Delayed phosphate rock project commissioning may extend the industry upcycle; HSBC names Yuntianhua its top pick

Overview

Drawing on the second-quarter results of three Chinese phosphate chemical companies, phosphate rock supply and demand, sulfur cost policies and project progress, the report concludes that the phosphate rock upcycle may last longer. HSBC raises earnings forecasts for Yuntianhua and Xinyangfeng and lowers those for Chanhen Chemical due to delays in its phosphate mine project, but maintains Buy ratings on all three companies and names Yuntianhua its top pick.

Core views

Second-quarter results show that the presence of a fertilizer business and access to low-cost sulfur are important factors behind the divergence in the three companies' profitability. Yuntianhua and Xinyangfeng benefited from the government-backed sulfur supply program and growth in fertilizer sales, with both reporting year-on-year net profit growth above HSBC's expectations. Chanhen Chemical does not produce phosphate fertilizers and therefore did not benefit equally from low-cost sulfur, with its second-quarter results coming in slightly below expectations. HSBC consequently raises earnings forecasts for Yuntianhua and Xinyangfeng while lowering its 2026—2028 forecasts for Chanhen Chemical due to delays in its new phosphate mine project. At the industry level, HSBC expects phosphate rock supply in 2026 to remain constrained by increasingly stringent mine safety inspections. Although phosphate fertilizer output is weak on the demand side, rapid growth in lithium iron phosphate is expected to gradually offset this impact and keep phosphate rock fundamentals tight. The report had previously been concerned that new phosphate rock capacity around 2028 might weaken the supply-demand balance, but persistent delays to Chanhen Chemical's project highlight the practical difficulties of domestic phosphate mine exploration, construction and ramp-up. Commissioning of the Laozhaizi phosphate mine has been postponed from 2028 to 2029. HSBC therefore believes that new capacity may come onstream more slowly than originally expected and that the phosphate rock upcycle may last longer than previously anticipated. The impact of higher sulfur costs on industry profits is expected to be relatively limited. In the first half of 2026, phosphate chemical companies with fertilizer capacity obtained lower-cost feedstock through the government-backed sulfur supply program, easing cost pressure; Yuntianhua's sulfur procurement costs even declined quarter on quarter. Given that geopolitical tensions involving the US and Iran remain unresolved, HSBC expects the supply program to continue supporting industry margins in the second half of 2026. Starting in 2027, the gradual commissioning of sulfuric acid facilities using phosphogypsum may also provide a new source of cost savings, further supporting industry margins. Yuntianhua's second-quarter revenue fell 10% year on year due to lower sales volumes, but the government-backed sulfur supply program, improved profitability in yellow phosphorus and support from the DCP business expanded gross margin by 1.5 percentage points year on year, limiting the decline in gross profit to 5%. Together with continued cost control, this drove 3% year-on-year net profit growth. Given the higher-than-expected gross margin and the expectation that the sulfur supply program will continue into the second half of 2026, HSBC raises its 2026 net profit forecast by 7%, bringing the revised figure broadly in line with market consensus. The valuation continues to use a PB-ROE methodology: the 2027 ROE forecast is raised from 19% to 20%, the cost of equity remains at 8.6%, and the target PB increases from 2.6x to 2.7x. Applying this to 2027 book value per share of RMB16.46, versus RMB16.29 previously, raises the target price slightly from RMB43.10 to RMB43.90, implying approximately 47% upside. The report maintains its Buy rating and names Yuntianhua its top pick due to its attractive risk-reward profile. Chanhen Chemical's products are more market-oriented than those of peers with fertilizer businesses. Higher product prices drove 20% year-on-year revenue growth in the second quarter, but rising sulfur costs reduced gross margin by 1.7 percentage points. Net profit increased 11% year on year but was still slightly below HSBC's expectations. The postponement of the Laozhaizi phosphate mine's commissioning from 2028 to 2029 means that the ramp-up in phosphate rock production and the profit contribution from new capacity will both be deferred. HSBC accordingly lowers its 2026, 2027 and 2028 net profit forecasts by 14%, 16% and 14%, respectively. In terms of valuation, 2027 ROE is reduced from 21% to 18%, the cost of equity remains at 9.65%, and the target PB falls from 3.5x to 2.83x. The 2027 book value per share forecast is lowered from RMB13.94 to RMB13.75, and the target price is cut from RMB49.00 to RMB38.90, implying approximately 19% upside. Although the realization of growth has been delayed and market consensus forecasts may be revised down further, HSBC believes that the relatively high dividend payout ratio can provide downside support for the share price and therefore maintains its Buy rating. Accelerated phosphate mine expansion and price increases for its main product, MDCP, are near-term catalysts. Xinyangfeng's second-quarter revenue rose 22% year on year, mainly driven by higher compound fertilizer sales volumes. Although a sharp increase in sulfur costs reduced gross margin by 1 percentage point, the company partially benefited from the government-backed supply program, and gross profit still rose 20% while net profit increased 6%. HSBC consequently raises its 2026 compound fertilizer sales volume assumption and increases its margin forecasts for the existing compound fertilizer business, ultimately raising its 2026, 2027 and 2028 net profit forecasts by 22%, 8% and 3%, respectively. Its PB-ROE valuation uses an 8.8% cost of equity, comprising a 4.25% risk-free rate, a 4.75% China equity market risk premium and a beta of 1.0. The 2027 ROE forecast rises from 12.8% to 13.5%, and the target PB increases from 1.6x to 1.75x. Applying this multiple to 2027 book value per share of RMB11.70, versus RMB11.36 previously, yields a target price of RMB20.50, up from RMB18.70 and implying approximately 50% upside. The Buy rating is maintained. Overall, HSBC believes that tight phosphate rock supply is sufficient to support industry earnings and valuations, while the low-cost sulfur supply program and future sulfuric acid capacity using phosphogypsum can cushion raw material cost pressures. The three companies occupy different positions: Yuntianhua offers advantages in costs, margins and risk-reward; Xinyangfeng benefits from better-than-expected compound fertilizer sales volumes and profitability; and Chanhen Chemical's long-term phosphate mine expansion thesis remains intact, but the realization of growth has been delayed, leaving it more reliant on dividends for near-term support.

