1Q24 results fall short of market expectations
The company announced 1Q24 results: revenue of 6.89 billion yuan, +4.8% year on year; net profit to mother of 380 million yuan, -15% year over year, lower than market expectations. We believe that 1Q24's performance is under pressure mainly due to the continued weakness of the silicone/glyphosate industry. In addition, 1) The company plans to launch a 2024 employee shareholding plan. The scope of implementation includes no more than 1,500 senior managers, core technical leaders, etc., and the maximum amount of capital raised is 360 million yuan. 2) Hubei Xingrui, a wholly-owned subsidiary, plans to acquire 100% of Gucheng Xingfa's shares, belonging to Yichang Xingfa, the controlling shareholder of the company, with a transaction consideration of 329 million yuan. Gucheng Xingfa has 8.9937 million tons of silica ore resources and 1 million tons/year of ore production capacity.
Development trends
Glyphosate prices are close to the bottom, but upward elasticity may be limited. The overall price of glyphosate was weak in 1Q24, with an average quarterly price of 25,600 yuan/ton, -8% month-on-month. We believe it was mainly due to some production cuts/discontinuation of production capacity in the early stages, and the demand side's acceptance of high-priced products was relatively low. Looking ahead, although the current glyphosate price/spread is close to the historical bottom since 2010, the continued decline in product prices is likely to be relatively low. However, considering that downstream inventories are currently high (according to Baichuan information, as of April 26, glyphosate manufacturers have stocks of 53,000 tons), and weak prices of large agricultural products such as soybeans/corn may continue to inhibit downstream acceptance of high-priced products, we believe that the upward flexibility of glyphosate prices is also limited, and may remain volatile at the bottom throughout the year.
Silicone prices may remain volatile at the bottom. It will take time for the silicone boom to recover. The average price of silicone in 1Q24 was 15,500 yuan/ton, -11% year-on-year and +8% month-on-month. We believe that the month-on-month increase is mainly due to an increase in the price of industrial silicon on the raw material side. Looking ahead, considering 1) the supply side, we estimate that by the end of 2023, China's silicone production capacity had increased to about 2.7 million tons/year, and there is still a possibility that large-scale production capacity under construction (more than 500,000 tons/year) will be put into operation in 2024; 2) On the demand side, China's domestic consumption of silicone plus export demand increased slightly to about 2.3 million tons year-on-year in 2023. Taking into account the macroeconomic growth situation, we judge that domestic silicone consumption and export demand in 2024 will still have to wait some time for the boom to recover.
The phosphate boom is expected to continue. According to Baichuan information, the average price of phosphate ore (28% taste) was 939 yuan/ton in 1Q24, up slightly from month to month, and the boom remained high. Looking ahead, considering the long construction period for phosphate ore production capacity, we believe that the short-term increase in supply is limited, and supply and demand may continue to be tight. By the end of 2023, the company had its own phosphate production capacity of 5.85 million tons/year, which is expected to fully benefit from the phosphate boom.
Profit forecasting and valuation
Considering that phosphate prices have remained relatively high recently, we have kept our profit forecasts unchanged for 2024 and 2025. The current stock price corresponds to the 2024/2025 price-earnings ratio of 12.0x/11.4x. Maintaining an industry rating and a target price of 25.00 yuan, corresponding to 14.1 times the price-earnings ratio of 2024 and 13.4 times the price-earnings ratio of 2025, there is 16.8% upside compared to the current stock price.
risks
Glyphosate prices continued to fall, and agricultural commodity prices fluctuated greatly.