1Q22 results in line with our forecast

Sierte Fertilizer announced 1Q22 results: Revenue advanced 86.51% YoY to Rmb1.43bn, and attributable net profit accelerated 70.5% YoY to Rmb154mn (Rmb0.18 per share), in line with our expectations. Results were mainly driven by increased sales volume and prices of fertilizer products such as monoammonium phosphate (MAP). Data from baiinfo.com shows that domestic ASP of MAP and chlorine-based sulfur-based compound fertilizers were hiked 41%, 49% and 42% YoY. Recurring net profit grew 68.0% YoY to Rmb136mn, and net operating cash flow surged 168% YoY to Rmb172mn.

In 1Q22, major business profit margin shrank 5.6ppt YoY and 5.9ppt QoQ to 20.8% due to rising sales of compound fertilizers and raw material cost increase.

Trends to watch

Price and earrings of phosphate fertilizers likely to remain high. We think the buoyant prices of grain products worldwide and governments’ continued efforts to ensure stable grain supply should further boost demand for fertilizers. On the supply side, we expect limited growth in global production capacity of phosphate fertilizers over the next few years, sustaining the sector uptrend. While China’s phosphate fertilizer exports tumbled YoY on the adoption of a new inspection policy, overseas phosphate fertilizer ASP surged. The free-on-board (FOB) price of exported MAP (60% particles) is now US$1,089/t, boosting earnings from fertilizer exports. Domestic phosphate fertilizer price remained buoyant due to rising prices of raw materials such as sulphur and synthetic ammonia. Sierte’s MAP price currently equals Rmb3,700/t, and we think profit from domestic sales is solid thanks to the firm’s full presence along the phosphate fertilizer value chain.

Proactive expansion into new energy industry. Sierte’s Mingniwan phosphate mine (located in Guizhou province) currently has annual capacity of 0.8mnt, and the Yongwen mine (also located in Guizhou province) is approved for annual capacity of 3mnt. We think the firm will expedite expansion into phosphate chemicals market and promote business transformation by leveraging its ample phosphate mine resources.

Financials and valuation

We leave our 2022 earnings forecast unchanged at Rmb530mn, and introduce our 2023 forecast of Rmb544mn. The stock is trading at 12.0x 2022e and 11.7x 2023e P/E. We maintain an OUTPERFORM rating and cut TP by 36.7% to Rmb9.5 (mainly reflecting a tumble of iron phosphate sector valuation), implying 15.3x 2022e and 12.5x 2023e P/E, offering 27% upside.

Risks

MAP price declines; MAP export volume disappoints.