Incident: The company released its 2024 semi-annual report. The first half of 2024 achieved operating income of 1.698 billion yuan, -16.03% year over year; net profit to mother of 0.27 billion yuan, -62.32% year over year. Among them, 24Q2 achieved operating income of 1.064 billion yuan, -8.82%/+68.09% year-on-year, and realized net profit of 0.189 billion yuan, or -50.40%/+132.56% year-on-month.

Comment:

In the first half of the year, the company's potash production and sales increased year on year, but the price decline dragged down revenue: in the first half of this year, the company produced 0.8451 million tons of potassium chloride products, up 11% year on year, and sold 0.861 million tons, up 12% year on year. Among them, 24Q2 potassium chloride production/sales volume was 0.415/0.468 million tons, respectively, -3.5%/+56.8% month-on-month. The company's potash production and sales grew steadily, with Q2 sales increasing particularly significantly, but the company's revenue performance was hampered by the fall in high domestic and foreign potash prices. According to Baichuan Yingfu statistics, the average price of potash fertilizer in the Southeast Asian market and the domestic market in the first half of this year was 290 US dollars/ton and 2,440 yuan/ton respectively, which was -37.0% and -24.1%, respectively. In July of this year, domestic potash fertilizer contract negotiations were completed, and the 2024 potash import contract price was confirmed as CFR 273 US dollars/ton. We are optimistic about the large contract price confirmation that the peak season for autumn fertilizer is approaching. The domestic potash market is expected to regain confidence, and there is limited room for further decline in potash prices.

Affected by potash prices, the company's gross margin declined: the fall in potash prices affected the company's profit margin level. 24H1 recorded gross margin/net sales margin of 49.06%/14.99%, respectively, and -13.16PCT/ -20.17PCT, respectively. At the same time, the company's depreciation and amortization pressure increased due to the water flow problem in the main inclined well of the second 1 million tons/year potash project in Laos, while expenses and costs increased. Currently, the company has established cooperation with authoritative domestic water control agencies and is effectively managing the flood problem. The company also stated that it will combine early mining construction experience and cooperate with relevant water treatment technical service agencies to jointly summarize an efficient waterproof water treatment mine construction model to ensure that the company successfully completes subsequent production capacity expansion.

The bromine expansion project was completed, and the company's industrial chain layout was continuously improved: the company established a non-potassium division in 2022 with the intention of expanding the company's profit growth points. In July of this year, the company successfully completed a bromine expansion project with an annual output of 0.025 million tons. We are optimistic that the company's upstream and downstream bromine industry chain will continue to improve, and it is expected to become an important chain carrying the upstream and downstream chemical industry layout in the non-potassium business in the future. In terms of potash fertilizer, in January 2023 and April 2024, the company successfully completed feed testing for the second and third 1 million tons/year potash project, and will also speed up the completion of the underground mining work for the two projects. Furthermore, the company plans a total annual production capacity of 5 million tons of potash fertilizer in the medium term. We continue to be optimistic about the company's high growth in the medium to long term.

Investment proposal: Based on the company's semi-annual profit performance and the pace of increasing the new potash production capacity in Laos, we adjusted the company's previous profit forecast for 2024-2025 from 1.827/2.525 billion yuan to 0.739/1.338 billion yuan, and supplement the 2026 net profit forecast of 2.293 billion yuan, corresponding to the current PE of 21.8x/12.1x/7.0x, respectively. Referring to the company's historical valuation center, we gave the company a target PE of 15 times in 2025, corresponding to a target price of 21.60 yuan, and downgraded the rating to “recommended”.

Risk warning: The construction progress of the new project fell short of expectations; new mineral rights were not approved; overseas companies quickly released production capacity and the competitive pattern deteriorated; extreme weather affected crop cultivation and harvesting; and the price of potash fertilizer fluctuated greatly.