www.research.hsbc.comDisclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix, and with the Disclaimer, which forms part of it.Equity Research ReportAs China encourages larger farms as part of its sweeping land reforms, fertiliser demand should benefitStricter environmental and safety standards will cut excess capacity and provide another boost for the industryInitiate coverage of Xinyangfeng, Sinofert, Zangge and China BlueChemical at Buy; Salt Lake and Kingenta at Reduce. We prefer XinyangfengChemicalsJuly 2019By: Eric Shen (S1700519030001)China FertiliserInitiate coverage: Harvesting the fruits of bigger farmsAs China encourages larger farms as part of its sweeping land reforms, fertiliser demand should benefitStricter environmental and safety standards will cut excess capacity and provide another boost for the industryInitiate coverage of Xinyangfeng, Sinofert, Zangge and China BlueChemical at Buy; Salt Lake and Kingenta at Reduce. We prefer XinyangfengS P O T L I G H T 1 Equities ● Chemicals July 2019 It likely comes as no surprise that China has the world’s biggest fertiliser market with 1.4 billion mouths to feed. 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 India’s 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, China 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 shift to bigger farms with more mechanisation and efficiencies. We estimate that 14m farmers with larger holdings – which we call “big planters”, with holdings 10x bigger than those of ordinary planters – will emerge over the next 10 years. All this matters to the fertiliser industry as these bigger farms 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 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 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, 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 China cleans up the Yangtze River. We see these drivers as leading to higher profitability and a better balance sheet structure. Executive summary A 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 domestic consumption the market is a defensive play amid China-US trade tensions We initiate coverage of six Chinese fertiliser leaders and explain why we prefer Xinyangfeng (Buy) Eric Shen*(S1700519030001) Head of A-share Petrochem & New Materials Research HSBC Qianhai Securities Limited eric.shen@hsbcqh.com.cn +86 755 8898 3403 Yi Ru* (S1700118110008) Associate *Employed by a non-US affiliate of HSBC Securities (USA) Inc. and not registered/ qualified pursuant to FINRA regulations Equities ● Chemicals July 2019 2 Executive summary 1 Facts and figures 3 New pastures ahead 4 Bigger farms, better demand 19 Company section 31 Xinyangfeng (000902 CH) 32 Sinofert (0297 HK) 40 Zangge (000408 CH) 48 China BlueChem (3983 HK) 56 Salt Lake Industry (000792 CH) 64 Kingenta (002470 CH) 71 Disclosure appendix 77 Disclaimer 80 Content 3 Equities ● Chemicals July 2019 Facts and figures 14m “big planters” The number of farmers with bigger holdings we see emerging in the next decade, thanks to China’s agricultural reforms 35% The proportion of fertiliser demand that “big planters” are likely to take up over the next decade The system of collective ownership – where farmers do not have independent property rights – was implemented in 1949, the year the People’s Republic of China was founded. 30 years How often China implements substantial reforms to...
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