Open Source Securities: Supply and demand in the compound fertilizer industry are optimistic, leading companies are recovering profits and increasing dividends
The Zhitong Finance App learned that Open Source Securities released a research report saying that as supply and demand in the compound fertilizer industry improves, leading compound fertilizer companies with multiple advantages such as industrial chain, scale, channels, innovation, environmental protection, etc., as well as significant brand influence, have outstanding competitive advantages. As the price fluctuation of monomer fertilizer slowed down, leaders in the compound fertilizer industry ushered in quantitative profit restoration, and steady cash flow returns led to a steady increase in dividends.
The main views of Open Source Securities are as follows:
Compound fertilizer: Industry supply and demand are improving, and leading companies are optimistic about quantitative profit restoration and dividend increases
The upstream of compound fertilizer is elementary fertilizer such as nitrogen fertilizer, phosphate fertilizer, and potash fertilizer, and the downstream is connected to agricultural production. (1) Demand side: According to data from the National Bureau of Statistics, domestic agricultural compound fertilizer application increased from 9.18 million tons to 24.01 million tons from 2000 to 2023, with a CAGR of 4.3%, which is significantly higher than the total application rate of nitrogen fertilizer, phosphate fertilizer and agricultural fertilizer; in 2023, the domestic chemical fertilizer compounding rate was 47.8%. As the country promotes chemical fertilizer control and efficiency, scientific fertilization, and the compound fertilizer product structure is rapidly changing, and the compound fertilizer usage and market size are expected to increase steadily. (2) Supply side: According to Baichuan Yingfu data, the domestic production capacity of compound fertilizer is currently 134.14 million tons. China's agricultural market is vast and scattered, and the sales season is obvious. Compound fertilizer companies are mostly concentrated in resource production areas or sales locations. Due to sales settlement and multi-base operation, the industry's production capacity is scattered, and the annual operating rate remains below 50%. (3) Price review: Compound fertilizer products mainly use a cost plus pricing model combined with market price conditions. The cost of raw materials accounts for more than 80% of the total cost of compound fertilizer, which has a great impact on the volume and price of compound fertilizer. From 2020 to the first half of 2023, wide price fluctuations in upstream monomer fertilizer, synthetic ammonia, sulfuric acid, etc. had a negative impact on the production and sales of compound fertilizers. Since 2023Q3, raw material price fluctuations have slowed down, and leading compound fertilizer companies have ushered in sales growth and profit recovery.
Leading companies have remarkable advantages, continuous improvement in industrial chain integration, and steady cash flow to help dividends grow steadily
Compound fertilizer companies include production type and marketing type. Since 2020, the compound fertilizer industry chain has returned to rationality after extensive shocks, and industry competition has intensified. Competition between the two major types of enterprises around cost, products, brands, and channels has become the norm, and the competitive advantages of leading companies have become more prominent. (1) Xinyangfeng: The annual production capacity of compound fertilizer is 7.98 million tons, and the annual production capacity of monoammonium phosphate is 1.85 million tons. The company's compound fertilizer production and sales volume has been ranked first in China for many years, and facilities such as phosphate ore, sulfuric acid, and synthetic ammonia are improving. (2) Yuntu Holdings: With an annual production capacity of 7.45 million tons of compound fertilizer and 430,000 tons of monoammonium phosphate, it focuses on building a “salt-alkali-fertilizer” nitrogen fertilizer industry chain and a hierarchical phosphoric acid utilization industry chain. (3) Stanley: With an annual production capacity of 5.9 million tons of compound fertilizer and an annual production capacity of 1.1 million tons of monoammonium phosphate, the “brand+channel+product+service” comprehensive business model. As the Hebei Chengde and Hubei Songzi phosphorus chemical projects entered use, the company achieved partial self-supply of phosphate fertilizer raw materials. Since 2022, leading companies have had a steady turnover rate of inventory and accounts receivable, a continuous net inflow of operating cash, and a steady increase in the cash dividend ratio.
Profit forecasting and investment advice
Demand side: The compound fertilizer rate is expected to maintain an upward trend for a long time. The compound fertilizer product structure is also expanding from conventional compound fertilizers to efficient, specialized, functional, and precise new fertilizers, and the demand for compound fertilizer and market size are expected to grow steadily. Supply side: Compound fertilizer leaders enhance their competitiveness in all aspects from upstream resource control to industrial chain integration and improvement, from technological innovation to product research and development, brand building, and market expansion, which are expected to enhance their resilience to risks and the profitability of products, and their market share is expected to continue to increase. [Recommended targets] Yuntu Holdings, Xingfa Group, etc. [Beneficiaries] Stanley, Xinyangfeng, Yuntianhua, China Heart to Heart Chemical Fertilizer, etc.
Risk warning: large fluctuations in raw materials, increased market competition, safe and environmentally friendly production risks, etc.