Summary of the report

The heart-to-heart performance broke out in the first half of the year, and the net profit of returning to the mother increased by 258%, far exceeding expectations. In the first half of the year, the company's revenue was 7.57 billion yuan, up 53.3 percent from the same period last year; gross profit was 2.12 billion yuan, up 99.4 percent from the same period last year; profit attributable to the owner of the parent company was 650 million yuan, up 258.4 percent from the same period last year; and earnings per share were 55.1 cents. The performance in the first half of the year was much higher than expected, mainly due to the commissioning of Jiujiang base and the rise in prices of urea, melamine and other products.

Jiujiang base is the new driving force of heart-to-heart development. Construction of the Jiujiang base began in September 2016 and was put into production in February 21, with an additional capacity of 600000 tons of synthetic ammonia, 520000 tons of urea and 400,000 tons of dimethyl ether. After the Jiujiang base was put into production, the geographical layout of the company was further optimized, forming a strategic layout of the Central Plains, Northwest and South China bases supporting each other and radiating the whole country. Jiujiang base was put into production on February 8 and was officially put into operation in March. Relying only on four months of operation, Jiujiang base accounted for 40% of the net profit in the first half of the year, accounting for the highest proportion of net profit among the three major bases. It can be seen that Jiujiang base has a great driving force for the development of heart to heart.

The prices of chemical fertilizers and chemical products have risen sharply. In the first half of the year, chemical fertilizer products accounted for 57%, chemical industry accounted for 37%, and others accounted for 6%. Chemical fertilizer products include urea, compound fertilizer and vehicle urea. Urea has always been the most important product of heart to heart, accounting for the highest proportion of income, up to 27%. Urea prices have continued to rise this year, from 1800 yuan / ton at the beginning of the year to 2700 yuan / ton at present, an increase of 50%. Chemical products include methanol, dimethyl ether, melamine, liquid ammonia, furfuryl alcohol and so on. The price of melamine rose greatly in the first half of the year, from 6600 yuan / ton at the beginning of the year to 13000 yuan / ton at present, an increase of nearly 100%. We believe that the prices of urea and melamine are already high and are expected to fluctuate at high levels in the second half of the year.

Target price is HK $9.3, buy rating. We believe that with the completion of the upgrading and transformation of Xinxiang No. 2 and No. 3 Plant in the second half of the year, and the new production capacity of hydrogen peroxide and DMF, the scale and cost control of China's Xinlianxin Fertilizer will rise to a new level to ensure high performance growth in 21 and 22 years. We expect the company's homing net profit to reach 1.26 billion and 1.54 billion in 21 and 22 years, up 262% and 23% from the same period last year. We give the target price HK $9.3, corresponding to the 21-22 forecast price-to-earnings ratio of 7.2 times and 5.8 times, respectively, which has 100% room to rise from the current price and maintain the buy rating.

Risk hint: industry competition intensifies; epidemic situation intensifies.