Sale of part of agricultural product assets, business strategy or transformation
The company announced that Fujin Agricultural Products, a holding subsidiary of the company, plans to transfer some of its assets (including buildings, equipment, and land use rights) to Fujin Biochemical, the controlling shareholder of the company. The transfer price is estimated to be 73.6534 million yuan, and the transaction price is 7.71% higher than the net book value.
In the first half of '23, Xiangyu Agricultural Products, a subsidiary of the company that specializes in the agricultural products supply chain, achieved a net profit of 713 million yuan. The agricultural products supply chain business lost serious losses. The main reason was that the raw grain supply chain had industry characteristics that did not match the pace of procurement due to concentrated procurement seasons. Gross profit and gross margin were highly sensitive to price fluctuations. Subsequently, the price drop in the price of the main grain corn handled by Xiangyu Agricultural Products caused serious business losses. This asset sale can effectively revitalize the company's idle assets. We believe it also highlights the company's shift in business strategy in the agricultural products business to a certain extent, reduce agricultural product inventories with a high turnover model, reduce the risk of falling commodity prices, and pursue operational soundness.
Commodity prices have risen, and the company is expected to recover profits
Raw material supply chain companies include commodity values in revenue, and the correlation between revenue and commodity prices is high; on the profit side, with the improvement of comprehensive service capabilities and deepening industrial chain operations, supply chain business profits may be more flexible during the price increase cycle. Since 2022, the inventory cycle in China and the US has been declining for about 1.5 years, and the year-on-year inventory growth rate is at a relatively low level in history. The year-on-year decline in PPI, the leading inventory index, narrowed in July-August 23, and China's inventory growth rate rebounded in August 23. We expect China to usher in an upward inventory cycle; since the second half of '23, the South China Industrial Products Index has stopped falling and rebounded, and the company is expected to recover profits in 2024-2025.
The industry clears up, and the market share of Xiangyu in Xiamen is expected to increase
On the one hand, as commodity prices fluctuate, small-scale private enterprises may shrink in scale or even exit.
Looking back at the 2012 steel trade crisis, the number of steel traders nationwide shrunk from 200,000 in 2012 to around 100,000 in early 2015. Commodity prices have fluctuated and declined since 2023, and a large number of steel trading enterprises have also entered the bankruptcy and liquidation stage. Small and medium-sized supply chain enterprises may have entered a new round of liquidation due to lack of effective risk management institutional mechanisms. Meanwhile, Xiamen's Xiangyu actively increased its market share by category during the commodity decline. The 23H1 commodity volume reached 102.05 million tons, an increase of 14% over the previous year. Among them, the sales volume of black gold/raw grain/coal/oil products increased 10%, 10%, 18%, and 229% year over year.
On the other hand, some central enterprises are subject to regulation and may withdraw from the commodity supply chain business. The State Council's State-owned Assets Administration Commission has comprehensively launched a special campaign to rectify false trade by central enterprises, prohibiting central enterprises to deviate from their main business to carry out trade business and engage in financing trade business. We believe that due to the characteristics of flexible organizational structures, market-based management transformation, and strong financial credit backgrounds, the market share of local state-owned enterprises is expected to continue to increase, and there is still plenty of room for improvement until CR4 (50% +) of the US-Japan bulk supply chain.
Undervalued, high dividends, and supported value
From a valuation perspective, Xiamen's Xiangyu enjoys higher valuation premiums with higher profit flexibility. Currently, the valuations of leading large supply chain companies are historically relatively low, implying that the return on investment is high.
If commodity prices rise in the future, Xiamen's Xiangyu is expected to achieve a revaluation. From a dividend perspective, the company's dividend ratio is 55% in 2022, and the dividend ratio has been rising steadily in the past three years. Referring to Wind's consensus expectations in '23 and the dividend ratio in '22, the company's current dividend rate is about 6.2%, which is strongly supported by value.
Lowered profit expectations and downgraded to “Overweight” rating
Based on the 23H1 commodity price decline and agricultural product losses, the company's revenue and profit were affected to a certain extent. We lowered our profit forecast. We estimated the company's net profit to be 15, 2, and 2.9 billion yuan (previous values were 33, 42, and 4.7 billion yuan, respectively), -43%, +36%, and +39% compared to the same period last year. The corresponding PE was 10x, 7x, and 5x, respectively, downgraded to the “increase” rating.
Risk warning: Consumer demand for commodities reduces risk, risk of falling commodity prices, increased risk of bad accounts receivable, risk of exchange rate and interest rate fluctuations.