Incident: Potash International issued an announcement that it plans to issue convertible bonds to unspecified targets to raise no more than 2 billion yuan in total capital for the 2 million tons/year potash fertilizer project in the Pengxia-Nongpo mining area of the Potash Mine in Khammoun Province, Laos (Phase II).

The company released its third quarter report. In the first three quarters, it achieved revenue of 2,881 billion yuan, an increase of 19.81%; net profit of 994 million yuan, a year-on-year increase of -34.54%; net profit after deducting non-return net profit of 1,006 billion yuan, an increase of -33.39%; gross profit margin of 59.95%, net profit margin of 34.09%.

Potash prices are falling, and Q3 results are under pressure. Looking at a single quarter, Q3 achieved revenue of 869 million yuan, a year-on-year increase of 33.83%, a month-on-month increase of -25.55%; net profit of 278 million yuan, a year-on-year increase of -26.98%; a net profit margin of 282 million yuan, a year-on-year increase of -32.54%, a year-on-year increase of -27.30%; a gross profit margin of 54.67%, a year-on-year decrease of 22.29pct, a year-on-year decrease of 4.59pct; and a net profit margin of 31.59%, a year-on-year decrease of 33.24pct, a slight decrease of 0.65pct month-on-month. The company achieved 1.176,700 tons of potassium chloride and sales volume of 1.1901 million tons in the first three quarters, of which 414,900 tons in the Q3 quarter decreased 6.55% from Q2 (444,400 tons), and sales volume of 423,600 tons decreased 15.48% from Q2 (5012,000 tons). In terms of price, Potassium Asia International's Q3 sales price without tax was about 2,052 yuan/ton per ton, down about 11.89% from the Q2 price of 2,329 yuan/ton without tax compared to the Q2 single ton price of 2,329 yuan/ton. According to data from Wind and Longzhong, the average price of potassium chloride in 23Q3 in China was 2,442 yuan/ton, down 45.12% year on year, down 11.72% month on month.

Production capacity ushered in a period of rapid expansion, and the issuance of convertible bonds to help project construction. The company has now obtained two high-quality potash mining rights in the 35-square-kilometer Dongtai mining area and the 179.8-square-kilometer penghia-nongbo mining area in Khammoun Province, Laos, and prospecting rights for the 48.52-square-kilometer potash ore in the Nonglong mining area. It is estimated that the reserves of purified potassium chloride resources will exceed 1 billion tons.

As project production climbed, the company's potassium chloride production and sales grew rapidly. In 2021, it produced 330,000 tons and sold 350,000 tons, sold 910,000 tons in 2022, sold 910,000 tons, sold 910,000 tons, sold 1.19 million tons in the first three quarters of 2023, and sold 1.19 million tons in the first three quarters of 2023, and strived to maintain 1.8 million tons and strive for 2 million tons throughout 2023. On the basis of the smooth production of the first 1 million tons/year potash fertilizer project, the second 1 million tons/year potash project was successfully selected and tested in January 2023, and the third 1 million tons/year potash project aims to be completed and put into operation by the end of this year. On October 27, the company used two production lines of 1 million tons to set a record for the highest daily production of 9116 tons of potash fertilizer, successfully exceeding the single-day production standard of 3 million tons of production capacity, demonstrating the company's strong execution. The company plans to raise capital through the issuance of convertible bonds to rapidly promote the construction and production of a total of 3 million tons/year potash fertilizer production projects in existing mining areas. It will strive to achieve 5 million tons/year potash fertilizer production capacity in 2025, and expand the potash production capacity to 7 to 10 million tons/year in the future according to market demand. In terms of product upgrades, on November 10, 2023, the production plant with an annual output of 500,000 tons of granular potassium achieved production, and the daily output steadily reached more than 1,500 tons and a maximum of 1,731 tons. The company already has a total production capacity of nearly 900,000 tons of granular potassium. The fourth phase of the project to add 300,000 tons of granular potassium production capacity has now started. After production is put into operation, a production capacity of nearly 1.2 million tons of granular potassium will be formed. In the future, according to the company's mid-term production capacity plan for 5 million tons of potash fertilizer, it will match the production capacity of 2.5 million tons of granular potassium.

Potash prices have steadily rebounded, and an increase in the peak winter storage season can be expected. Potash prices continued to fall this year and hit 2,250 yuan/ton in mid-July and began to rise steadily. According to data from Longzhong, the price of 60% powdered potassium chloride in Qinghai as of November 29, 2023 was 2,860 yuan/ton, a slight increase of 10 yuan/ton from the previous day, up 27% from the low of 2,250 yuan/ton in mid-July 2023. The peak winter storage season is approaching. Driven by immediate demand, there may be room for potash prices to continue to rise.

Investment advice: Potash International has scarce potash resources in Laos and is in a period of rapid release. There is huge potential for scale and cost optimization. The expansion of non-potash business is expected to cultivate new growth points. The current steady rise in potash prices can be expected, and the fourth quarter is expected to usher in a sharp rise in volume and price. Maintaining the profit forecast, the company's 2023-2025 revenue is expected to be 40.84 /61.46/7.874 billion yuan, up 17.8% /50.5% /28.1 percent year on year, and net profit of 16.03 /25.29/3.26 billion yuan respectively, up -21.0% /57.8% /28.3% year on year, corresponding to PE 15.8x/10.0x/7.8x; maintaining the “increased holdings - B” rating.

Risk warning: demand continues to be sluggish; project construction and capacity release fall short of expectations; changes in geopolitical and trade policies.