Incident: The company released its 2024 three-quarter report. 2024Q1-3 achieved operating income of 15.697 billion yuan, -2.78% year over year; realized net profit of 0.669 billion yuan, -6.36% year over year; realized deducted non-net profit of 0.584 billion yuan, +3.98% year over year. Among them, 24Q3 achieved operating income of 4.691 billion yuan, -13.02%/-22.47% year over year; realized net profit of 0.215 billion yuan, +5.93%/-10.40% year over month, respectively; and realized deduction of non-net profit of 0.143 billion yuan, or -22.0.15% year over month. In the third quarter, the company generated non-recurring profit and loss of approximately $72.59 million, of which investment income and profit from hedging instruments were about $69.25 million.

Phosphorus compound fertilizer prices are picking up, and the chemical sector is still operating under pressure: According to Baichuan Yingfu data, the average prices of 2024Q3 domestic sulfur-based compound fertiliser/monoammonium phospate/soda ash/yellow phosphorus market were 2871.6/3281.0/1701.1/22773.8 yuan/ton, respectively, +1.4%/-16.4%/+2.6% month-on-month, respectively, +3.7%/+18.1%/-6.3%. The price of compound fertilizer increased slightly in the third quarter, while monoammonium phosphate was driven by demand for industrial monoammonium and agricultural fertilizer preparation. Prices increased significantly from month to month. We expect the rise in the price of phosphorus compound fertilizer products combined with the marginal decline in the cost of raw materials such as ammonia synthesis to drive a marginal improvement in the company's profit margin in this sector. However, at the same time, the price of soda ash continued to decline in the third quarter, and the price of yellow phosphorus fluctuated at a low level. It is expected that the company's profits in the chemical sector will still be under pressure.

2024Q3 recorded gross margin/ net sales margin of 10.88%/4.72%, -0.07/+1.17PCT year-on-year, and -0.44/+0.65PCT, respectively.

The company's free cash flow is stable, and the “resource+industrial chain” strategic layout continues to improve. The compound fertilizer business's cash flow is stable and strong. 2024Q1-3's net cash flow from operating activities was $0.834 billion, an increase of $0.319 billion over the same period last year. Looking at the third quarter alone, although the company's net cash flow from operating activities was negative, we think it was mainly due to the impact on the revenue side, or mainly due to the drop in raw material urea prices in August/September, which led to delays in compound fertilizer orders and revenue confirmation. It can also be verified from the side that the company's inventory increased by about 0.94 billion yuan from the end of the third quarter compared to the end of the second quarter. We are optimistic that as the procurement pace of compound fertilizer dealers returns to normal, the company's compound fertilizer product sales and profits are expected to grow steadily. The company continues to improve the layout of the nitrogen fertilizer and phosphate fertilizer industry chain. The construction of the 0.7 million ton ammonia synthesis project at the Yingcheng base is being fully advanced; the Leibo base plans to build a 4 million tons/year phosphate mining project and is currently undergoing mine construction; at the same time, in April of this year, the holding subsidiary Leibo Kerry obtained prospecting rights for the Aguloxia phosphate mine in Leibo County and the western section of the Niuniuzhai phosphate mine in Leibo County. On October 14, the company announced that it had completed the former mining license and plans to build a 2.9 million-ton/year phosphate mining project. We are optimistic that the company will continue to adhere to the “resource+industrial chain” strategic layout, fill in and complete the compound fertilizer nitrogen and phosphorus industry chain, and continue to strengthen cost control and industrial synergy advantages along the downstream layout along the industrial chain.

Investment advice: Based on the company's latest performance and changes in the price spread of main products, we maintain our previous net profit forecast for the company 2024-2026, which was 0.912/1.073/1.287 billion yuan, respectively, corresponding to the current PE of 11.0x/9.4x/7.8x, respectively. Referring to comparable company valuations and historical company valuations, we gave the company a target PE of 12 times in 2025, corresponding to a target price of 10.68 yuan, maintaining a “recommended” rating.

Risk warning: The progress of projects under construction falls short of expectations; large fluctuations in agricultural products affect demand; rapid rise in raw material prices, etc.