XINAN CHEMICAL INDUSTRIAL GROUP(600596)：4Q21 PREANNOUNCEMENT SLIGHTLY BEATS ON PRICE RALLIES OF TWO MAIN PRODUCTS

Preannounces 2021 earnings up 344-362% YoY

    Xinan Chemical （Xinan） has preannounced its 2021 results, estimating that its attributable net profit surged 344-362% YoY to Rmb2.60-2.70bn in 2021, and earnings stood at Rmb1.00-1.10bn in 4Q21, slightly beating market expectations. The firm attributes stronger profitability to sharp YoY increase in prices main products, including organosilicon, glyphosate, and industrial silicon. In addition, we think that the firm’s efforts in expanding mid- to high-end products also contributed earnings in 2021.

    Trends to watch Price of broad-spectrum herbicides hit historical high in 2021 and

    may remain elevated in 1H22. In 2021, price of broad-spectrum herbicides hit record highs driven by rising prices of grain and crude oil.

    Specifically, the price of glyphosate rose to Rmb80,000/t and that of glufosinate ammonium grew to Rmb370,000/t. Looking ahead, we think overseas demand for glyphosate will remain strong, and price of broad-spectrum herbicides may stay buoyant in 1H22.

    Organosilicon prices to continue to recover. In 4Q21, organosilicon

    prices fluctuated sharply, and dimethylcyclosiloxane （DMC） prices continued to decline until mid-December after surging to Rmb60,000/t in October. However, DMC prices started to recover in 2022, thanks to accelerated restocking. As of January 10, DMC price had rebounded by 27% from its low in December 2021 to Rmb30,000/t at its highest. Looking ahead, we think that demand for stocking up will continue, given the low inventory of organosilicon. Coupled with overhauls at some suppliers, this might boost continued recovery of organosilicon prices, in our view.

    Capex remains high; growth potential still underestimated. Xinan has

    strengthened its corporate governance structure and started a new capex cycle. The firm’s capex increased 48.9% YoY in 1-3Q21, and we believe this should underpin its medium-to-long-term growth. Major projects such as glufosinate and industrial silicon are proceeding well, and we expect the 3,000t glufosinate Phase-I plant and 0.1mnt Yunnan industrial silicon plant to start operation in 1Q22 and 2Q22. We believe the glufosinate business will become a new driver for earnings growth, and Xinan may supply more industrial silicon for polysilicon companies.

    Valuation and recommendation

    Considering glyphosate price remained high in 4Q21, we raise our 2021 earnings forecast 8% to Rmb2.62bn. We maintain our 2022 earnings forecast at Rmb2.63bn, and introduce our 2023 earnings forecast of Rmb2.88bn. The stock is trading at 7.6x 2022e and 7.0x 2023e P/E. We maintain OUTPERFORM, and cut our TP by 27% to Rmb35 （mainly reflecting uncertainty over glyphosate price in 2H22）， implying 10.9x 2022e and 10.0x 2023e P/E, offering 43% upside.

    Risks

    Sharp fall in glyphosate prices; slower-than-expected capacity expansion.