Key points of investment:

The company released its 2023 annual report, and the results were in line with expectations. In 2023, the company achieved operating income of 28.105 billion yuan (yoy -7.3%), realized net profit of 1,379 billion yuan (yoy -76.4%), net profit after deduction of 1,313 billion yuan (yoy -78.3%). Overall gross sales margin fell 19.44 percentage points year-on-year to 16.17%, and the performance was in line with expectations. Among them, 4Q23 achieved operating income of 6.178 billion yuan (yoy +13.27%, QoQ -25.73%), net profit of 445 million yuan (yoy -52.67%, QoQ +36.85%), net profit after deduction of 434 million yuan (yoy -58.90%, QoQ +31.61%), gross margin for 4Q23 decreased 5.40 pcts year on year, and increased 14.28 pcts to 26.89% month on month, which is in line with expectations. The year-on-year decline in the company's revenue and net profit in 2023 was mainly due to changes in market supply and demand, the company's agrochemical sector and silicone sector declined markedly, sales prices of products such as glyphosate raw materials and silicone DMC declined year on year, sector profits declined year on year, and the mining and specialty chemicals business maintained steady development, which was the main source of performance. The month-on-month increase in performance in 4Q23 is mainly due to the gradual recovery of the agrochemical sector since 3Q23. Prices of products such as monoammonium phosphate, diammonium phosphate, and phosphate ore have risen sequentially, and profitability has increased. The company also announced the 2023 profit distribution plan. The company plans to distribute a cash dividend of 6 yuan (tax included) for every 10 shares to all shareholders. As of March 29, 2024, the total share capital of the company was 1,103 billion shares. Based on this calculation, it is proposed to distribute a cash dividend of 662 million yuan (tax included), accounting for 48% of net profit due to mother in 2023.

Phosphate ore prices fluctuated at a high level. The company's mining and selection business revenue increased sharply year-on-year, and profits were stable. Prices of fertilizer and glyphosate series products increased and fell, profits declined, and silicone volume, price and profit declined. Benefiting from the commissioning of Houping phosphate mine, the company's mining and selection business revenue increased 87.36% year on year to 1,603 billion yuan in 2023, and gross margin decreased slightly by 0.19pct to 73.74% year on year.

In 2023, the company's sales volume of glyphosate series products and fertilizers increased by 10.58%, 22.55% to 17.14 and 1,2397 million tons, respectively, but the price without tax (same below) fell by 55.33% and 14.65% to 24,990 and 2,909 yuan/ton, respectively, resulting in gross margins falling 27.08 and 10.38 pcts to 31.01% and 8.70%, respectively. Among them, in 4Q23, the company's glyphosate sales increased by 152.6% and 22.5% to 49,500 tons, respectively, and the sales price fell 28% year on year and increased 2% from month to month to 23,605 yuan/ton; fertilizer sales increased 8.0% year on year to 338 million tons, sales price decreased 7% year on year and increased 13% month on month to 2,833 yuan/ton. Affected by weak demand, the company's silicone sales price fell 39% year on year to 11,446 yuan/ton in 2023, sales volume fell 15.6% year on year to 187,000 tons, and gross margin fell 13.2 pct to 4.3% year on year.

The company's specialty chemicals sector maintains a healthy development trend and is one of the main sources of profit throughout the year. In the future, it will focus on the new materials business such as phosphorus-based, silicon-based, sulfur-based and microelectronic materials to accelerate transformation and upgrading to a new technology-based green chemical materials enterprise.

In 2023, the company's specialty chemicals sales increased 12.94% year on year to 449,400 tons, sales price fell 29% year on year to 11,186 yuan/ton, and gross margin fell 17.5 pct year on year to 20.75% year. Mainly, Xingfu Electronics' 30,000 tons/year electronic-grade phosphoric acid and 20,000 tons/year electronic-grade etching solution projects were completed and put into operation. According to the company's annual report, in 2024, the company will strive to achieve revenue of 30.2 billion yuan and continue to promote the construction of key projects. In 2024, the company will strictly control the scale of investment, focus on extending and strengthening the chain, and steadily promote the construction of key projects: 1) Accelerate the upgrading of the phosphorous and sulfur industry. Accelerate the layout of Yuanan Wanli Industrial Park and strive to complete Yuanjixing's 53,000-ton yellow phosphorus technical improvement project and the 5,000-ton XF-A project within the year; actively promote Liu Caopo's 3,000-ton dimethyl sulfone relocation technical improvement project, and strive to complete it in 1H24; 2) improve the silicone industry chain. Ensure that Hubei Xingrui's 400,000-ton new silicone material project (phase I), 150,000-ton silicone rubber and functional silicone rubber project (phase I) achieve production results within the year; 3) speed up the construction of key mine projects to ensure that the 2 million ton beneficiation project of Houping phosphate and the Wawu 1 million ton photoelectric beneficiation project are completed and put into operation in June 24; 4) complete the iron phosphate project. By the end of 2023, the company's fixed assets increased by 2.9 billion yuan to 26.2 billion yuan compared to the end of 2022, and the number of projects under construction increased by 1.56 billion yuan to 4.02 billion yuan compared to the end of 2022.

Investment analysis opinion: Phosphate ore prices fluctuate at a high level, glyphosate and silicone prices are at the bottom. In the future, the company will strive to expand and strengthen the new materials business such as phosphorous, silicon-based and sulfur-based materials and microelectronic materials. The industrial chain and technical advantages are leading, and the profit share of the new materials business segment is gradually increasing. We maintain the company's net profit forecast for 2024-2025 at 17.65 billion yuan and 2,195 billion yuan. The corresponding EPS is 1.60, 1.99, 2.39 billion yuan Yuan, corresponding to the current PE is 12X, 10X, and 8X, maintaining an increase rating.

Risk warning: 1. Prices of products such as phosphate ore, silicone, glyphosate, yellow phosphorus, phosphate fertilizer, and dimethyl sulfoxide continued to plummet; 2. The commissioning of new projects such as electronic chemicals fell short of expectations; 3. Short-term shutdown due to safety and environmental inspections.