Incident: On March 28, 2024, Chuanheng Co., Ltd. released its 2023 annual report. The company's revenue for 2023 was 4.320 billion yuan, up 25.30% year on year; net profit to mother was 766 million yuan, up 1.02% year on year; net profit after deducting non-net profit was 761 million yuan, down 1.40% year on year. Corresponding 4Q23 revenue was 1,248 billion yuan, up 4.72% month-on-month; net profit to mother was 275 million yuan, up 25.98% month-on-month.

Comment: In 2023, the company's performance improved year-on-year, and production and sales of main products increased. The company's overall gross sales margin in 2023 was 39.04%, down 5.89pcts from the same period last year. In 2023, the company's financial expenses rose 60.23% year on year; sales expenses rose 28.00% year on year; R&D expenses decreased 8.15% year on year; and management expenses increased 10.01% year on year. The company's net profit margin in 2023 was 18.26%, down 4.61 pcts from the same period last year. In 2023, the company's operating income and net profit to mother both increased year on year. The main reasons were: the company's newly built production facilities were put into operation one after another, the new products iron phosphate and phosphoric acid were added, the production and sales of the natural product monoammonium phosphate rose year on year, the volume and price of the exported phosphate ore rose sharply, and the company's main business revenue increased year on year; revenue increased year on year, and investment losses and non-operating expenses decreased year on year.

The production and sales volume of the company's main products all showed significant year-on-year growth in 2023. In 2023, the company's phosphorus chemical production was 779,700 tons, up 35.83% year on year; phosphorus chemical sales volume was 789,200 tons, up 48.17% year on year. In 2023, the company's phosphate ore mining production volume was 2.992 million tons, up 19.11% year on year; phosphate ore mining sales volume was 754,200 tons, up 13.28% year on year.

The company had good cash flow in 2023. The net cash flow from the company's operating activities in 2023 was $528 million, a year-on-year decrease of 2.81%. Net cash flow from investment activities was -983 million yuan, up 41.79% year on year, mainly due to a decrease in cash payments for the purchase and construction of fixed assets, intangible assets and other long-term assets. Net cash flow from fund-raising activities was $1,007 billion, a year-on-year decrease of 29.14%, mainly due to increased cash payments made to repay bank loans. The balance of cash and cash equivalents at the end of the period was $2,045 million, up 37.31% year on year. Accounts receivable increased 21.13% year over year, and accounts receivable turnover fell from 18.97 times in the same period last year to 18.90 times. Inventory turnover increased from 3.32 to 3.36 in the same period last year.

Market demand for main products is stable, and the new energy materials market can be expected in the future. The company's main products include feed-grade calcium dihydrogen phosphate, monoammonium phosphate for fire fighting, phosphoric acid, iron phosphate, etc. In terms of feed grade calcium dihydrogen phosphate, feed grade calcium dihydrogen phosphate has a trend of gradually replacing feed grade calcium hydrogen phosphate in the field of livestock feed because of its high biological efficacy and advantages in promoting growth and disease resistance. According to the company's 2023 annual report, global feed products showed an overall upward trend from 2013 to 2022, and overseas livestock feed gradually became an important market for feed-grade calcium dihydrogen phosphate. With the steady increase in total domestic feed production and the gradual release of demand for feed-grade calcium dihydrogen phosphate in the domestic livestock feed additive sector, the market share of feed-grade calcium dihydrogen phosphate is expected to expand further.

In terms of phosphoric acid, it has a wide range of downstream applications, and overall demand is relatively stable. For agriculture, phosphoric acid is an important raw material for the production of phosphate fertilizer and feed additives; for industry, phosphoric acid is mainly used for metal surface treatment, production of chemical polishing agents, production of washing products and pesticides, production of phosphorous flame retardants, etc.; for the food industry, phosphoric acid can be directly used as an acidulant, yeast nutrient, and an important raw material for the production of food-grade phosphate; for the medical field, phosphoric acid can be used to prepare phosphorus-containing drugs, etc. After special treatment, the phosphoric acid produced by the company can also be used as a battery raw material and customized grade.

In terms of iron phosphate, it is mainly used to make lithium iron phosphate cathode materials, and can also be used as a catalyst, additive, etc. Benefiting from the rapid growth of the NEV market and the continuous expansion of the energy storage sector, China's lithium battery production scale continues to expand, driving lithium iron phosphate shipments to rise year by year. According to data from GGII (GGII), domestic shipments of lithium iron phosphate cathode materials reached 1.65 million tons in 2023, an increase of 48.3% over the previous year. In 2020, domestic shipments of lithium iron phosphate cathode materials were only 124,000 tons, an increase of more than 12 times. Iron phosphate is a key precursor for preparing lithium iron phosphate. We believe that in the future, iron phosphate can benefit from the rapid development of the new energy industry and contribute more performance to the company.

The company has the advantage of phosphate ore resources and continuously improves its ability to guarantee raw materials. Fulin Mining, a holding subsidiary of the company, already holds three mining rights: Xiaoba phosphate mining rights, Xinqiao phosphate mine mining rights, and Jigongling phosphate mining rights. The phosphate ore produced by Fulin Mining is mainly provided to the company for its own use to ensure normal production, and the rest of the phosphate ore is exported. In 2023, Fulin Mining achieved a total mining volume of 2.992 million tons of phosphate ore, mainly for the company's own use. While ensuring the company's normal production, it also exported 754,200 tons of phosphate ore. In 2023, the company has basically achieved self-sufficiency in phosphate ore, and only purchased a small amount of different-grade phosphate ore and phosphate concentrate from abroad to meet product quality requirements. The company expects the scarcity of phosphate ore to gradually increase in the future, and China's phosphate ore market price will remain high. We believe that the company relies on its own phosphate resources, is not easily affected by rising raw material prices, and can strongly guarantee the continuity and stability of its production.

