SDIC Securities: Cost Recovery and Demand Release, Compound Fertilizer Expected to Lead Restocking

SDIC Securities released a research report stating that the favorable raw material environment for compound fertilizer in the long term lies not in extremely large price increases, but in stable upward trends. Key items to track are the November phosphate and compound fertilizer conference and the 2027 China standard potassium chloride long-term agreement negotiations: these two will provide key anchors for forecasting the future cost center from the phosphorus and potassium dimensions, respectively. The compound fertilizer industry often sees strong restocking momentum after cost pressures are released, and combined with the grain production reduction expectations brought by El Nio, which are repairing planting returns and fertilization willingness, the bank is optimistic about this round of compound fertilizer restocking. The main views of SDIC Securities are as follows: Learning from history: four profit patterns of compound fertilizer Compound fertilizer is the downstream of the three major straight fertilizers and a core agricultural input for agricultural production, with outstanding irreplaceability. It undertakes three core functions: inventory adjustment, resource allocation, and nutritional adaptation, and both its supply and demand are mainly domestic. From the supply side, industry concentration is relatively low. Leading enterprises hedge cyclical fluctuations through capacity expansion and industrial chain extension, while small and medium-sized manufacturers are gradually cleared out due to factors such as raw material cost fluctuations and insufficient channel coverage. In recent years, industry concentration has continued to rise. From the demand side, due to the rigid attributes of agriculture, price increases at Shenzhen Agricultural Power Group often boost farmers' willingness to fertilize, driving compound fertilizer purchases. Through historical review, the per-ton profit of leading compound fertilizer enterprises fluctuates within a profit range of RMB300-600/ton and shows different characteristics amid rising and falling trends of straight fertilizers: When straight fertilizers rise moderately, dealers worry about further price increases before the peak season and tend to pay in advance to lock in prices, showing the typical "buy on rising prices, not falling prices" mentality, often accompanied by expanding per-ton profit and increased sales volume; During rapid increases in straight fertilizers, channels concentrate on panic buying, but compound fertilizer price increases lag costs, and purchases drop sharply after inventory builds up. Profit variance among fertilizer enterprises is large, depending on enterprises' procurement structure; During a slow decline in straight fertilizers, costs decline slowly and selling prices follow downward in sync, but limited by a wait-and-see attitude in channels, this often shows "stable profit, weak volume"; During a raw material plunge, channels wait and see, demand release is delayed, and after nitrogen, phosphorus, and potassium fertilizer prices subsequently stabilize, a new round of restocking often follows, with gross margin and profit recovering moderately in tandem. Therefore, the favorable raw material environment for compound fertilizer in the long term lies not in extremely large price increases, but in stable upward trends. Analogous to the fourth scenario, wait for the restocking after raw material risks are fully released Urea supply is guaranteed and prices are stabilized, potassium fertilizer fluctuates within a narrow range, and phosphate fertilizer is the only major declining variable. Taking 45% chlorine-based compound fertilizer as an example, in October 2026 phosphate fertilizer, nitrogen fertilizer, and potassium fertilizer accounted for 52.5%, 17.5%, and 30.0% of cost, respectively, and phosphate fertilizer has become the first variable in cost. By variety, the signals of the three are not consistent: urea is within the framework of ensuring supply and stabilizing prices, with both a ceiling and a floor, and fluctuations are converging; potassium fertilizer will see no large-scale supply-side shock before 2028, demand is growing steadily, the medium- to long-term outlook is improving, and prices are expected to continue a stable trend; phosphate fertilizer is the only variety still falling, with current prices already at the lowest level of the year, but still at the 87.3rd percentile since 2017, making it the decisive factor on the cost side in this round. The key to phosphate fertilizer stopping its decline lies in sulfur. From January to September 2026, sulfuric acid accounted for 62% of phosphate fertilizer cost (synthetic ammonia 15%, phosphate rock 23%), constituting the main source of cost elasticity. After the Middle East conflict at the beginning of the year, prices were transmitted along the chain of "sulfur price increase - sulfuric acid price increase - ammonium phosphate cost rise - passive ammonium phosphate price increase," and are now playing out in reverse. As of October 30, sulfur reached RMB4,750/ton, having fallen back from the RMB10,000 mark to the level of the early conflict period in March. Risks on the raw material side are gradually being released, and the market is waiting for demand release in the subsequent winter storage and spring plowing stages; in terms of