中国化肥：收获更大农场的果实

1、By: Eric Shen (S1700519030001)Equity ResearchReportJuly HYPERLINK / SPOTLIGHTChina FertiliserAsAs &reportbepartExecutive summaryA powerful combination of bigger farms and less supply is set to reshape the fertiliser industry and spur a decade-long upturn and with market leaders focused mostly on dom

2、estic consumption the market is a defensive play amid China-US tradetensionsWe initiate coverage of six Chinese fertiliser leaders and explainwhy we prefer Xinyangfeng(Buy)Eric Shen*(S1700519030001)Head of A-share Petrochem & New Materials ResearchHSBC Qianhai Securities Limited HYPERLINK mailto:eri

3、c.shen eric.shen+86 755 8898 3403Yi Ru* (S1700118110008)Associate*Employed by a non-US affiliate of HSBC Securities (USA) Inc. and not registered/ qualified pursuant to FINRA regulationsIt likely comes as no surprise that China has the worlds biggest fertiliser market with 1.4 billion mouths to feed

4、. But the industry has struggled in recent years. The country is saddled with hundreds of millions of inefficient tiny farms on average half the size of Indias and 1/140 of those in the US who have little spare cash for better fertiliser products even though they boost the yields on crops.However, C

5、hina is undergoing a once every 30-year transformation to its farmlands, and encouraging bigger farms by relaxing the rules on land transfers. With many working out in the fields near retirement age and the young generation more eager to work in the cities, we see that dynamic as a tailwind for the

6、shift to bigger farms with more mechanisation and efficiencies. We estimate that 14m farmers with larger holdings which we call “big planters”, with holdings 10 x bigger than those of ordinary planters will emerge over the next 10 years.All this matters to the fertiliser industry as these bigger far

7、ms are typically more willing to pay higher prices for fertiliser products with strong brands, high quality and additional technology services. The industry has not escaped supply-side reforms that are shaking up a raft of sectors across China, with stricter environmental and safety regulations set

8、to eliminate small and medium-size fertiliser producers, benefiting the big players who survive.While fertiliser may not be the most glamorous of products, it has some unique characteristics not always appreciated by the market. As a low-priced product and with customers sensitive to any additional

9、transportation costs, most fertiliser is used domestically or exported just to neighboring countries. That means the market leaders we cover in this report are focused on the domestic market, and a potential defensive play given the ongoing China-US tensions.Initiate coverage with Buy on Xinyangfeng

10、, Sinofert, Zangge Holding and China BlueChemical, and Reduce on Salt Lake and Kingenta. We most prefer Xinyangfeng as we believe it will benefit from big planters tendency to buy compound fertilisers (with two or three nutrients rather than just one) as well as shrinking supply by competitors as Ch

11、ina cleans up the Yangtze River. We see these drivers as leading to higher profitability and a better balance sheet structure.Content HYPERLINK l _bookmark0 Executivesummary1 HYPERLINK l _bookmark1 Facts andfigures3 HYPERLINK l _bookmark2 New pastures ahead4 HYPERLINK l _bookmark3 Bigger farms,bette

12、r demand19 HYPERLINK l _bookmark4 Companysection31 HYPERLINK l _bookmark5 Xinyangfeng (000902 CH)32 HYPERLINK l _bookmark6 Sinofert(0297HK)40 HYPERLINK l _bookmark7 Zangge(000408CH)48 HYPERLINK l _bookmark8 China BlueChem (3983HK)56 HYPERLINK l _bookmark9 Salt Lake Industry(000792 CH)64 HYPERLINK l

13、_bookmark10 Kingenta(002470CH)71 HYPERLINK l _bookmark11 Disclosureappendix77 HYPERLINK l _bookmark12 Disclaimer80Facts and figures14m “big planters”The number of farmers with bigger holdings we see emerging in the next decade, thanks to Chinas agricultural reforms35%The proportion of fertiliser dem

14、and that “big planters” are likely to take up over the next decadeThe system of collective ownership where farmers do not have independent property rights was implemented in 1949, the year the Peoples Republic of China was founded.30 yearsThe system of collective ownership where farmers do not have

15、independent property rights was implemented in 1949, the year the Peoples Republic of China was founded.How often China implementssubstantial reforms to the agriculture typically delivering largeresults1/140The average planting area of farmers in China compared with the US10 xAmid overcapacity in th