Analysis framework

The report first compares the three companies' second-quarter revenue, gross margins and net profits with HSBC's expectations to identify the operating divergence caused by government-backed sulfur supply, fertilizer sales volumes and project delays. It then assesses the industry's supply-demand and margin trajectory based on mine safety inspections, lithium iron phosphate demand, progress on new phosphate mine projects and sulfur cost policies. On this basis, HSBC revises its 2026—2028 earnings forecasts and uses a PB-ROE framework to translate forecast ROE and cost of equity into target PB multiples, which are then applied to 2027 book value per share to determine target prices. EPS sensitivity analysis is also used to test the impact of changes in phosphate rock prices and compound fertilizer spreads.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Phosphate rock supply-demand balance analysis

  The report examines both the supply constraints caused by mine safety inspections and delays to new projects, as well as changes in demand from phosphate fertilizers and lithium iron phosphate, to conclude that the tight phosphate rock balance and upcycle may be extended.

• Industry/Sector Analysis FrameworkVolume-Price Breakdown

  Breakdown of revenue and profit by volume, price and cost

  The report breaks down the three companies' second-quarter performance by sales volume, product prices, sulfur costs and changes in gross margin to explain the divergence between revenue growth and net profit performance.

• Valuation MethodPB valuation

  PB-ROE valuation

  HSBC determines target PB multiples based on forecast ROE and cost of equity, then multiplies them by 2027 book value per share to derive target prices; changes in ROE or cost of equity directly affect fair PB multiples.

• Quantitative/Factor/Portfolio TheoryCAPM Capital Asset Pricing Model

  Cost of equity parameter setting

  Xinyangfeng's 8.8% cost of equity is constructed using a 4.25% risk-free rate, a 4.75% China equity market risk premium and a beta of 1.0, and serves as the required return in the PB-ROE valuation.

