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
+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