16、e agricultural sector, with profits under pressure, the Chinas fertiliser gross margin fell from 16% in 2005 to about 11% in 2016-17How much more land farmers with larger holdings known as “big planters” have versus ordinary farmersAmid overcapacity in the agricultural sector, with profits under pre

17、ssure, the Chinas fertiliser gross margin fell from 16% in 2005 to about 11% in 2016-174xBig planters income compared with farmers10 years+How often Chinas fertiliser industry experiences a downturn5 yearsWith fundamentals improving, major fertiliser products utilisation rate has hit its highest lev

18、el in five yearsyearsoldThese people account for about 30% of agricultural workers in China and are expected to finish working in the next five yearsNew pastures aheadChina is transitioning from an agricultural landscape dominated by small and inefficient farms into one with modern large-scale holdi

19、ngs as reforms start to take shape. As a result, we estimate 14m so-called “big planters” will emerge over the next decade, reshaping demand for the fertiliser industry. We think these larger farms will buy higher-grade fertiliser, boosting the gross margin of industry leaders and reducing their exp

20、ense ratiosChinas fertiliser industry to enter an upturn of 10 yearsChina is the worlds No. 1 fertiliser market, selling 60m tonnes each year. However, the industry has experienced a decade of turmoil, with overcapacity slamming profits and gross margins dropping from 16% in 2005 to about 11% in 201

21、6-17.We see an upturn ahead, as China enters an era of bigger farms we call “big planters” and excess capacity is cleared out. A surfeit of small and inefficient farms has constrained the fertiliser industry for more than a decade, and with this bottleneck finally easing we see a far brighter outloo

22、k.Exhibit 1. Gross margin of fertiliser industry experienced a downturn of over 10 years. We believe 2018 rebound is the starting point of a decade-long uptrend2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e 2017e 2018eFertilizerUreaPhosphateCompoundPotash RHS60%50%40%30%20%10%0%Source:

23、 Wind, HSBC Qianhai Securities estimatesExhibit 2. The utilisation rate of major fertiliser products have the highest since 2015, and we expect further upside on improving fundamentals75%70%65%60%55%50%45%40%35%30%Jan-15Jun-15Nov-15Apr-16Sep-16Feb-17Jul-17Dec-17May-18Oct-18AverageUreaMAPDAPCompoundf

24、ertilizerSource: Baichuan, HSBC Qianhai SecuritiesLand transfer and ageing are the driving forcesThe current average planting area per farmer in China is just 0.53 ha (8 mu), half that in India, one-thirdthatinJapan,and1/140thatintheUS.Theexcessivelyfragmentedlandscapeweighs on the fertiliser indust

25、ry in twoways:First, it limits the scale and concentration of the leading fertiliser players, making it hard to diluteexpensesbecausemarketleadershavetomaintainahugesalesnetworktosupporta small market share. The market share of the largest Chinese enterprise producing nitrogen fertiliser, mono-ammon

26、ium phosphate (MAP) and compound fertiliser is about 5%only.Second, small planters are very sensitive to prices, so therefore gross profit for fertiliser makers is unlikely to increase. Rising Chinese agricultural labour costs squeezes earnings for farmers, forcing fertiliser leaders to compete in a

27、 price war. It also means the impact of improved branding, technology and quality is unlikely to beachieved.Exhibit 3. Rising Chinese agricultural labour costs squeezing plantation revenue and limiting fertiliser price hikes (Unit: RMB/Ha)2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2

28、014 2015 2016 20172002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170LabourcostsNetprofitFertilizer feeSource: Wind, HSBC Qianhai Securities We estimate that 14m big planters will emerge in China in 2019-30e, reshaping 35% of fertiliser demand. This means 1.3m big plante

29、rs will be created every year on average, and impacting 1.9m-tonne of fertiliser demand.However, the landscape is changing. China carried out reform to the land transfer policy from 2014 to 2018, abolishing the limitations on land transfer and consolidation. Chinas aging population is also pressurin

30、g the sector. The agricultural population aged between 56 and 65, and accounting for about 30% of workers, will gradually exit from agricultural production. With many young people seeking to avoid working in the sector, this shift though will likely spur land transfer and consolidation and accelerat

