Overview of events

In 2021, the company achieved operating income of 2.063 billion yuan, down 6.33% from the same period last year, and realized net profit of-309 million yuan, down 224.94% from the same period last year, the first loss since 2011. 2022H1, the company achieved operating income of 974 million yuan, up 4.82% from the same period last year, and its net profit was-101 million yuan, down 42.59% from the same period last year. The company's losses in 2021 and 2022H1 are caused by many factors: (1) the edible fungus market remains in the doldrums; (2) the epidemic situation is repeated, and consumption, especially in the catering industry, is limited; (3) the rising prices of raw materials lead to higher costs. Since the middle and late July of 2022, under the influence of the supply side, the price of edible mushroom, especially Flammulina velutipes, has increased significantly. As a leader in the edible mushroom industry, the daily production capacity of edible mushroom and Flammulina velutipes ranks first in the country. With the rise in the price of the main products, the company is expected to usher in a reversal of difficulties.

Analysis and judgment:

The leading revenue of edible fungi maintains stability, and the depressed market is a drag on the performance of 2021&2022H1.

From 2017 to 2020, the company's performance continued to improve, operating income increased from 1.33 billion yuan to 2.202 billion yuan, CAGR+18.30%; return net profit increased from 122 million yuan to 247 million yuan, CAGR+26.51%. As the price of edible mushroom began to fall in the fourth quarter of 2020, the company's performance was affected by the repeated COVID-19 epidemic. In 2021, the company achieved operating income of 2.063 billion yuan, down 6.33% from the same period last year, and realized net profit of-309 million yuan, down 224.94% from the same period last year. It was the first loss since 2011. In the first half of 2022, the price of edible fungus remained low, and as the company's main raw materials were planting wastes and scraps, according to the company's announcement, due to the impact of trade in bulk goods, the purchase prices of major raw materials increased significantly, and the company continued to lose money. Achieve a net profit of-101 million yuan.

The off-season is not light, and many factors promote the general rise in the price of edible fungi.

Since the middle and late July of this year, the price of edible mushrooms has risen significantly. In terms of categories, the prices of Flammulina velutipes, Pleurotus eryngii and Lentinus edodes have also risen. In theory, the second and third quarters are the off-season of Flammulina velutipes consumption, because Flammulina velutipes is mainly suitable for hot pot consumption, the annual peak consumption season is the first quarter and the fourth quarter, because the hot pot consumption demand will be relatively large. The sharp rise in the price of Flammulina velutipes in the off-season is higher than expected. We believe that the main reasons for the recent rise in the price of edible mushrooms represented by Flammulina velutipes are: (1) the price of hairy pigs has remained high since July this year, driving up residents' expectations of future inflation, leading to a rise in the prices of all necessities of life, or the price of raw materials for food, including meat and vegetables. (2) there was a large-scale high temperature and drought in the whole country in August, and the temperature in many places remained above 40 degrees, which damaged the growth of vegetables. In addition, the high temperature brought about a shortage of power supply, and power cuts in many places affected the storage and transportation of vegetables. when the supply of vegetables was blocked, the prices of Flammulina velutipes rose, and the prices of Flammulina velutipes rose along with the prices of vegetables; (3) the prices of edible mushrooms began to fall back in the second half of 2020, and the industry fell into a loss and capacity removal; (4) the second and third quarters are the off-season of consumption, and large factories are under-load production.

The production base & marketing network is all over the country, and the C-end customer company is the largest industrial production enterprise of edible fungus in China. As of June 30, 2022, the company has built six major production bases in Changchun, Jilin, Dezhou, Guangdong, Dujiangyan, Guizhou, Lintao, Gansu, and Thailand abroad. From 2018 to 2021, the company's daily production capacity of edible fungi increased from 1060 tons to 1345 tons, and the daily production capacity of Flammulina velutipes, the main product of CAGR+8.26%;, increased from 900tons to 1050 tons, CAGR+5.27%. The company's daily production capacity of edible fungi and Flammulina velutipes rank first in the country. In terms of marketing, relying on reasonable production capacity layout, the company has distributed six sales regions across the country and established a national sales network covering major populated areas; the company has been promoting multi-channel sales strategy for many years, intensive cultivation of KA channels, increasing the distribution of large chain supermarkets such as Yonghui supermarket and Jiajiayue supermarket, and continuing theme promotion to strengthen the company's offline brand strength and channel strength. The company has also moved into fresh head platforms such as Hema Xiansheng and Dingdong (Cayman) Limited, giving full play to the advantages of creating a "fresh radius" in its seven production bases, providing daily direct supply of e-commerce warehousing, so that products can quickly and directly reach C-end consumers.

Investment suggestion

Our analysis: 1) benefiting from the rising prices of the main products, especially Flammulina velutipes, the company, as the leader of edible mushroom production enterprises, ranks first in the country in total edible mushroom production capacity and Flammulina velutipes production capacity, and the performance is expected to improve and usher in a difficult reversal in the second half of this year. 2) the company's production base and marketing network are distributed all over the country, and the new construction of production bases in Central and East China is also being promoted continuously, and the products reach C-end customers directly. At present, they have settled in a number of online and offline platforms. With diversified marketing methods and rich product categories, the future performance is expected to be further thickened. Taking into account the impact of these factors, we estimate that the operating income of the company in 22-24 will be RMB 25.74 million, respectively, and the net profit attributable to the company will be RMB 2.99 billion, RMB 0.25 million, EPS 0.20 and RMB 0.65, respectively. On September 16, 2022, the share price of RMB 7.14 will correspond to 22/23/24PE of 35x12x11X, which will be covered for the first time and will be rated as "overweight".

Risk hint

The risk of raw material price fluctuation, the risk of product price decline caused by intensified market competition, and the risk of seasonal fluctuation of sales price and profit.