons in 2022. At the same time, the company still has plans to expand production capacity by 5 million tons in '25 and 7 to 10 million tons in the long term, and future production capacity growth is still quite impressive.

The company is a potash fertilizer manufacturer with outstanding execution. The volume of production capacity+the reversal of the economy helped to explode performance, and long-term growth can also be expected

At this point, we are still optimistic about the company's overall development. The core points are as follows:

1. The company has obtained mining rights for 1 billion tons of potash reserves in Laos and is a scarce domestic potash producer

Potassium is one of the three essential elements for crop development (nitrogen, phosphorus, potassium). Potash fertilizer is an agricultural fertilizer with potassium as the main component. It is just needed by some cash crops. The use of potash fertilizer can promote the photosynthesis of crops and improve the resistance of crops to cold and disease, thereby increasing crop yield.

The contradiction between domestic supply and demand for potash fertilizer is prominent: as a major agricultural country, China needs about 17 million tons of potash fertilizer every year; however, from a supply point of view, potash salt, the raw material for potash fertilizer production, is a scarce mineral resource in China. Domestic potash resource reserves account for only 1.63% of the world's potassium resources. The domestic potash industry cannot meet demand, and import dependence has reached 50%. Moreover, production is mainly concentrated in a very small number of enterprises in Qinghai Salt Lake.

The company is based on potash ore resources in Khammouane Province, Laos. Currently, it has obtained mining rights with a total of 1 billion tons of potash reserves, with remarkable resource advantages. Furthermore, the mining area is located in the Nakhon Ratchasima Basin in the mountainous region of Laos. The supply of hydropower is sufficient, there is a certain industrial base, and environmental pressure is low. As a result, the supply of materials to neighboring China is convenient.

Moreover, the potash mine is buried between 80-200 meters underground. The ore body is thick and mining is less difficult. Its expansion cycle is short, production costs are low, and production costs are low, and there is potential for rapid release of production.

As a result, the company has become an enterprise with abundant reserves of scarce A-shares potash resources and the ability to continuously expand production.

2. Management execution is the key guarantee for the company's long-term growth

The predecessor of the company was Dongling International, and the company was close to delisting due to poor management. In '19, Mudanjiang Guofu joined and the board of directors was reorganized. Since then, from 2019 to 2020, the company first optimized the company's internal management structure, then divested the shipping business and grain trading business, adjusted the company's development strategy to a model integrating potash mining, production and sales, and then began promoting the potash project in Laos.

In 19-20, in the context of the global COVID-19 pandemic, the company completed the first phase of production of 1 million tons of potash mine in Laos, showing outstanding management execution. Historically, domestic-funded enterprises have a total of 34 overseas potash mine expansion projects, but currently almost only the company and Oriental Tower's Laos project have achieved stable mass production, and the company's potash production capacity is the highest. The reason behind this certainly includes the fact that projects in the Laos region have a short expansion cycle compared to potash projects in Russia, Canada, etc., but the deeper reason is that we still think it is due to the company's efficient corporate governance — going overseas to do mineral development business, involving many aspects such as obtaining mineral rights, prospecting, and construction, which greatly tests the strategic planning ability and execution of enterprise management; historically, the implementation of such plans has often fallen short of expectations.

Currently, the company has sufficient reserves of mineral rights, and there is a strong desire to expand production. According to the company. The production plans for 2022, 2023, and 2024 are 1 million tons, 2 million tons, and 3 million tons, respectively, and aim to reach 5 million tons by the end of 2025. Looking back over the past 3 years, the company's historical reports have fully reflected that the company has fully implemented its own strategic plans; and looking forward to the future, we believe that the execution ability of the company's management is still an important guarantee for the continuous and rapid expansion of production capacity in the future.

3. Potash is an extractive industry, and global supply and demand attributes are strong; its price is difficult to predict, but generally speaking, it is not pessimistic about the supply side of the industry. Unlike other agrochemical sub-industries, the potash industry has strong resource attributes and outstanding resource monopoly. The global distribution of potash resources is extremely uneven. Canada, Russia, and Belarus account for the vast majority of global potash reserves and contribute more than 70% of global potash exports. Moreover, the high concentration of industries also gives oligopolistic enterprises in these countries (potash addition, Ural potash, Belarusian potash, etc.) higher pricing power. Looking at the demand side, potash fertilizer, as one of the agrochemical subsectors, naturally has the characteristic of stable demand. For some important crops, potash fertilizer is an essential type of chemical fertilizer, so it is less affected by macroeconomic disturbances.

Potash's prominent resource attributes and global supply and demand make its price logic different from ordinary commodities: first, the global oligarchy has a profound influence on prices, while the demand side is relatively stable, which makes the supply-demand relationship less likely to drive price changes. On the other hand, resource attributes and global supply and demand also make potash prices show characteristics similar to crude oil that are sensitive to global currency factors and geopolitical disturbances. Therefore, in general, we do not think it is appropriate to simply use the relationship between supply and demand to infer the future price trend of potash fertilizer. However, on the other hand, considering that global geopolitics are currently tense, commodity prices remain high, and considering that future global potash supply and release will be relatively moderate, we do not think the price of potash fertilizer is pessimistic. Its central price over the next few years may continue to guarantee the company's high profit margin level.

Profit forecasting and valuation

The company's net profit for the year 23, 24, and 25 is estimated to be 14.75, 23.58, and 3.129 billion yuan respectively, corresponding to 17, 11, and 8X PE, respectively, maintaining the buying rating.

Risk warning

1. There is still a possibility that the expansion of overseas potash production capacity will fall short of expectations: although the company's management has shown strong execution in history, the mineral development process has gone through many steps such as obtaining mineral rights, prospecting, and construction, and there are many situations in history where it has been slower than expected; furthermore, the company's mining rights are overseas, and business development involves a large number of local policies and import and export trade related matters, and there are risks of international politics and low verifiability.

2. The risk that the price of potash fertilizer will continue to fall: Although the current price of potash fertilizer has declined markedly from a high point, the current price of potash fertilizer is still in a relatively high position in history. There is a possibility that the decline will continue in the next few years due to reasons such as falling commodity prices and the expansion of industry production capacity. As a single-product manufacturer, if the price of potash fertilizer falls too much, it may impact the company's profit performance to a large extent.

3. International trade and exchange rate risk: Almost all of the company's products are traded internationally, and there are risks in terms of international trade obstruction and exchange rate.