The wet phosphoric acid process is advanced and has energy consumption and cost advantages. The company uses wet phosphoric acid, which has energy consumption and cost advantages, to replace high-energy thermal phosphoric acid, and mainly uses self-developed semi-aqueous wet phosphoric acid production process technology. The technology has the advantages of short process flow, advanced and reliable technical level, good product quality, low total energy consumption, low production cost, and smooth production operation. The company's technology has reached the advanced level of similar international technology. The company's complete semi-aqueous wet phosphoric acid technology has obvious cost advantages over dihydrate phosphoric acid technology. The main symptoms are: sulfuric acid consumption is about 2% lower than the dihydrate method; phosphogypsum crystallized water content is low, only 5%-6%, which can be effectively used to a certain extent by combining it with the company's mine filling technology; the phosphoric acid impurity content is lower than the dihydrate method, making it easy to purify and purify. We believe that the gradual improvement of the company's production capacity in the middle of the phosphorus chemical industry chain will help it develop the downstream industrial chain, thereby enhancing the synergy and market competitiveness of the entire supply chain and expanding its market share.

The Guangxi Pengyue back-end chemical product plant is about to be put into operation, and the economic efficiency is expected to be further improved. The company's subsidiary Guangxi Pengyue made a profit of -138 million in 2023. The wet phosphoric acid production line was put into production in the “200,000 tons/year water-two water wet phosphoric acid and deep processing” project, but the back-end chemical product plant was not officially produced. Therefore, the phosphoric acid produced by Guangxi Pengyue in 2023 was mainly sold abroad, and since the newly built production line has not yet reached production, various inputs and fixed costs are high, and the economic benefits are not ideal. We believe that later, with the commissioning of the Guangxi Pengyue Chemical Product Plant, the project will effectively improve its profit level after releasing production capacity.

The construction of several projects has been completed, and the rise in production capacity is beneficial to the company's performance. The company's Guangxi Fusui plant's calcium dihydrogen phosphate and anhydrous hydrogen fluoride product projects were completed at the end of 2023, but have not yet been officially put into production; the Guangxi Fusui Plant purification phosphoric acid product project was completed at the end of 2023 and trial production was carried out; the production capacity of the 100,000 tons of commercial phosphoric acid products project at the Guangxi Fusui Plant was completed in 2023, and the production time was less than 12 months.

We believe that more of the company's new construction projects will be completed in 2023, and as subsequent production capacity gradually climbs, the company is expected to have more room for performance growth.

The company's phosphorus chemical industry chain continues to improve and actively explore new performance growth points. The company continuously improves the phosphorus chemical industry chain from phosphate ore to phosphate products, vigorously implements the “integrated mineralization” industry model, realizes self-supply of phosphate ore through phosphate ore development, ensures a stable supply of basic raw materials, and continues to develop new products at the end of the industrial chain. The company's terminal product structure gradually expanded from high-performance feed calcium phosphate, ammonium phosphate, and novel fertilizers to a pattern with equal emphasis on iron phosphate for batteries, food-grade purified phosphoric acid, and fine phosphate. New construction materials were used as supplements, and developed in the direction of food grade, pharmaceutical grade, electronic grade phosphorus chemistry and organophosphorus chemistry. We believe that the company's active expansion of the phosphorus chemical industry chain will help it continue to develop new business profit growth points.

Focus on shareholder returns and increase the cash dividend ratio. According to the company's 2023 profit distribution plan, the company distributes profits for 2023 according to the principle of paying a cash dividend of 10.00 yuan (tax included) for every 10 shares, and the total cash dividend is not expected to exceed 595 million yuan. The company's cash dividend standard in 2023 has been greatly improved compared to the cash dividend of 7.00 yuan (tax included) for every 10 shares in 2022. We believe that the company's use of a higher cash dividend ratio has further protected shareholders' rights and interests, and is also expected to increase its long-term investment value.

The first sales limit period for the company's equity incentives met the conditions for lifting the limit. The equity incentive plan implemented by the company in 2022 grants senior management a total of 30,000 shares of restricted shares. The first sales restriction period expires in 2023 and the conditions for lifting restrictions have been achieved, and the company's senior management lifted a total of 150 million restricted shares in 2023. We believe that the smooth progress of the company's equity incentive plan may effectively motivate managers, attract and stabilize excellent management and technical talents, and facilitate the steady development of the company.

Investment advice: The company is expected to achieve operating income of 56.41/66.58/7.287 billion yuan in 2024-2026, and realized net profit of 987/12.44/1,469 million yuan, respectively. The corresponding EPS is 1.82/2.30/2.71 yuan, respectively. The PE multiples corresponding to the current stock price are 10.4X, 8.2X, and 7.0X, respectively. Based on the following aspects, 1) the company's own phosphate ore resources are abundant, which can guarantee the continuity and stability of its production; 2) the production and sales of the company's main products increased year-on-year in 2023, and the company is also actively developing new downstream products, such as iron phosphate for batteries and food-grade phosphoric acid, to further expand market share and increase profit margins; 3) the production capacity of the company's new construction projects is expected to be gradually released in 2024, further enhancing the company's market supply capacity and profit margin. We are optimistic about the company's stable operating capacity and new production capacity investment. We covered it for the first time, and gave it a “buy” rating.

Risk warning: downstream demand falls short of expectations; risk of product price fluctuations; production capacity investment progress falls short of expectations; technology and product development progress falls short of expectations, etc.