• Industry/Sector Analysis Framework

  EPS sensitivity analysis

  The report separately analyzes the sensitivity of 2027 EPS to phosphate rock prices and compound fertilizer spreads to show how changes in key product prices or spreads affect earnings forecasts.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Yuntianhua (600096.SH)

  Benefits from low-cost sulfur and improved profitability in yellow phosphorus and DCP, and is named the report's top pick in the phosphate chemical sector.

  Strengths

  Second-quarter gross margin increased by 1.5 percentage points year on year, while cost control supported net profit growth; its risk-reward profile is the most attractive of the three companies.

  Weaknesses

  Lower second-quarter sales volumes caused revenue to decline 10% year on year, while gross profit still fell 5%.

  Comparison

  Compared with Chanhen Chemical, Yuntianhua has a fertilizer business and benefits more fully from the government-backed sulfur supply program; the report assigns it approximately 47% target upside.

  Risks

  Tighter fertilizer export policies causing domestic oversupply, falling grain prices reducing fertilizer demand, and persistently rising sulfur prices depressing gross margins.

• Chanhen Chemical (002895.SZ)

  Benefits over the long term from phosphate mine capacity expansion, but the delay to the Laozhaizi project defers new output and earnings growth.

  Strengths

  Its products are relatively market-oriented, and second-quarter revenue rose 20%; its relatively high dividend payout ratio is viewed as providing downside support.

  Weaknesses

  It does not produce phosphate fertilizers and therefore did not benefit equally from low-cost sulfur; second-quarter gross margin declined by 1.7 percentage points, and its 2026—2028 earnings forecasts were lowered.

  Comparison

  Compared with Yuntianhua and Xinyangfeng, which have fertilizer businesses, its exposure to sulfur cost pressure is more direct, and it also received the largest target price cut.

  Risks

  Falling phosphate rock prices, slower-than-expected progress on new phosphate mine capacity, continued increases in sulfur prices, and asset impairments on new materials projects such as iron phosphate.

• Xinyangfeng (000902.SZ)

  Benefits from growth in compound fertilizer sales volumes, better-than-expected margins and partial support from the government-backed sulfur supply program.

  Strengths

  Second-quarter revenue and gross profit increased by 22% and 20%, respectively, driving broad-based upgrades to 2026—2028 earnings forecasts.

  Weaknesses

  A sharp increase in sulfur costs still reduced second-quarter gross margin by 1 percentage point.

  Comparison

  Its earnings improvement is mainly driven by compound fertilizer sales volumes and spreads, and its target price implies approximately 50% upside, higher than that of the other two companies listed in the report.

  Risks

  Inventory losses caused by sharp declines in raw material prices, narrowing compound fertilizer spreads due to insufficient demand, slower-than-expected phosphate mine expansion, and unexpected production cuts caused by tighter environmental regulation.

