类别:行业 机构:兴业证券股份有限公司 研究员:Chen Jiao/Mao Yifan/Lv Ya/Cao Xinrui 日期:2020-01-14

Investment Highlights

    Global sugar supply demand dynamics is shifting from a loose pattern to a tight one.

    During 19/20 sugar-crushing season, the major sugar-producing countries in the world maycontinue to reduce their production, especially in India and Thailand (with a larger reduction). Theglobal sugar market may have a supply-demand gap for the first time since 16/17 sugar-crushingseason.

    After the sugar production in 17/18 sugar-crushing season reached a historical peak, the globalsugar supply surplus continued, so that the current sugar inventory has risen to a historical high.

    In the context that sugar production has edged down for two consecutive crushing seasons anddemand for sugar slowly increases, the global sugar market in 19/20 sugar-crushing season willmeet a marginal improvement and sugar supply & demand may gradually turn tight from loose.

    Global market: in 19/20 sugar-crushing season, major producers show an expectation for capacityreduction, but the overall sugar inventory remains high.

    1) Due to the low sugar price for a long time, sugarcane production in Brazil sugar factories willtake up another historically low proportion in their total. Although sugarcane production in19/20 crushing season has slightly risen, sugar production in Brazil may edge down on YoYbasis.

    2) Drought and flood occurred in the main production areas may dent Indian sugar capacity byabout 15%, but sugar inventory maintains a historical high level.

    3) Sugarcane market price cut and drought is estimated to result in a production decline ofover 7% in Thailand. Inventory level may continue climb.

    Domestic market: the cycle of capacity expansion in the period of 19/20 sugar-crushing season maycome to an end, and the policy is uncertain.

    1) The damage by insects and drought in main production areas make domestic planting areaand sugar output decline by about 1% YoY in 19/20 crushing season, implying that thethree-year cycle of production increase may end.

    2) In 2019, the purchase price of sugarcane in Guangxi will meet a market-oriented reform, butat present, it is still high without elasticity. As there is no stimulus to continuously reducethe planting area, the effect of the reform remains to be observed.

    3) The import policy has changed to a relaxed one. If the trade safeguard measures expire inMay 2020 and the additional tariff returns to 50%, the sugar import will be under greatgrowth pressure.

    4) In addition, there are uncertainties in the policies of sugarcane direct subsidies andnational-level sugar destocking.

    White sugar shows an uptrend, with sugar price passing the lowest point.

    In China’s market, the low inventory and the delayed entry of imported sugar led to a temporarytightening supply in H219 and a strong uptrend of sugar price in the short term. But the potential negative impacts caused by policy remain to be waited.

    In global market, despite high inventory, supply surplus is expected to improve. Overall, sugarprice has bottomed out and is trending up.

    Investment recommendation

    We recommend COFCO TUNHE (600737.SH) and NNSUGAR (000911.SZ).

    COFCO leads the domestic white sugar sector and is the largest sugar trader in China. Its sugarimports account for more than half of the total imports of China, and it has a strong futurehedging system. Rising sugar prices will benefit the company's trade profits.

    As a local SOE, NNSUGAR actively divested the loss assets after transferred to SASAC of Guangxi.With the help of resource integration by major shareholders, it is expected to turn the loss in thefuture. We recommend focusing on the company at the bottom.

    Potential risks: natural disasters, policy changes, forex rate fluctuations, oil price fluctuations,weaker-than-expected sales volume