A new potash star that is growing rapidly. Since 2020, the company has shifted its business focus to potash production, adhered to the development strategy of “resources, scale and innovation”, consolidated resource reserves, and maintained a rapid expansion of production capacity by one million tons a year. Against the backdrop of a sharp rise in potash prices, the company's revenue and profit situation improved markedly. In 2020-2022, the company's operating income increased from 363 million yuan to 3.466 billion yuan, and net profit after deducting non-return from parent increased from 05 million yuan to 2,028 million yuan.

Efficient execution is the underlying driver of the company's rapid growth, and equity incentive plans help achieve strategic goals. In 2022, the company released the “2022 Stock Options and Restricted Stock Incentive Plan (Draft)” for core management and technical (business) personnel. The basic goals are set around increasing potash production, supported by potash sales. The basic goals are that 2022-2024 production will reach more than 800, 1.8, and 2.8 million tons, respectively, with sales volume not lower than 85% of that year's production, and higher goals of excellence and challenge. Equity incentive goals match strategic goals, bind core personnel interests, and promote the achievement of strategic goals.

The steady state of supply and demand is disrupted, and the medium- to long-term price of potash fertilizer may rise. (1) On the demand side, potash fertilizer has effects such as improving the stress resistance and quality of crops. International food prices have risen sharply in the past two years, increasing enthusiasm for potash fertilizer application. In the long run, global population growth and the decline in per capita cultivated land area place higher demands on increasing crop production and quality, and potash fertilizer is expected to receive further attention, driving demand for potash fertilizer in the long term. ① According to Nutrien, in 2001-2021, the CAGR of global potash demand was about 2.8%. Based on this growth rate, it is estimated that by 2026, global potash demand will increase to 68.24 million tons, an increase of more than 7 million tons over 2022; ② China's potash demand growth rate is higher than the world average, with a CAGR of 4.8%. ③ Demand in Southeast Asia is growing at a significant rate. According to Argus, the total demand for potassium chloride in Southeast Asia, East Asia, and South Asia is 30 million tons. With consumption upgrades and population growth, the growth rate of potash demand in Asia is expected to remain at 4%-5% in the future. (2) On the supply side, as of 2025, the new production capacity of potash fertilizer is limited. According to the review, the cumulative increase in global potash supply in 2023, 2024, and 2025 may be 400, 5, and 8 million tons, respectively. Compared with the increase in demand, there is no need to worry too much about the deterioration of the supply and demand pattern. Since the second half of 2020, due to a combination of factors such as public health events, geopolitical conflicts, and rising energy prices, potash prices have fluctuated drastically. International potash once rose to a high price of nearly 1,000 US dollars/ton. Although it has since declined, up to now, its price center has not returned to the range before 2020. We believe that the Russian-Ukrainian conflict continues to disrupt potash exports and the rise in international energy prices are important factors, and may persist in the medium to long term, raising the potash price center. (3) On the cost side, the marginal costs of old mines are rising, and new production capacity requires higher operating costs and capital expenses. Combined with rising international energy prices, potash production costs may continue to rise, which in turn supports the upward shift in international potash prices. Looking at 2023-2024, if we refer to Nutrien's analysis and forecast, global potash fertilizer shipments in 2023 are 65-67 million tons; in 2023, China's potash demand is expected to be 16.30-16.7 million tons. In 2023, the potash exports from Belarus and Russia may drop by 4 million tons and 2 million tons, respectively, compared to 2021. In the context of declining exports and rising demand, the relationship between supply and demand for potash fertilizer may become tight in 2023-2024, and the price of potash fertilizer is likely to rise or fall.