Key data

• Yuntianhua second-quarter performanceRevenue -10% YoY; gross margin +1.5 percentage points YoY; gross profit -5% YoY; net profit +3% YoYLower sales volumes weighed on revenue, but low-cost sulfur and improvements in the yellow phosphorus and DCP businesses cushioned profit pressure.
• Yuntianhua earnings revision2026 net profit forecast raised by 7%Reflects the higher-than-expected second-quarter gross margin and the expected continuation of the government-backed sulfur supply program into the second half of 2026.
• Yuntianhua valuationTP RMB43.90; approximately 47% upsideThe previous target price was RMB43.10; 2027 ROE is 20%, cost of equity is 8.6%, target PB is 2.7x and book value per share is RMB16.46.
• Chanhen Chemical second-quarter performanceRevenue +20% YoY; gross margin -1.7 percentage points YoY; net profit +11% YoYHigher product prices drove revenue, but rising sulfur costs weighed on margins, and net profit was slightly below HSBC's expectations.
• Chanhen Chemical project progressCommissioning of the Laozhaizi phosphate mine postponed from 2028 to 2029New phosphate rock capacity and its earnings contribution are expected to arrive later than previously anticipated.
• Chanhen Chemical earnings revision2026 -14%; 2027 -16%; 2028 -14%The scale of HSBC's downward revisions to its net profit forecasts for each year.
• Chanhen Chemical valuationTP RMB38.90; approximately 19% upsideThe previous target price was RMB49.00; 2027 ROE was reduced to 18%, cost of equity is 9.65%, target PB was lowered to 2.83x and book value per share was reduced to RMB13.75.
• Xinyangfeng second-quarter performanceRevenue +22% YoY; gross margin -1 percentage point YoY; gross profit +20% YoY; net profit +6% YoYGrowth in compound fertilizer sales volumes offset part of the pressure from higher sulfur costs.
• Xinyangfeng earnings revision2026 +22%; 2027 +8%; 2028 +3%The scale of HSBC's upward revisions to its net profit forecasts for each year.
• Xinyangfeng valuationTP RMB20.50; approximately 50% upsideThe previous target price was RMB18.70; 2027 ROE was raised to 13.5%, cost of equity is 8.8%, target PB was increased to 1.75x and book value per share was raised to RMB11.70.
• Forecast net profitYuntianhua 2026—2028: CNY5,241m, CNY5,611m, CNY6,056m; Chanhen Chemical: CNY1,107m, CNY1,483m, CNY1,672m; Xinyangfeng: CNY1,572m, CNY1,872m, CNY2,236mHSBC Qianhai's 2026—2028 net profit forecasts for the three companies.

Impact & implications

The report believes that repeated delays to phosphate mine projects may postpone the previously feared new supply shock around 2028, thereby extending the period of tight phosphate rock supply-demand balance and support for industry earnings. The government-backed sulfur supply program and the commissioning of sulfuric acid facilities using phosphogypsum from 2027 are expected to reduce cost volatility, but the degree of benefit across companies will depend on their fertilizer businesses, feedstock security and the pace at which phosphate mine projects are delivered. Consequently, Yuntianhua and Xinyangfeng receive earnings and target price upgrades, while Chanhen Chemical's long-term expansion thesis remains unchanged but the timing of growth realization and valuation recovery has been delayed.

Risks

• A decline in phosphate rock prices could weaken industry profitability and affect the value of companies whose core thesis is phosphate mine expansion.
• Construction or ramp-up of new phosphate mine capacity at companies such as Chanhen Chemical may fall short of expectations, potentially further delaying earnings contributions.
• Persistently rising sulfur prices could compress the gross margins of Yuntianhua, Chanhen Chemical and Xinyangfeng.
• New materials projects such as iron phosphate may incur asset impairments.
• Further tightening of fertilizer export policies could result in domestic oversupply.
• Falling grain prices could lead to weaker fertilizer demand.
• Significant declines in raw material prices could cause inventory losses at Xinyangfeng.
• Lower-than-expected compound fertilizer demand could narrow product spreads.
• Stricter environmental regulation could cause unexpected production suspensions or cuts.

What to watch

• Monitor the intensity of mine safety inspections in 2026 and their constraints on phosphate rock supply.
• Monitor whether growth in lithium iron phosphate demand can continue to offset weaker phosphate fertilizer output.
• Monitor the continuation of the government-backed sulfur supply program in the second half of 2026 and companies' actual procurement costs.
• Monitor the commissioning pace and cost savings of sulfuric acid facilities using phosphogypsum from 2027 onward.
• Monitor whether Chanhen Chemical's Laozhaizi phosphate mine can commence production by the postponed 2029 deadline and whether expansion of its other phosphate mine projects accelerates.
• Monitor Chanhen Chemical's MDCP price increases and whether market consensus earnings forecasts continue to be revised down.
• Monitor whether fertilizer export policies are relaxed and whether tensions in the Middle East ease.
• Monitor progress on Xinyangfeng's phosphate mine projects and changes in compound fertilizer spreads.