DFZQ has released a research report noting that the compound fertilizer industry is undergoing structural changes, enhancing the competitive advantages of industry leaders and establishing them as typical cash cow entities. As capital expenditures for improving the integrated industrial chain approach completion, these companies are expected to increase their dividend potential. The report highlights related companies such as New Yangfeng (000902.SZ, Buy), Stanley (002588.SZ, Not Rated), and Yuntu Holdings (002539.SZ, Not Rated), whose combined sales in 2024 are projected to account for around 20% of the national total.
According to the analysis, the competitive advantages of leading firms are likely to continue strengthening, creating a positive feedback loop, which makes them stable investments akin to public utilities, with significant dividend enhancement potential. Key insights from DFZQ include the following: The long-term dividend potential of leading compound fertilizer companies is underestimated. The cash cow attributes of these leading firms and their future dividend enhancement potential have been undervalued. The market often focuses on the compound fertilizer industry’s asset-light nature, low manufacturing barriers, low concentration, low operating rates, and homogenous competition, raising concerns about profitability stability while seldom examining the comparative advantages of leading firms from a competitive standpoint, making it challenging for dividend potential to become a core logic of the sector.
However, listed companies representing the leading firms in the compound fertilizer market have shown cumulative payables significantly greater than receivables in recent years, and their accumulated operating cash flow has exceeded net profit, demonstrating strong bargaining power with both upstream and downstream entities. The structural changes in the industry are enhancing the competitive advantages of these leaders, which are characterized as cash cows. Future improvements in dividend potential stem from expected steady profit growth, fueled by increasing competitiveness.
In terms of sales, the brand stickiness of leading companies is supporting sales growth. As production materials, brand stickiness in agricultural inputs may seem relatively abstract; however, DFZQ does not aim to frame it as consumer goods. The report suggests that the brand stickiness of leading firms stems from their ability to reduce uncertainty in channels and among farmers, fundamentally achieving benefit binding and mutual prosperity, ensuring that channels and farmers can profit amid fluctuations in raw material and end product prices. This capability relies on companies' financial strength, cost control, and comprehensive support abilities, where leading firms have a pronounced advantage over small- to medium-sized enterprises, contributing to a continuous increase in industry CR3.
In terms of profitability per ton, continuous improvement in integrated layouts enhances product profitability. Recently, following dramatic fluctuations in major raw materials, companies have intensified upstream integration by enhancing their presence from compound fertilizers to straight fertilizers and mineral resources. Concurrently, they are improving the differentiation of end products and farming service capabilities to increase product pricing power. The sustained improvement in the integration of leading firms will further enhance their sustainable profitability, positively reinforcing brand stickiness.
As the phase of large capital expenditures nears its end, there is potential for increased dividends. Leading firms' operating cash flow is healthy, with ample cash reserves. However, in recent years, substantial capital expenditures focused on upstream support have led to a slight increase in dividends, yet overall levels remain relatively muted. With on-hand project investments nearing completion and the industrial chain becoming more integrated, DFZQ believes that future investments will be relatively restrained, thus enhancing further dividend potential.
Risk Warning: Risks associated with fluctuations in product and raw material prices; the risk of project progression not meeting expectations; uncertainties in estimating dividend potential.