31、e Chinas transition to more efficient and less labor- intensive large-scale planting.We estimate that 14m big planters will emerge in China in 2019-30e, reshaping 35% of fertiliser demand. This means 1.3m big planters will be created every year on average, and impacting 1.9m-tonne of fertiliser dema

32、nd.We estimate that 14m big planters will emerge in China in 2019-30e, and be responsible for 35% of fertiliser demand. This means 1.3m big planters will be created every year on average, affecting 1.9m-tonne of fertiliser demand.That shift matters to the fertiliser industry as big planters have gre

33、ater financial strength and attach more importance to brands and technologies, a positive for fertiliser leaders seeking to expand their market share.We see big planters turning to leading enterprises to purchase products with strong brands, technologies and added-value services. Secondly, after the

34、 expected improvement in market concentration, there is still room to lower their marketing costs of fertiliser. Thirdly, while big planters will have more bargaining power we see their bargaining power as limited given they are mainly 3.3-6.6 ha (50-100 mu) planters and only buy 1.5-3 tonnes of fer

35、tiliser every year.Exhibit 4. We expect 14m big planters to be added over the next decade in China, impacting 35% fertiliser demand2019-30e agricultural population declining (M people)422019-30e new big planters (M planters)14Corresponding arable land area (m mu)718New big planters per year (m plant

36、ers)1.3Corresponding arable land area (m hectares)48Corresponding arable land per year (m mu)65Corresponding fertiliser demand (m tonnes)21Corresponding arable land per year (m hectares)4% of total fertiliser demand35%Corresponding fertiliser demand per year (m tonnes)1.92019-30e agricultural popula

37、tion declining (M people)422019-30e new big planters (M planters)14Source: Wind, NBS, HSBC Qianhai Securities estimatesExhibit 5. The arable land area of big planters is 10 x that of ordinary planters; total household income of big planters is c4x that of ordinary planters0.4200.4151050Ordinaryplant

38、ersBig Average arable land area (hectares) Household income(00000RMB)Source: Song Yu, Behavioural differences in fertilising among farmers against the backdrop of land transfer, in Agricultural Outlook, issue. 2 (Agricultural Information Institute of the Chinese Academy of Agricultural Sciences, 201

39、6)Exhibit 6. Big planters are 8 years younger than ordinary planters, with 2 more years of schooling on average5446796054467950403020100OrdinaryplantersBigplantersAverageageSchoolingyearSource: Song Yu, Behavioural differences in fertilising among farmers against the backdrop of land transfer, in Ag

40、ricultural Outlook, issue. 2 (Agricultural Information Institute of the Chinese Academy of Agricultural Sciences, 2016)Exhibit 7. Higher willingness for technical training and compound fertiliser among big planters53%38%17%4%60%53%38%17%4%50%40%30%20%10%0%OrdinaryplantersBigplantersTechnicaltraining

41、Willingness to test soilformulaExhibit 8. Output of big planters c10% higher compared to ordinary planters82507502750767508500825075027507675080007500700065006000OrdinaryplantersBigplantersWheatyield(ka/haCornyield(kg/ha)Source: Song Yu, Behavioural differences in fertilising among farmers against t

42、he backdrop of land transfer, in Agricultural Outlook, issue. 2 (Agricultural Information Institute of the Chinese Academy of Agricultural Sciences, 2016)Source: Song Yu, Behavioural differences in fertilising among farmers against the backdrop of land transfer, in Agricultural Outlook, issue. 2 (Ag

43、ricultural Information Institute of the Chinese Academy of Agricultural Sciences, 2016)Reforms, environment and safety concerns accelerating exit of small producersThere remains oversupply in Chinas fertiliser market following growth of 120% from 2001-15. To tackle this, China has implemented supply

44、-side reforms, mirroring similar measures made to other industries where too much supply lurked, and the industry saw 18m tonnes of nitrogen fertiliser capacity eliminated from 2016-18. Overall, Chinas fertiliser production dropped 11% consecutively in 2016/17, from 74m tonnes to c60m tonnes.Meanwhi

45、le, the Chinese government is stepping up regulatory requirements for environmental protection and safety, following serious production accidents in the Chinese chemical industry. In the short term, regulators are focusing on monitoring and rectification, impacting small and fertiliser producers wit

46、h medium-size capacity. In the long term, stricter environmental protection and safety requirements will lift the operating costs for small and medium-size fertilisercapacity.Regulation of environmental protection and safety, combined with the supply-side reform, will facilitate the closure of ferti