timing, key items to track are the November phosphate and compound fertilizer conference and the 2027 China standard potassium chloride long-term agreement negotiations: these two will provide key anchors for forecasting the future cost center from the phosphorus and potassium dimensions, respectively. Demand recovery: the restocking window after the end of the raw material plunge, coupled with El Nio catalysis The core observation on the domestic demand side is the landing of the channel restocking window. At the current point in 26Q4, there are two comparable historical intervals: 2022Q3-2023Q1, when the high-level raw material plunge came to an end (urea's largest single-quarter decline 18.7%, potassium chloride 21.3%), per-ton gross profit fell from RMB627/ton to RMB454/ton, but enterprise profitability achieved recovery; 2020Q4-2021Q1, when raw materials turned from decline to rise, per-ton gross profit rose from RMB361 to RMB430/ton, gross margin exceeded 20%, and quarterly enterprise profit expanded in tandem. 26Q4 has the characteristics of both and is expected to replicate the transmission of "cost inflection point - demand recovery - winter storage payment": sulfur's retreat from its high has driven a sharp decline in ammonium phosphate, potassium chloride fluctuates within a narrow range, and urea supply is guaranteed with stable prices. Therefore, the bank believes this round is not only the starting point for per-ton gross profit recovery, but also the starting point for demand recovery. If raw materials stabilize, driving ammonium phosphate quotes to stop falling and cost expectations to converge, and channels confirm the bottom, winter storage payment and shipments are expected to start, and restocking intensity can approach 20Q4 and 22Q4. Exogenous climate catalysis is appearing simultaneously. This strong El Nio is expected to last until summer 2027, directly hitting the sowing and harvest windows in India, Southeast Asia, and Australia. In October, the average FOB price of Thai rice was about US$480/ton, up about US$64/ton from the average in the first half of 2026; the average FOB price of Malaysian palm oil was about US$1,146/ton, up about US$6/ton; according to the latest WASDE forecast, global rice production in 2026/27 will be 537 million tons, down 9 million tons year on year, and ending stocks will be 193 million tons, down 6 million tons from the previous year. Rising crop prices repair planting returns and planting willingness, while production reduction expectations brought by climate risks drive farmers to increase inputs to protect output with fertilizer, thereby pulling fertilizer demand; the recovery in global straight fertilizer demand also transmits secondarily from the cost side, among which potassium fertilizer is most sensitive due to its high dependence on imports. The convergence of the raw material decline and the climate expectations brought by El Nio will overlap in the winter storage and spring plowing windows from 26Q4 to 27Q2, forming the fundamental support for this round of restocking. Compound fertilizer enterprises: high-quality long-cycle dividend targets Compound fertilizer has already shown the dividend characteristics of a mature-stage industry: continuous dividends, sufficient payment capacity, and current returns still cost-effective. In terms of sustainability, from 2012 to 2025 the proportion of dividend-paying companies among listed companies remained at 70%-100%; among the 11-sample average, 90% of years implemented dividends, 7 had no interruptions, and 6 paid continuous dividends for more than 10 years. Dividends have become an industry convention. In terms of capacity, capital expenditure/depreciation and amortization fell from 6.2x in 2012 to 1.2x in 2025, close to maintenance expenditure levels, and the capacity expansion cycle is basically over; the asset-liability ratio is 46.3%, lower than coal (54.7%), power (58.0%), and banking (92.0%), with controllable leverage; operating cash flow/net profit rose from 0.95x to 1.72x, higher than coal (1.33x) and second only to power (2.31x). In terms of returns, as of November 15, the median TTM dividend yield of compound fertilizer was about 1.98%, ranking 4th among chemical sub-sectors; the dividend yield gap with high-dividend industries narrowed from 3.09 percentage points in 2022 to 0.96 percentage points on the latest TTM dividend yield. More critical is the mismatch between dividends and valuation: from 2018 to 2025, the coal dividend payout ratio rose 25.5 percentage points, while the dividend yield instead fell from 3.0% to 2.5%. The divergence between payout ratio and dividend yield often manifests as valuation expansion; over the same period, the compound fertilizer payout ratio rose 6.1 pct to 34%, while the dividend yield still rose from about 1.3% to 2.1%. Among the four sectors, only compound fertilizer and power achieved dual increases, and compound fertilizer had a larger increase in payout ratio, leaving some cost-effectiveness at the valuation level. Suggested focus: Stanley Agriculture Group, YONFER Agricultural Technology, CHINA XLX FERT, Chengdu Wintrue Holding, Shenzhen Batian Ecotypic Engineering, Anhui Huilong Agricultural Means of Production, etc. Risk warnings: winter storage launch weaker than expected, large fluctuations in sulfur prices, adjustments to straight fertilizer export policies, downstream demand recovery weaker than expected, etc.