It is deeply involved in one of the leading brands of soy products in Jiangsu, Zhejiang, and Shanghai, and its historical performance has grown steadily. The company is headquartered in Hangzhou City, Zhejiang Province. It is a rare enterprise in the industry that produces all three series of “fresh+drink+leisure” soy products. The products cover fresh soy products, vegetable protein drinks, casual soy products, and other products, totaling more than 400 varieties. With high-quality products and perfect service, the company has become one of the leading brands of soybean products in Jiangsu, Zhejiang and Shanghai. Over the past few years, the company's revenue scale has been growing steadily. In 2013-2021, revenue increased from 774 million yuan to 1,337 million yuan, with a compound annual growth rate of 7.08%, net profit from 112 million yuan to 56 million yuan, with a compound annual growth rate of 21.57%. Furthermore, in the first three quarters of 2022, the company achieved operating income of 1,113 million yuan (YOY = 15.62%) and net profit of 37 million yuan (YOY = -12.97%).

The soy products market is steadily expanding, and the concentration of the industry continues to increase. According to the “2021 Status and Development Trends of China's Soybean Food Industry” data released by the Soy Products Professional Committee, the amount of beans invested by the top 50 enterprises in China's soy products industry increased from 1,044 million tons to 1,859,900 tons (CAGR = 10.73%) in 2015-2021. The traditional small workshop production model is small, and it is difficult for the production environment and hygiene conditions to meet food safety requirements. As people's awareness of food safety increases, the advantages of large enterprises are becoming more and more obvious. From 2015 to 2021, the market share of soybean investment by the top 50 companies increased from 8.73% to 12.10%.

The three “fresh+drink+leisure” series developed collaboratively, and the products were continuously upgraded and innovated. The company has formed a production line pattern based on fresh soy products, with plant-based protein drinks and casual soy products as development priorities, and supplements with other types of products. (1) The company's fresh soy products mainly include tofu, chicken, dried tofu, deep-fried tofu, etc., with households, restaurants, canteens, etc. as consumer groups. In 2017-2021, the company's revenue for fresh soy products increased from 496 million yuan to 884 million yuan (CAGR = 15.86%), and 2022H1 fresh soy products achieved revenue of 494 million yuan (YOY = 18.30%). (2) In 2021, the company launched the “Feed Yourself” whole soy milk series, which is high in dietary fiber and has a long shelf life. At the same time, the company launched a new product of freshly squeezed corn juice in 2022.

Based on the steady development of Jiangsu, Zhejiang, and Shanghai regions, we are expanding regionally through equity investment and production base construction. Due to the characteristics of the company's products, the regional characteristics of the company's sales are obvious, mainly concentrated in Zhejiang Province, Jiangsu Province, and Shanghai City. In 2021, the company's revenue share in Zhejiang Province, Jiangsu Province, and Shanghai was 64.14%/18.70%/12.01%, respectively.

The company has also achieved regional expansion through equity investments. In July 2021, the company successively signed “Cooperation Framework Agreements” with companies such as Nanjing Guoguo Food Co., Ltd., Guizhou Longyuansheng Soybean Industry Co., Ltd., and Taiyuan Golden Soy Food Co., Ltd. It plans to invest in these companies by increasing capital or transferring shares to the original shareholders. In addition, the company plans to invest in a soybean products production base construction project in the Jiangxia Economic Development Zone in Wuhan. The construction of this project is an important strategic layout for the company in central China.

We look forward to the subsequent decline in soybean prices to restore the company's profitability. According to the company's semi-annual report for 2022, soybeans, as the main raw material for the company's product production, account for a high proportion of production costs, which has a certain impact on the company's gross margin and profitability, and price fluctuations will directly affect the company's efficiency. Soybean prices have continued to rise since the second half of 2020 — according to wind data, the average price of the national soybean (soybean) market increased from 4658.76 yuan/ton to 5334.04 yuan/ton in 2020-2021, up 14.49% year on year. In the first half of 2022, the average price of the soybean (soybean) market increased to 5689.30 yuan/ton, the company's gross margin fell 7.09 pct year on year in 2021, and gross margin fell 12.08 pct year on year in the first half of 2022. According to the company's investor relations activity record on May 13, 2022, as the country adjusts the planting structure and expands the area under soybean cultivation through the soybean cultivation subsidy policy, soybean prices are expected to fall during the new purchasing season. We believe that if soybean prices continue to drop in the future, we are optimistic that the company's profitability will be repaired.

Profit forecasting and valuation. We expect the company's operating income from 2022-2024 to be 15.47/18.00/2.106 billion yuan respectively, net profit to be 0.42/0.99/144 million yuan respectively, and corresponding EPS of 0.34/0.80/1.16 yuan/share, respectively. Based on the valuation situation of comparable companies, the company was given a PE (2023E) valuation range of 30-35 times, and the corresponding reasonable value range was 24.00-28.00 yuan. For the first time, we covered and gave it a “superior to market” rating.

Risk warning. (1) Food safety risks, (2) downstream demand falls short of expectations, (3) market competition intensifies, (4) expansion of new products, new channels, and new markets falls short of expectations, and (5) upstream raw material costs, prices, and cost investments fluctuate.