As a leading domestic tomato processing company rooted in Xinjiang, Guannong mainly focuses on three major Xinjiang specialty agricultural products: tomatoes, cotton, and sugar beets. It has been operating along the value chain, fully leveraging its advantages in raw material costs, production scale, and quality. The Company's core product, large-packaged tomato ketchup, mainly serves the export market.

Benefiting from global supply shortages, the transfer of production capacity in Europe, and the appreciation of USD against RMB, Guannong's tomato processing business has achieved a ramp-up in both shipment and prices and stands well to grow further going forward. The coupling among the prosperity in tomato ketchup, cotton, and sugar beets, coupled with the Company's upcoming concentrated commissioning of production capacity, may unlock its earnings growth potential. Its shareholding company, SDIC Xinjiang Luobupo Potash, has posted excellent operating performance, benefiting from Guannong’s large production scale and significant resource cost advantages, and we expect it to continue to contribute considerable investment returns to the Company. We assign 13x 2023E PE to derive a target market cap of Rmb9.7bn, equivalent to a target price of Rmb12, and initiate coverage with a “BUY” rating.

Deep rooted in Xinjiang, Guannong has been focusing on specialty and advantageous agricultural products.

Guannong is a specialty and advantageous agricultural products processing enterprise in Xinjiang. Its actual controller is the second division of the Xinjiang Production and Construction Corps （XPCC）。 The Company mainly focuses on three major businesses, namely, tomato, cotton, and sugar beet processing.

The core product is large-packaged tomato ketchup, which targets the export market. The tomato and cotton businesses are the main revenue sources for the Company, with the tomato business contributing core profits. In addition, the Company's key shareholding company, SDIC Xinjiang Luobupo Potash, continues to perform well, contributing to the Company's considerable investment income. Since 2H22, tomato ketchup and cotton prices have posted continuous growth, and the ramp-up in both shipment and prices has greatly boosted the Company's earnings. Its 1H23 operating revenue increased by 49.8% YoY, with attributable net profit （ANP） up 77.6% YoY, hitting a record high.

Tomato business: Tight supply, capacity transfer, and RMB depreciation bring earnings elasticity to the fore.

The overseas ketchup market is huge and rising steadily. According to the forecasts by Statista, a global data and business intelligence platform, the global market size of ketchup may reach US$46.9bn by 2028, an increase of about 40% compared to 2022. The production and marketing areas of tomato products are highly separated. Xinjiang is one of the world's largest industrial tomato production areas, boasting low raw material costs and good product quality. The current supply of overseas tomato ketchup is tight, which, coupled with the transfer of European production capacity and the appreciation of USD　　against RMB, bringing the competitive advantage of Xinjiang's large-packaged tomato ketchup exports to the fore. In addition, with the waking of domestic tomato product consumption, the domestic market has been rapidly taking shape. Guannong has production capacity of 100ktpa vat ketchup and 225ktpa small packaged ketchup, with the project of 45ktpa vat ketchup production capacity under construction. The Company's products mainly serve the export market. The ramp-up in both capacity scale and work resumption rates, coupled with cost optimization, pushes the Company's tomato business to rise in both shipment and prices. In addition, the integration trend of Xinjiang's tomato processing industry is prevailing, and Guannong, as the main enterprise along the tomato processing value chain of the XPCC, is likely to achieve rapid development going forward.

Cotton and sugar business: The industry boom is on an upturn, adding another boost to the Company's performance.

Xinjiang is one of the world's best cotton-producing regions. Since the beginning of 2023, the recovery in relevant consumption demand both at home and abroad has boosted the upstream demand for lint. The cotton industry has capitalized on the situation to embrace a recovery, leading to a sustained increase in domestic cotton prices. Looking ahead, the domestic cotton supply is likely to tighten up affected by shrinking cotton planting areas and declining yields in Xinjiang. Coupled with low commercial inventories and the impending of the traditional peak season, we expect cotton prices to maintain prosperity in 2H23. Since 2Q23, the increasing uncertainty in overseas sugar supply has pushed up international sugar prices and severely curtailed raw sugar imports, while domestic sugar supply has remained tight, along with a rapid increase in sugar prices. We expect that domestic sugar prices have started a boom cycle and will remain at highs. We believe that, based on the raw material advantages of cotton and sugar beet resources in Xinjiang, the Company’s lint and by-products, as well as beet sugar products, have market competitiveness. Under the uptrend of the cotton and sugar industries, Guannong’s cotton and sugar beet processing businesses may contribute incremental earnings to the Company.

External investment: The Company has built a forward-looking presence in a potash giant, where high investment returns drives earnings growth.

Based on the profound insights into the agricultural industry and Xinjiang's specialty resources, the Company made a forward-looking strategic investment in the world's largest potassium sulphate producer SDIC Xinjiang Luobupo Potash in 2004. Based on the huge production scale and significant resource cost advantages, SDIC Xinjiang Luobupo Potash has excellent operating performance and may continue to contribute considerable investment returns to the Company. At present, SDIC Xinjiang Lupbupo Potash's 5ktpa lithium carbonate project is about to be put into production and has great potential for capacity enhancement. We believe that the potash giant has become an extremely important earnings source for Guannong and will likely continue to contribute more in a stable manner.

Potential risks: Geopolitical deterioration leading to hampered export trading; intensified competition in domestic and overseas markets; volatile raw material prices; sharp fluctuations in the earnings of associated companies; significantly lower-than-expected downstream demand; huge upheavals in exchanges rates; the progress or returns of new projects failing expectations; extreme natural disasters.

Investment recommendation: Guannong has been giving full play to the advantages in raw material costs, production scale, and quality of the three major crops, namely, tomatoes, cotton, and sugar beets in Xinjiang. It has been operating along the value chain, bringing product competitiveness to the fore. Benefiting from the global supply constraints, the transfer of production capacity in Europe, and the appreciation of USD against RMB, the Company's tomato processing business has posted a ramp-up in both shipment and prices and stands well to growth further. As tomato ketchup, cotton, and beet sugar generate synergies, coupled with the Company's pending commissioning of new production capacity （according to the Company’s announcements）， Guannong may unleash strong earnings elasticity. Its shareholding company, SDIC Xinjiang Luobupo Potash, has posted excellent operating performance, leveraging Guannong’s production scale and significant resource cost advantages, and we expect it to continue to generate extremely considerable investment returns. We forecast the Company’s 2023E/24E/25E ANP to be Rmb690mn/820mn/850mn, equivalent to EPS of Rmb0.88/1.05/1.10. Given the high growth expectations of its tomato, cotton, and sugar businesses going forward, and with the average comps valuation of 13x 2023E PE for the agricultural product processing companies of COFCO Sugar （600737.SH）， GDH Supertime Group （001338.SZ）， COFCO Biotechnology （000930.SZ） based on Wind consensus estimate as a reference, combined with the absolute valuation results, we assign 13x 2023E PE to derive a target market cap of Rmb9.7bn, corresponding to a target price of Rmb12, and initiate coverage with a “BUY” rating.