47、liser overcapacity, improving the competitive landscape. Withinvestment into the industry slipping since 2016, we expect fixed asset investment to go through a downturn for a further 5 years, although in the long run as fertiliser margins improve, leading companies will support industry fix asset in

48、vestment by capacity expansion.Exhibit 9. Fixed-asset investment of Chinas fertiliser industry declined since 2017. Small and medium-size capacity investment limited by environmental and safety regulations(Unit: RMBbn)Exhibit 10. New capacity growth of Chinas fertiliser declined since 2012, with fer

49、tiliser production peaking in 2015(Unit: m tonnes)14012010002003 2007 2010 2013 2016 2019e 2022eFertilizerTOTALPhosphateNitrogenCompound8070605040302010020012005200920132017 2021eFertilizer OutputFertilizer new additional capacity12.010.08.06.04.02.00.0Source: Wind, HSBC QianhaiSecuritiesforecastsSo

50、urce: Wind, HSBC Qianhai SecuritiesforecastsProfit to pick up on four key driversWe are optimistic about the fertiliser profit trend over the next three years:Rising urea spread mainly from the decline in coal prices. With Urea, an inexpensive form of nitrogen fertiliser thats frequently made from c

51、oal, we pay attention to the Urea-to-coal spreadgivenitimpactsprofitabilityforproducers.Our2019-21ecoal-to-ureaspreadassumptions are RMB778/914/1,006 per tonne. Even though Chinas urea capacity dropped by 20m tonnes since 2015, there is still urea substantial capacity of 70m tonnes and believe the c

52、urrent supply is sufficient as Chinas utilisation rate of urea capacity is at about 70%. Therefore, any room for price hikes is limited, and see the spread expansion coming from our forecasted coal price decline. HSBC Global Research expects coal prices to decline over the next three years, with 201

53、9e, 2020e and 2021e semi-soft coking coal prices at USD130, USD119 and USD110 per tonne, respectively, high-quality coking coal prices at USD185, USD170, and USD150 (please see HSBC Global Researchs Metals & Mining teams Metals Quarterly Q2 2019, 15 April2019).Spread expansion of phosphate fertilise

54、r resulted from environmental regulation. For 2019e, 2020e, and 2021e, our spread assumptions are RMB557, RMB638 and RMB704 per tonne,respectively,forMAP(monoammoniumphosphate,asourceofphosphorusandnitrogen and used in fertiliser) and RMB778, RMB861 and RMB926 per tonne for DAP (a popular phosphorus

55、 fertiliser). Around 80% of Chinas phosphate resources are concentrated along the Yangtze River in the provinces of Hubei, Sichuan, Guizhou, Yunnan and others. We believe over the next two years, phosphate pollution control along the Yangtze River will significantly impact the phosphate fertiliser c

56、apacity, leading to a supply contraction and higherprices.The market price in China is underpinned by the imported potash price, with 50% of potash (fertiliser potassium) in China imported, and the import price is the benchmark for the domestic price. As the concentration of overseas potash resource

57、s is high, we estimate that the imported potash price will continue to rise. We estimate prices at USD290, USD300 and USD310 in 2019e, 2020e, and 2021e, near 2015 levels. With this support, Salt Lake Industry and Zangge Holdings ex-factory potash prices (excluding VAT) are RMB2,200, RMB2,300 and RMB

58、2,400 per tonne in 2019e, 202e, and2021e.Exhibit 11. We believe the decline in coal prices should support the stable increase of urea spread (RMB/tonne)Exhibit 12. We believe phosphate pollution control should lead to supply contraction, supporting the increase of phosphate fertiliser spread (RMB/to

59、nne)69884100917769587397437807788619265576387042953735152500300069884100917769587397437807788619265576387042953735150201720182019e2020e02016201720182019e 2020e 2021eUrea avg.ex-factory price Anthracite market price Urea spreadMAPex-factorypriceDAP ex-factorypriceMAPspreadDAPspreadSource: Wind, HSBC

60、QianhaiSecuritiesestimatesSource: Wind, HSBC Qianhai SecuritiesestimatesCompound fertiliser demand and prices to improve. The current utilisation rate of compound fertiliser hit the highest since 2015, and we think the rise of big planters will mainly take place among leading compound fertiliser pla