Migao Group is a leading potash company in China. According to the Frost & Sullivan report, based on the 2023 potash sales volume, Migao Group ranked fourth among Chinese potash companies and third among non-reserve potash companies in China. We are optimistic that the steady recovery in potash prices will drive the company's profit improvement. It is estimated that the operating income of Mikao Group in the 2025-2027 fiscal year will reach 4.11/4.73/5.48 billion yuan, up 9%/15%/16% year on year, respectively, and net profit of 0.38 billion/0.44 billion/0.52 billion yuan, up 50%/17% year on year. The target price of HK$8 was given to the Mico Group, corresponding to the projected PE multiplier of 13.4 times for FY2025, for the first rated purchase.

Report summary

The Migao Group is the leading potash fertilizer company in China. The company's main products are potassium chloride and potassium sulfate, which accounted for 83% and 12% of revenue in FY24, respectively. The company's performance declined in FY24 due to falling potassium chloride prices. Revenue reached 3.77 billion, down 16% year on year, and net profit to mother 0.25 billion, down 31% year on year. We believe that the Migao Group has high-quality customer resources and plenty of room for growth. The sales growth rate will continue to grow by about 15% in the next three years.

The company has established 6 production bases in Heilongjiang Province, Jilin Province, Guizhou Province and Guangdong Province in China. They are all located in major planting areas in China, close to major customers, and have convenient transportation networks. The company has established strategic relationships with major customers such as Beidahuang and Guizhou Tobacco. Other customers such as Hulunbuir Nongken and Anhui Huilong have maintained business partnerships for more than 10 years.

China relies on imports for potash fertilizer, and Migao has scarce potash import rights. The global potash market is an oligopoly. The pattern is stable for a long time, and there is a clear mismatch between supply and demand. According to USGS (US Geological Survey), the three countries of Canada, Russia, and Belarus account for more than 60% of global potash reserves in 2022. China is a major consumer of potash, but potash resources are relatively scarce, and 50% of potash demand is highly dependent on imports. The Migao Group has been operating the potash business in China for more than 20 years and has established a full range of potassium chloride procurement channels. It can obtain stable potassium chloride supply from major overseas potash producers at competitive prices.

China's potash industry is expected to maintain a slow growth rate in the future. In 2022, China's potassium chloride sales reached 15.38 million tons, accounting for 77.4% of total potash sales. In 2022, sales of potassium sulfate and potassium nitrate reached 3.73 million tons and 0.76 million tons, respectively. According to Frost & Sullivan's forecast, China's potassium chloride sales will increase from 16.53 million tons in 2023 to 18.05 million tons in 2027, with a CAGR of 2.2%. By 2027, sales of potassium sulfate and potassium nitrate will reach 4.46 million tons and 0.91 million tons, respectively, with compound annual growth rates of 3.0% and 2.5% from 2023 to 2027.

First rating purchase. We are optimistic that the steady recovery in potash prices will drive the company's profit improvement. It is estimated that the operating income of Mikao Group in the 2025-2027 fiscal year will reach 4.11/4.73/5.48 billion yuan, up 9%/15%/16% year on year, respectively, and net profit of 0.38 billion/0.44 billion/0.52 billion yuan, up 50%/17% year on year. We gave the MGM Group a target price of HK$8, corresponding to the projected PE multiplier of 13.4 times for FY2025, for the first rated purchase.

Risk warning: industry competition intensifies; prices fall short of expectations;