1H22 results beat our expectations

Sierte Fertilizer announced its 1H22 results: Revenue grew 39.1% YoY to Rmb2.99bn, and attributable net profit rose 94.6% YoY to Rmb491mn (implying EPS of Rmb0.58), beating our expectations driven by a significant increase in profit margin of monoammonium phosphate (MAP). Recurring net profit surged 107.5% YoY to Rmb471mn. Raw material price hikes have driven up MAP prices. The firm boasts ample resources and an integrated value chain. This, coupled with an upsurge in MAP export prices, led to a marked increase in prices and earnings of the firm’s MAP products. Revenue from MAP grew 64.2% YoY to Rmb1.29bn in 1H22, with gross margin rising 13.73ppt YoY. Revenue from ternary compound fertilizer increased 39.78% YoY to Rmb1.42bn. Due to rising raw material prices, the gross margin of compound fertilizer fell 2.21ppt YoY to 18.13%. The firm’s Maweishan pyrites mine produced 49,600t of pyrites and sold 27,300t of pyrites in 1H22.

In 2Q22, revenue grew 12.7% YoY (+8.7% QoQ) to Rmb1.56bn. Attributable net profit rose 108.1% YoY (+118.2% QoQ) to Rmb337mn. Thanks to rising MAP prices and export earnings, the firm’s gross margin increased 4.4ppt YoY (9.0ppt QoQ) in 2Q22.

Trends to watch

Prices of phosphate ores and phosphate fertilizers likely to remain high; profitability improving thanks to a well-established supply chain. Data from baiinfo.com shows that the prices of phosphate ores (30% P2O5) in Guizhou and Hubei stand at Rmb990-1,100/t, relatively high compared with historical data. The robust demand for new energy materials such as lithium iron phosphate has driven up the demand for phosphate ores. Meanwhile, safety inspections and companies’ reluctance to sell has led to tighter phosphate ores supplies. Against this backdrop, we think that the phosphate ore prices will likely remain high. Considering the high prices of downstream agricultural products and the support from rising raw material costs, we expect the phosphate fertilizer prices to stay high. Guizhou Lufa, the firm’s wholly-owned subsidiary, has a mining capacity of 800,000t/yr. Its phosphate ores are primarily supplied to Sierte Fertilizer for the production of phosphate fertilizers. Meanwhile, Guizhou Lufa’s 3mnt/yr Yongwen mine (with a comprehensive grade of more than 30% P2O5) project is at the design phase. Construction of this project will start after the National Mine Safety Administration reviews and approves the firm’s application. Meanwhile, the firm has production capacity of 380,000t/yr for pyrite and kaolinite. We believe the integrated supply chain can further boost the profitability of the firm’s phosphate fertilizers.

Financials and valuation

Given a significant increase in profit margin of MAP, we raise our 2022 and 2023 earnings forecasts 58% and 31% to Rmb835mn and Rmb712mn. The stock is trading at 10.5x 2022e and 12.3x 2023e P/E. We maintain OUTPERFORM and lift our TP 26.3% to Rmb12 (12.3x 2022e and 12.1x 2023e P/E), offering 17.1% upside.

Risks

MAP price declines; MAP export volume disappoints.