Description of the event

Vietnam Petroleum Technology Service Corporation (PTSC) and Laos National Transmission Grid Corporation (EDL-T) visited Asia Potash International's potash production base in Laos on June 7 and 11, 2024, respectively. PTSC said it hopes to further develop Shula Port and sign a memorandum of cooperation of 1 million tons/year to guarantee the overseas transportation of 3 million tons of potash products and 5 million tons of potash fertilizer products in the medium term; EDL-T had in-depth discussions with the company on electricity plans for industrial park development, focusing on exchanging opinions and reaching consensus on improving the level of electricity service guarantee.

Overseas production capacity has been steadily released, cooperating with local enterprises to reduce logistics and electricity costs as the first batch of Chinese companies to “go global” to implement overseas potash salt development. Through cooperation with local enterprises, Asia Potash International is solving the growing logistics and electricity demand brought about by the steady release of potash fertilizer production capacity.

The company focuses on potash mining, potash production and sales. Currently, as the largest potash enterprise in Southeast Asia, the company has a potash production capacity of 1 million tons/year in Laos. The second and third potash projects with an annual output of 1 million tons were successfully put into trial in January 2023 and April 2024, respectively. According to the 2023 annual report, the company has now set up dedicated shipping terminals in Vietnam's Groo Port and Wan'an Port, and has set up backup shipping terminals at Bangkok Port and Laem Chabang Port in Thailand. Shula Port is one of the nearest ports to sea in a straight line from the company's potash base. Further cooperation will help take advantage of the fact that the Laos base has a shorter delivery distance compared to Russian potash and potash. In December 2023, the company's power plant project was approved and authorized by the Lao government. After the completion of the power plant project, the company's electricity costs are expected to drop by about 35% per degree compared to the period of high electricity prices.

The medium- to long-term business demand side is supported, and the potash market is expected to rise in the medium to long term. The demand side of potash fertilizer is supported by rising grain prices, supply-side mining resources are limited, and potash prices are expected to advance steadily. Downstream potash fertilizer is mainly used in agriculture. According to iFind data, the domestic agricultural product production price index will rise in 2024, +2.25% compared to the beginning of the year, and the corresponding demand for potash fertilizer will recover. China has limited potash resources, limited independent production capacity, and relies on imports from Belarus, Russia and Canada. However, in recent years, due to geopolitical and other factors, the global potash supply pattern has changed greatly, and overseas resources from Chinese enterprises are needed to feed back the domestic market. In 2023, China imported 1.7084 million tons of potash fertilizer from Laos, an increase of 181.45% over the previous year, accounting for 14.76%, effectively alleviating the conflict between domestic potash supply and demand.

The company reduces costs by obtaining high-quality overseas mineral resource reserves, rapid capacity expansion, and large-scale production. At the same time, the company collaboratively develops non-potassium resources by utilizing the advantages of rich bromine elements in minerals to consolidate the foundation for profit growth. In 2023, the capacity utilization rate of the company's 1 million tons of potash fertilizer project reached 164.67%. Market demand is sufficient, and the expanded production capacity will be effectively utilized. As the company continues to expand production capacity, the company is expected to reduce production costs and increase profit margins through scale effects. In addition, the company continues to optimize the product structure and increase the production capacity of large red granular potassium with higher profit added value. Currently, it has a production capacity of nearly 900,000 tons/year, which is expected to create new profit growth points through product structure optimization.

In May 2023, the company's 10,000 ton bromine project was successfully put into operation, filling the gap for Chinese enterprises to produce bromine overseas, and striving to achieve 25,000 tons of bromine production capacity and downstream flame retardant new material projects in 24 years.

Investment advice

The company's net profit for 2024-2026 is estimated to be 1,517 billion yuan, 22.60 billion yuan, and 2,844 billion yuan respectively (the value before 2024-2025 was 22.56 billion yuan and 2,887 billion yuan, respectively), with year-on-year growth rates of 22.8%, 49.0%, and 25.8%, respectively. The corresponding PE is 11, 7, and 6 times, respectively. Due to factors such as uncertainty about potash production capacity construction in Laos, the rating was downgraded to “increase”.

Risk warning

(1) Risks caused by price fluctuations of raw materials and major products; (2) production safety risks;

(3) Environmental protection risks;

(4) Project commissioning progress falls short of expectations;

(5) Equity incentives fell short of expectations.