Company highlights
(1) Migao Group is a Chinese private potash enterprise founded in 2003, engaged in product processing, manufacturing and resale. The company mainly sells products such as potassium chloride and potassium sulfate, most of which are supplied to the domestic market. Currently, the company has five main production facilities in Heilongjiang, Jilin, Guizhou and Guangdong. According to potash sales volume and sales revenue in 2022, the company is the third largest potash enterprise in China, with market shares reaching 7.1% and 6.0% respectively.
(2) The company's customers are mainly agricultural reclamation enterprises, agricultural integrated service enterprises and tobacco companies.
Product demand is affected by seasonality. The peak season is the fertilizer period for farmers, that is, spring farming season (January to March) and harvest fertilization season (October to December).
(3) The company procures the main raw material potassium chloride through overseas and domestic suppliers. Raw materials are the main component of product costs, accounting for 96.4% of sales costs for the first eight months of fiscal year 2024 (ending March 31).
Industry prospects
According to the Frost & Sullivan report, in terms of sales volume, the compound annual growth rates of China's potassium chloride, potassium sulfate, and potassium nitrate markets in 2018-2022 were 1.3%, -3.3%, and -1.8%, respectively. The relevant 2023-2027 forecast CAGR is 2.2%, 3.0%, and 2.5%. According to China's sales volume in 2022, the potassium chloride and potassium sulfate markets are relatively concentrated, with the top five market shares totaling 71.0% and 58.2%, respectively. The potassium nitrate market is scattered, and the total share of the top five related markets reached 8.9%.
Company operation
The company's revenue increased from $2.08 billion (RMB, same) in fiscal year 2021 (ending March 31) to $4.72 billion in fiscal year 2023, mainly due to the increase in sales volume and average sales price of potassium chloride from 730,000 tons and 1724 yuan/ton to 1.07 million yuan and 3,772 yuan/ton respectively during the same period. Potassium chloride sales revenue increased from 1.25 billion yuan to 4.02 billion yuan, and its share of total revenue increased from 60.1% to 85.2%. Potassium sulfate sales revenue declined from 520 million yuan to 480 million yuan.
The company's gross profit and shareholders' net profit increased from 250 million yuan and 200 million yuan in fiscal 2021 to 770 million yuan and 410 million yuan in fiscal 2023, respectively. The gross margin increased from 12.0% to 16.5% during the same period. Among them, the gross margin of potassium chloride increased from 10.3% to 17.1%, but the gross margin of potassium sulfate fell from 15.6% to 10.5%. Shareholders' net profit margin fell from 9.7% to 8.6%, mainly due to exchange losses and reduced interest income.
Revenue for the first eight months of fiscal year 2024 fell 16.3% year on year to 2.28 billion yuan, mainly due to the average sales prices of potassium chloride and potassium sulfate both falling 36.8% and 23.9% year over year to 2,598 yuan/ton and 3,066 yuan/ton, respectively. Although sales increased 29.7% and 54.0% year over year to 750,000 tons and 80,000 tons, respectively, this did not offset the impact of the drop in sales prices. Since the Russia-Ukraine conflict did not ultimately lead to a tight global supply of potash fertilizer, the potash market price has declined from a high level since the third quarter of 2022. The company's gross profit and shareholders' net profit for the first eight months of fiscal year 2024 decreased by 28.5% and 33.8% year on year to 330 million and 160 million yuan, respectively. The main reason was that the gross margin of potassium chloride fell 4.0 percentage points to 13.5% year on year, leading to a drop of 2.5 percentage points to 13.5%.
The company expects a year-on-year decline in profit for the 2024 fiscal year, as the average selling price of the main product, potassium chloride, fell year on year, resulting in a year-on-year decline in the company's revenue and gross margin.
In addition, the company plans to build a potassium nitrate production facility in Mianyang, Sichuan. It is expected to start construction in the second half of 2024 and be completed and put into operation in the second half of 2025.
Valuation level
We selected three Hong Kong stock fertiliser/chemical companies for benchmarking, including Sinochem Fertilizer (297 HK), China Heart Link Chemical (1866 HK), and CNOOC Petrochemical (3983 HK). In terms of valuation, the company's price-earnings ratio for FY2023 was 6.7-8.8 times higher than that of its peers. Although the company's net interest rate is 8.6%, which is higher than that of some peers, the year-on-year growth rate of net profit was only 2.2%, which is lower than that of peers.
A track record of price stability
The price stabilizer this time is GF Securities. It has participated in sponsoring 2 projects in the past 12 months, and all have also acted as price stabilizers. The performance on the first day was 1 increase of 1 flat.
Market atmosphere
Over the past 6 months, a total of 40 IPOs have been listed in Hong Kong stocks, and the market atmosphere has gradually improved in recent months. The breakout rate for the past 6 months was 25.0%, with an average first-day increase of 11%. The company introduced 4 cornerstone investors, including peers and financial investors, including Shenyang Xinchang, Xinhua Technology (note: controlling shareholders of China Heart to Heart), Harvest Global Investment, and VMS Holdings, which is conducive to stabilizing market confidence.
Subscription advice
The company is the third largest potash enterprise in China and has market advantages. However, industry growth is expected to be in the low single digits. The market for the company's main product, potassium chloride, is also relatively concentrated, and development needs to face challenges. The company anticipates a year-on-year decline in profit for the 2024 fiscal year as the average selling price of the main product, potassium chloride, falls, and a sharp rebound in prices requires more incentives. The company's new production line in Sichuan is only expected to be put into operation in the second half of 2025, and the revenue contribution will be reflected as soon as fiscal year 2026. In terms of valuation, the company's historical price-earnings ratio is higher than that of peers.
The company's fundamentals and valuation are slightly poor. Although the IPO climate has improved in recent months and price stabilizers have a good track record, the company has also brought in a number of cornerstone investors. Therefore, based on the above, 66 points were given, and the rating was “neutral.”
Risk warning
(1) price and cost risk, (2) market competition risk, (3) policy risk, (4) global supply and demand risk