Key points of investment:

The company released its 2024 quarterly report, and the results were in line with expectations. The company achieved operating income of 13.857 billion yuan (yoy -12.8%, QoQ -12.1%), net profit to mother of 1,459 billion yuan (yoy -7.2%, QoQ +78.5%), net profit after deducting non-return to mother was 1,435 billion yuan (yoy -5.4%, QoQ +54.3%), and gross sales margin increased 1.5, 0.4 pct year-on-year to 19.12%, respectively. Sales expenses, management expenses, and financial expenses decreased by 8.18%, 11.89% year-on-year, 14.11% to 1.90, 174, and 145 million yuan, R&D expenses increased 21.55% year on year to 90 million yuan. The size of the company's interest-bearing debt and comprehensive capital costs were further optimized and declined, and financial expenses continued to decline year on year, and performance was in line with expectations. The main reasons for the year-on-year decline in the company's revenue and net profit in 1Q24 are: 1. The company's phosphate fertilizer and polyformaldehyde sales declined slightly year on year; 2. Prices of phosphate fertilizer, compound fertilizer, urea, polyformaldehyde, and yellow phosphorus all fell year on year; 3. The overall increase in gross margin was mainly due to falling prices of raw materials such as coal and sulfur, and the gross margin of phosphorus fertilizer is expected to increase slightly.

Demand for spring fertilizer was stable in 1Q24. Due to export reasons, the company's phosphate fertilizer sales declined slightly. Qinghai Yuntianhua combined, and sales of compound fertilizer and urea increased year on year; prices of phosphate fertilizer, urea, etc. were dragged down by falling raw materials, and the gross margin of phosphate fertilizer is expected to increase slightly year on year. 1Q24 is the peak season for domestic spring farming. The average sales price of ammonium phosphate, compound fertilizer, and urea fell 4.4%, 14.8%, and 16.4% year on year, respectively in 1Q24. In 1Q24, the average purchase price of sulfur, feedstock coal, and fuel coal without tax fell 27.9%, 16.3%, 19.8% year on year to 1,042, 1066, and 648 yuan/ton, respectively. The sharp drop in costs led to a slight increase in overall gross margin level. In 1Q24, the company's phosphate fertilizer sales fell 3.7% year on year to 1.18 million tons, mainly due to a decrease in phosphate fertilizer exports. Domestic phosphate fertilizer exports began legal inspection and customs clearance one after another after March 15. The overall export volume is expected to remain stable in 2024 and 2023. Sales of compound fertilizer and urea increased by 36.0% and 31.5%, respectively, to 42.7 and 618,000 tons, respectively. The main reason is that since 2Q23, the company added a new subsidiary, Qinghai Yuntianhua, and the sales volume of urea and compound fertilizer increased. In the non-fertilizer business, the prices of polyformaldehyde, yellow phosphorus, and feed-grade calcium phosphate decreased by 3.4%, 23.4%, and 6.9% year-on-year to 11832, 20,382, and 3,227 yuan/ton, respectively, but sales increased and decreased by -1.9%, 35.6%, and 0.1% year-on-year to 2.6, 0.6, and 116,000 tons, respectively.

Expenses continue to be optimized. The continuous decline in interest-bearing liabilities has led to a reduction in financial expenses, and the company's balance ratio continues to decline. Strengthen the management and optimization of manageable expenses, solidly carry out deepening reforms of state-owned enterprises, and continuously optimize the size and structure of liabilities. Sales expenses, management expenses, and financial expenses for the three expenses continued to decrease year-on-year, and balance sheets continued to be optimized. The company continues to strengthen the settlement of accounts receivable, steadily reduce the use of capital, and at the same time strengthen centralized control of parent and subsidiary capital, optimize the loan structure, and continuously reduce the size of the company's interest-bearing liabilities. The company's three expenses in 1Q24 fell -10.86% year on year to 508 million yuan, or 64 million yuan; at the end of 1Q24, the company's balance ratio continued to drop 1.87 pct to 56.26% compared to the end of 2023.

Improve the mining efficiency of existing phosphate ores, increase phosphate ore output, and continue to expand the downstream industrial chain around “phosphorus” and “fluorine” resources. The company announced the 2024 “Improving Quality, Efficiency and Reward” action plan, which focuses on following up the medium- and long-term layout of phosphate resources, further improving the mining efficiency of existing phosphate ore, and promoting the construction of projects such as using medium- and low-grade phosphate ore to produce fine phosphorus chemical products with “phosphorus” and “fluorine” resources as the core. As of 1Q24, the company's ongoing projects increased by 167 million yuan to 1,653 million yuan compared to the end of 2023. In 2024, the company plans to produce and sell 2,544,900 tons of urea, 4,5415 million tons of ammonium phosphate, and 1.9251 million tons of compound fertilizer, up and down 2.2%, -5.3%, and 23.8% year-on-year, respectively; to produce 580,000 tons of feed-grade calcium hydrogen phosphate and 106,000 tons of polyformaldehyde, which is basically the same as the actual output in 2023. The action plan mentions paying attention to investor returns. The company distributes net profit realized each year at no less than 30% of the distributable profit for each year after making up for losses and withdrawing the statutory provident fund.

Investment analysis opinions: Phosphorus chemical companies with obvious integrated advantages continue to optimize their balance and liability structures, while transforming the layout of fine phosphating business, efficient development of phosphate ore resources, and comprehensive utilization projects of fluorosilicon resources. We maintain the company's 2024-2026 net profit forecasts of 46.20, 48.10, and 5.05 billion yuan. The corresponding EPS is 2.52, 2.62, and 2.75 yuan respectively. The PE corresponding to the current market value is 8X, 7X, and 7X, respectively. We are still optimistic about the value properties of phosphate ore resources, and maintain an increase in holdings rating.

Risk warning: 1. Prices of phosphate ore, phosphate fertilizer, yellow phosphorus, polyformaldehyde, etc. continued to fall; 2. The debt reduction process fell short of expectations, and the balance ratio rose; 3. The commissioning progress of the new materials project fell short of expectations; 5. The company's subsidiary Hulunbuir Dongming Mining Co., Ltd. received the “Notice of Administrative Penalty Hearing” delivered by the Hulunbuir Municipal Bureau of Ecology and Environment. During on-site inspection, it was discovered that the chemical oxygen demand, total nitrogen, and total phosphorus of the water quality samples collected from the Dongming Mining Coal Mine had exceeded the standard. 320,000 yuan. Currently, the Dongming mining industry is being evacuated Drainage remediation measures have been completed and put into operation, and the results of the remediation are obvious.