We have reaffirmed our “buy” rating and maintained our target price of HK$5.70. We slightly raised China Heart Link Fertilizer (the “Company”)'s 2024/2025/2026 earnings forecast by 7.4%/3.9%/2.7% to RMB 1.093/RMB 1.115/RMB 1.255. We maintain our target price of HK$5.70, which is equivalent to a price-earnings ratio of 4.8x/ 4.7x/ 4.2x for 2024/2025/2026.

Net shareholders' profit for the first half of 2024 was RMB 0.687 billion, up 25.8% year over year. Total revenue for the first half of 2024 remained the same as RMB 12.1 billion, with revenue from the top three products being RMB 3.834 billion (+9.0%) for urea, RMB 3.41 billion (+6.3%) for compound fertilizer, and RMB 1.291 billion (+32.3%) for methanol, respectively. The average sales price and sales volume changes for urea were -13% and +25%, respectively, for compound fertilizer -6% and +13%, and for methanol +1% and +13%. Overall gross margin increased by 2 percentage points to 19.5% year-on-year, mainly due to improvements in gross margins of urea (+2 percentage points to 31%), compound fertilizer (+6 percentage points to 18%), and methanol (+10 percentage points to 8%). The improvement in gross margin of these products was mainly due to lower prices of raw materials such as coal and potash.

The balance between supply and demand in the fertilizer industry will improve slightly due to economic recovery and a lower-than-expected increase in new supply. 1) We expect compound fertilizer performance to improve further in the second half of 2024 as coal prices stabilize and the economy recovers, thereby improving the balance between supply and demand in the fertilizer industry. 2) Although companies in the industry have formulated plans to expand fertilizer production capacity, the actual operating rate and implementation of production standards may fall short of expectations. Furthermore, strict environmental control to eliminate backward production capacity and winter environmental maintenance will further improve the balance between supply and demand by limiting oversupply. 3) The company strives to enhance brand influence through “differentiated products+accurate services”. It mainly uses big data, keeps an eye on large farmers, changes the organizational structure of the company's sales side, and transforms dealers into service providers.

Catalysts: 1) The country requires the power industry to complete urea desulfurization transformation, which will greatly increase industrial demand for urea; 2) The adjustment of export control policies may support the domestic fertilizer market.

Risk factors: 1) Fluctuations in raw material prices may affect gross profit margins; 2) Competition in the fertilizer industry may continue to be intense.