1Q22 results in line with our expectation

Xinan Chemical Industrial Group (Xinan) announced that 1Q22 revenue and attributable net profit rose 72.2% and 340.4% YoY to Rmb6.50bn and Rmb1.23bn (Rmb1.5/sh), in line with our expectation. The firm’s 1Q22 revenue and profit hit quarterly highs not seen since its listing.

In 1Q22, sales volume of agrochemical materials, organosilicon dimethylcyclosiloxane (DMC), and industrial silicon was 12,445t, 23,838t, and 17,375t, and their ASP rose 143.3%, 49.8%, and 61.9% YoY to Rmb71,739/t, Rmb29,039/t, and Rmb21,043/t.

Trends to watch

Prices of glyphosate stabilizing and earnings staying elevated. Data from baiinfo.com shows that glyphosate prices were Rmb63,000/t as of April 22, rising Rmb500/t compared with April 15 and ending the price drop since early-2022. Looking ahead, we expect the prices of glyphosate to remain stable considering mild rise in downstream demand and easing of disruption to export logistics from COVID-19 conditions. While prices have increased recently for raw materials such as glycine and yellow phosphorus, their price spread with glyphosate stays high. We estimate the firm’s per-tonne profit of glyphosate remains around Rmb20,000.

Prices of organosilicon still under pressure; focusing on end-market products with high added value. Data from baiinfo.com shows that organosilicon DMC prices were Rmb28,000/t as of April 22, down about 26% from the YTD high. Looking ahead, we see limited chances for a sharp rise in prices as a large amount of new production capacity is scheduled to start operation in 2022. However, we think that prices of organosilicon may see a mild recovery along with rising cost and improving demand amid easing COVID-19 conditions. In addition, the firm has been focusing on end-market products with high added value in recent years, which we think will partly offset the negative impact on earnings from falling organosilicon prices.

Capex rising further; growth potential to start to materialize. The firm’s 1Q22 capex rose 41.1% YoY to Rmb224mn. Looking ahead, several key projects may gradually start operation in 2022, such as the 3,000t/yr glufosinate project in Ningxia and 100,000t/yr industrial silicon project in Yunnan (Phase I at 50,000t/yr). In addition, several new projects are well on track, including the firm’s phosphorus-based flame retardants, silicon carbide anode, and special organosilane projects. We expect these projects to accelerate the firm’s earnings delivery in 2022-2023.

Financials and valuation

We keep our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 7.2x 2022e and 7.0x 2023e P/E. We maintain our target price of Rmb35 (implying 9.3x 2022e and 9.0x 2023e P/E), offering 29.1% upside. Maintain OUTPERFORM.

Risks

Demand for and price of glyphosate decline; organosilicon price tumbles; safety incidents and tightening of environmental regulations.