Preannounced 1H24 earnings down 55-67% YoY

Qinghai Salt Lake Industry preannounced its 1H24 results: Net profit attributable to shareholders fell 55-67% YoY to Rmb1.7-2.3bn and recurring net profit dropped by 54-66% YoY to Rmb1.72-2.32bn. Based on the preannounced results, we estimate that in 2Q24, the company's net profit attributable to shareholders came in at Rmb770mn-Rmb1.37bn, implying a QoQ change from -18% to +46%; and recurring net profit was Rmb850mn-Rmb1.45bn, implying a QoQ change from -3% to +65%.

The preannounced earnings missed our expectation, as the company made Rmb666mn in a supplementary payment for resource tax, other taxes, and overdue fines in 1H24. The company estimates that the supplementary payment eroded earnings by Rmb492mn.

Factoring out the impact of the supplementary payment, we estimate that the company's attributable net profit recovered QoQ in 2Q24, as the prices and sales volume of potash fertilizers increased QoQ. Corporate filings show that the company's sales volume of potassium chloride and lithium carbonate increased YoY in 1H24.

Trends to watch

Prices of large contracts (US$273/t) to bolster domestic product prices. According to www.sci99.com, China's negotiating team for potash fertilizer imports reached an agreement with major international suppliers that the contract price for potash fertilizers should be US$273/t (cost and freight) in 2024. The contract price implies a tax-inclusive price of about Rmb2,400/t in the domestic market, which we believe could support domestic potash fertilizer prices.

Data from www.baiinfo.com shows that currently, the average price of potassium chloride in China is Rmb2,597/t (vs. Rmb2,402/t in 2Q24). We are upbeat on domestic potash fertilizer prices, given the support from the prices of large contracts.

Cooperation at the shareholder level to increase growth potential of the company. According to an announcement, Qinghai State-owned Assets Investment Management Co., Ltd., the controlling shareholder of Qinghai Salt Lake Industry, plans to cooperate with China Minmetals Corporation to build a world-class salt lake industrial base and a global salt lake industrial group (to be controlled by China Minmetals Corporation).

We believe the cooperation between Qinghai State-owned Assets Investment Management Co., Ltd. and China Minmetals Corporation will help Qinghai Salt Lake Industry consolidate and explore resources in China and other countries, comprehensively utilize resources other than potash and lithium in salt lakes, and boost the company's growth in the long term.

Ample cash flows; debt-to-asset ratio continues to improve. Cash flows have improved substantially since 2021, thanks to the disposal of non-performing assets and a boom in the potash fertilizer industry. Net operating cash flow was Rmb4.8bn in 2021, Rmb17.5bn in 2022, and Rmb12.1bn in 2023. The liability-to-asset ratio declined to 24.05% in 1Q24, down 48.6ppt from 73.8% in 2020. The balance of monetary capital was Rmb19.08bn in 1Q24.

Looking ahead, we believe the costs of potassium chloride and lithium carbonate at the company will stay on the left side of the industry cost curve, thanks to its salt lake resources. As a result, the company is likely to maintain ample cash flows despite cyclicality. Ample cash flows will lay a foundation for its dividend payments, in our opinion.

Financials and valuation

We cut our 2024 and 2025 earnings forecasts 19.2% and 18.2% to Rmb5.5bn and Rmb5.7bn, to reflect the YoY declines in the prices of major products such as lithium carbonate and potassium chloride and the impact of tax payments on net profit. The stock is trading at 15.8x 2024e and 15.3x 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb18.5, as the establishment of a world-class salt lake industrial group may increase the growth potential of Qinghai Salt Lake Industry. Our TP implies 18.2x 2024e and 17.8x 2025e P/E, offering 15% upside.

Risks

Sharp declines in global potash fertilizer prices; sharp declines in lithium salt prices.