As the regular review window for the Hong Kong Stock Connect approaches, the market routinely begins searching in advance for the next batch of potential targets for southbound capital flows.
For Hong Kong-listed companies, inclusion in the Stock Connect scheme is significant not only for opening trading channels but also for potential changes in investor base, liquidity, and valuation benchmarks.
CHINA XLX FERT (SEHK: 01866) is currently under such scrutiny.
Public information shows the company has been included in the Hang Seng Composite Index and has consistently met key thresholds for Stock Connect inclusion regarding market capitalization and trading activity.
With the June 30 assessment date drawing near, market expectations for its potential addition to the Stock Connect list in September are rising.
However, it is worth noting that this stock is not merely a play on inclusion expectations.
The company achieved record-high revenue in 2025, with a significant release of profit elasticity in the first quarter of 2026.
Following the operation of the Jiujiang Phase II project, its cost advantages have been further strengthened, while projects at bases in Xinxiang, Zhundong, and Guangxi are also progressing.
Concurrently, an increased dividend payout, concentrated share purchases by the controlling shareholder and management, and target price upgrades by major international banks are reinforcing the market's assessment of its intrinsic value.
Stock Connect inclusion could act as a catalyst for heightened attention, but fundamental improvement is the core variable supporting a potential valuation re-rating.
Technical Criteria Fulfilled, Awaiting Official Confirmation
Stock Connect inclusion is not merely a thematic trade, as its inclusion logic is governed by relatively clear rules.
Under the current mechanism, the Hang Seng Composite Index serves as a key sample pool for Stock Connect constituents, with related stocks also needing to meet requirements on market capitalization, liquidity, and exchange rules.
From a market capitalization perspective, the company's current valuation is significantly above the minimum HK$5 billion threshold for small-cap stocks under the Stock Connect rules.
Based on share price calculations in late June, the company's total market capitalization is approximately over HK$12 billion, providing a comfortable buffer above the minimum requirement.
More importantly, the company's average share price level over the past year has notably increased, indicating that meeting the market cap requirement is not a one-day spike but is built upon profit recovery, enhanced dividends, and improved market trading activity.
From a liquidity perspective, Hang Seng Indexes Company sets a monthly turnover test for index constituents: at least 10 out of the past 12 months, and at least 5 out of the past 6 months, must pass a 0.05% turnover rate threshold.
The company's average daily turnover level is significantly above this standard.
Therefore, the current market focus has shifted from "whether it can meet the basic thresholds" to "when official list confirmation will occur."
Following the regular adjustment schedule, June 30 is a key assessment cut-off date, with results typically announced in August and taking effect in early September.
The final outcome remains subject to official announcements from the Shanghai Stock Exchange, Shenzhen Stock Exchange, and Hang Seng Indexes Company.
However, based on publicly visible market cap and liquidity conditions, the company is in a critical phase where inclusion expectations may be realized.
Post-Inclusion: Dual Benefits of Liquidity and Valuation
Inclusion opens the channel, but whether capital ultimately chooses to allocate depends on whether the stock is deemed worth buying.
Observing the allocation patterns of southbound capital in recent years, industry leaders with low valuations, high dividends, and stable profitability have consistently formed the core long-term holdings.
Especially against a backdrop of heightened market volatility, assets combining a margin of safety with cash return capabilities are increasingly sought as "ballast" by incremental funds.
From this perspective, the company's profile is quite clear.
On valuation, its current trailing price-to-earnings (P/E) ratio is approximately 10.8x, and its price-to-book (P/B) ratio is about 1.17x.
As one of China's leading urea producers, its P/B ratio shows a significant valuation discount compared to similar A-share listed peers—such as Shandong Hualu-Hengsheng Chemical Co., Ltd. at around 1.6x and Yuntianhua at about 2.45x.
The root of this discount lies not in fundamental differences but reflects the liquidity discount prevalent in the Hong Kong market.
Once southbound capital opens the allocation channel, a shift in pricing logic could bring about a re-rating.
Regarding shareholder returns, the company has maintained cash dividends for six consecutive fiscal years, with its payout ratio jumping from 23% to 44% in 2025.
The company has explicitly committed to a distribution ratio of not less than 25% of audited net profit attributable to shareholders for 2025-2027, with a minimum annual dividend per share of RMB 0.24.
Providing a profit distribution "floor" amidst cyclical fluctuations is relatively uncommon in the fertilizer industry.
As a scarce Hong Kong-listed fertilizer leader, if successfully included in the Stock Connect system, the company's market liquidity and investor structure are expected to further optimize, potentially opening a new window to observe the long-standing valuation discount.
Beyond the Inclusion Catalyst: Fundamentals as the Main Driver
In the first quarter of this year, the company reported revenue of RMB 6.822 billion, a year-on-year increase of 17%; net profit attributable to shareholders was approximately RMB 300 million, surging 52% year-on-year; gross profit grew 53% to RMB 1.279 billion.
A profit growth rate three times that of revenue growth reflects a systematic improvement in profitability—amplified cost advantages, optimized product mix, and realized economies of scale.
Simultaneously, several key projects are progressing as planned.
The Xinxiang base chemical new materials project has entered trial production; the first phase of the Zhundong project is expected to commence operations before the end of 2026; the first phase of the Guangxi major project is scheduled for production in the third quarter of 2027.
With the sequential launch of these three major bases, the target of 14 million tonnes of total fertilizer capacity by 2028 is moving from plan to reality.
At the shareholder level, from late May to date, the major shareholder and management have increased their holdings 12 times, totaling approximately 8.12 million shares, with expenditure exceeding HK$82 million.
Additionally, the company has approved a share repurchase plan of up to HK$200 million within the year.
Institutional sentiment is also positive, with Goldman Sachs upgrading its rating to "Buy" in May, raising the target price to HK$14, and lifting its 2026-2028 earnings per share forecasts by 43%, 19%, and 16%, respectively.
Stock Connect inclusion brings increased liquidity and attention, but sustained earnings growth, capacity expansion, and enhanced shareholder returns constitute the deeper layer of value support.
Of course, the inclusion outcome still awaits the official announcement by Hang Seng Indexes Company in September, and the cyclical nature of the fertilizer industry remains an objective risk factor.
However, based on current technical criteria and fundamentals, the company appears to be at an intersection where capital flow catalysts and fundamental improvements converge.
With the June 30 assessment date approaching, whether this company boards the Stock Connect train as expected warrants continued monitoring.
Comments