Expand volume and improve quality, reduce costs and increase profits, and move rapidly towards a world-class potash supplier (1) Heavy resources: “Resources are king”. Since 2015, the company has successively obtained 35.0 square kilometers of mining rights for the Dongtai section and 179.8 square kilometers of the Penghia-Nongpo mining section in Laos, and has obtained 48.52 square kilometers of exploration rights for the Nonglong mining section. It now has 263.3 square kilometers of mineral rights. The reserves of purified potassium chloride will exceed 1 billion tons, surpassing China's total potash resource production, accounting for about 1/3 of Asia's total reserves, which is the subsequent rapid and rapid production capacity Expansion lays a resource base.

(2) Scaling up: The company expanded production capacity “at the rate of adding one million tons of production capacity a year”. The first million-ton potash project was completed and put into production in 17 months to create a “sub-potassium speed” and reached production in March 2022. The second million tons took only 10 months to successfully select and test the plant, creating a new “sub-potassium miracle”, striving to form 5 million tons of potash fertilizer production capacity in 2025, and achieve a long-term potash production capacity of 7 to 10 million tons/year, making rapid progress towards a world-class potash supplier. In the 2022-2025 window period, the company's production capacity supply release is expected to increase the most, and the company's high growth attributes will be established. It is expected to quickly seize market share and further reduce costs by taking advantage of scale.

(3) Cost reduction: In the future, companies can further reduce costs through measures such as amortization of mining rights, large-scale, smart mine construction, use of large-scale machinery, reduce manual use, increase mineral processing yield, and reduce energy costs.

(4) Improving quality: According to information from the interactive platform, large red granular potassium in Southeast Asia has an excess gross profit of about 17-87 US dollars/ton compared to pink potassium. The company has already achieved production capacity of 500,000 tons in the third phase, and the fourth phase of the new granular potassium production capacity of 300,000 tons has now started. After the project is put into operation, it is expected to form a production capacity of nearly 1.2 million tons of granular potassium. It is estimated that 5 million tons of potash fertilizer will match the production capacity of 2.5 million tons of granular potassium, and the company's product structure and profitability are expected to be further improved.

(5) Increase profit: The company relies on associated resources such as bromine, lithium, sodium, magnesium, cesium, and rubidium in the Laos potash mine to build a non-potassium industrial park. Bromine is the company's key promotion project. The domestic bromine price remains above 20,000 yuan/ton all year round. As of November 3, 2023, the domestic bromine price is 32,000 yuan/ton. According to the interactive platform, the company's bromine production cost is 12,000 yuan/ton, and it is expected that it will still drop by 6,000 yuan/ton in the future. In May 2023, the company's first non-potassium project, a bromine project with an annual output of 10,000 tons, was successfully put into operation and reached production. The highest bromine output in a single day exceeded 36 tons, reaching 120% of the design capacity. In the future, the company strives to achieve a bromine production capacity of 50,000 to 10,000 tons and multiple new bromine-based material product lines by the end of 2025, creating a second profit growth curve.

Profit forecasting

Potash prices were strong in the fourth quarter. We raised the 2023 potash price center, considered the company's sales strategy, etc., and adjusted potash fertilizer sales slightly. We expect the company's revenue for 2023-2025 to be 41.54/68.60/8.704 billion yuan (original forecast was 41.58/69.40/8.662 billion yuan), net profit of 14.47/24.57/3,059 billion yuan (original forecast was 14.35/27.30/3,508 billion yuan), and EPS was 1.56/2.64/3.29 yuan (original forecast was 1.54/2.94/3.78 yuan), corresponding to the closing price of 27.63 yuan on November 20, 2023, PE 18/10/8 times

We selected Salt Lake Co., Ltd., which also has potash fertilizer business, and Jinshi Resources, which is deeply involved in fluorite resource development, as comparable companies. The average PE values for 2023-2025 are 20.88X, 14.13X, and 11.10X. Considering factors such as the company's rapid expansion of more than one million tons, the expected further reduction in costs, continuous improvement in product structure, and the addition of new profit growth points in the non-potassium business, we are optimistic about the company's long-term growth potential and increase the company's “buy” rating.

Risk warning: Potash prices have fluctuated greatly, trade policy changes in Laos, and project progress is lagging behind.