Incident: The company released its 2021 annual report and 2022 quarterly report on April 27, 2022. It achieved operating income of 2,733 billion yuan in 2021, an increase of 42.43% over the previous year, and achieved net profit of 28.3326 million yuan to shareholders of the parent company, an increase of 1.08% over the previous year. The first quarter of 2022 achieved operating income of 879 million yuan, an increase of 27.54% over the previous year, and net profit attributable to shareholders of the parent company was 103 million yuan, an increase of 826.02% over the previous year.
Comment:
Volume, price, and profit went hand in hand, and Q1 performance reached a record high.
Q1 revenue increased 27.54% year over year, and net profit increased 826.02% year over year. The gross profit margin was 27.72%, an increase of 16.32 pcts; the net sales margin was 11.72%, an increase of 10.12 pcts. The main reason: On the one hand, the main products of hydroquinone, hydroquinone, and vanillin and ethyl vanillin, which are the main products of the “20,000 tons of phenyl diphenol per year, 31,100 tons of benzodiol derivative construction project”, increased by varying degrees compared to the previous year, and the benefits of the project were gradually released; on the other hand, due to rising raw material prices, increased freight costs, environmental protection and emission reduction, etc., partly driven up the price of vitamin products. Looking ahead to the future market, we believe that prices of the company's main products are expected to remain high. On the one hand, downstream demand represented by agricultural products is strong. On the other hand, due to rising prices of raw materials such as chrome salt, compounded by factors such as increased supply and limited new production capacity, the tight supply and demand trend continues. The company closed LANXESS CISA has a stable and relatively low cost advantage on the raw materials side, and profit margins are expected to be maintained.
The absolute majority of revenue — the vitamin price boom is expected to continue.
The company currently has four major vitamin varieties, namely 3,200 tons/year of vitamin B1, 13,000 tons/year of vitamin B3, 3000 tons/year of vitamin K3, and 5,000 tons/year of vitamin B5.
Vitamin B1: The supply has been relatively stable in recent years. The company's vitamin B1 market share in 2020 accounted for 17% of the country. Prices are currently at the bottom and are expected to rise as downstream demand recovers. According to Wind, the average price of vitamin B1 in the first quarter of 2022 was 163 yuan/kg, up 4.89% year on year.
Vitamin B3: The supply and demand pattern is relatively stable. Since paraquat has been banned one after another in many countries, the supply of 3-methylpyridine, the key ingredient of vitamin B3, has shrunk, and rising costs will transfer terminal prices. Currently, the price is still at the bottom, with an average price of 50 yuan/kg in the first quarter.
Vitamin K3: In recent years, due to the completion of industry acquisitions, the concentration of vitamin K3 supply has increased. Vitamin K3 prices are booming due to rising prices of the main raw material sodium dichromate. According to Wind, the average price of vitamin K3 in the first quarter of 2022 was 173 yuan/kg, up 166.84% year on year. Since the expansion of vitamin K3 production is constrained by chromium powder, prices are high or maintained. However, after the company acquired LANXESS CISA, it guaranteed a stable supply of sodium dichromate, and the profit of K3 products directly benefited.
Vitamin B5: Since the production route includes cyanide-containing wastewater, environmental requirements are high, and manufacturers with cost advantages and stable and continuous supply are limited. According to Wind, the average price of vitamin B5 in the first quarter of 2022 was 319.18 yuan/kg, a year-on-year increase of 323.69%. Affected by the increase in the price of raw materials, the high price of vitamin B5 is expected to continue.
The inflection point of performance was established, and the path of transformation began.
After more than 30 years of development, the company has become an important supplier of vitamins in the world, and its production capacity ranks among the highest in the industry. In recent years, companies have actively deployed fine chemicals represented by flavors and perfumes, and pharmaceutical raw materials represented by iodine contrast agents, and enterprises have embarked on the path of industrial transformation and upgrading.
The company's fine chemical projects are mainly the “Project with an Annual Output of 20,000 Tons of Phenol and 31,100 Tons of Benzodiol Derivatives”. The key products are hydroquinol and vanillin, derivatives of phthalates, and ethyl vanillin. The project was completed in two phases. The first phase included 10,000 tons of diphenol and 1,5015 tons of benzodiol derivatives. The first phase of the project was put into operation at the end of 2020. After production capacity gradually climbed in 2021, the average capacity release rates of the main products hydroquinol and phthalates, vanillin and ethyl vanillin from October 2021 to March 2022 reached 74.19% and 74.30% respectively. Hydroquinone has been sold to many mainstream acrylic acid manufacturers in China, and vanillin and ethyl vanillin have been sold to major food and cosmetic customers in Europe and the US.
The pharmaceutical raw materials project is a “construction project with an annual output of 1,000 tons of iodine contrast agents and intermediates”. The first phase of the project is to produce 400 tons of iodine contrast agents and intermediates per year. The first phase was put into production at the end of 2020. Currently, all major users of iodine contrast agent intermediates have passed certification and commercialized sales. The API submission and approval process is being promoted, and approval is expected in 2023. If they obtain CDE review and approval, European CEP certification, and US FDA certification, the company's API products can be sold to various regulated market regions around the world.
The company's layout of new industries such as fine chemicals and pharmaceutical intermediates can not only form industrial and market synergies with traditional industries, but also have higher added value (the average gross margin of the industry is over 40%) and the competitive pattern is better, which will help the company's performance increase dramatically.
Profit forecast: Based on the assumption that the vitamin price boom continues, the release of production capacity and price of flavors and fragrances, and the smooth development of the iodine contrast agent market, we expect net profit attributable to the mother in 2022-2024 to be 50,000,000 yuan, 779 million yuan, and 887 million yuan respectively. EPS will be 0.48 yuan, 0.73 yuan, and 0.83 yuan respectively, with initial coverage for “buying”
ratings.
Risk warning: Risk of falling prices of vitamin products, the release of production capacity in the fine chemical sector falling short of expectations, a sharp rise in raw materials, approval and sales of APIs falling short of expectations, and untimely updates of research and usage information data.