Incident: The company recently released its 2022 annual report. It achieved annual revenue of 2.63 billion yuan, an increase of 42% over the previous year, achieved net profit of 730 million yuan, an increase of 84.7% over the previous year, and achieved net profit of 660 million yuan after deduction, an increase of 120.3% over the previous year. Benefiting from rising prices of caffeine products, the company's performance in 2022 was impressive.

The performance in '22 was impressive, with functional ingredients contributing a major increase. Achieved annual revenue of 2.63 billion yuan, up 42% year on year: 1) Functional ingredients business: revenue of 2.24 billion yuan (+62.1%), accounting for 85.36%, gross margin was 38.34% (+4.97pct), of which sales of caffeine products were 14,000 tons (+14.26%), sales of acarbose were 140 tons (+74.16%), and sales of anhydrous glucose were 31,000 tons (-2.48%); 2) Health food business: revenue of 330 million yuan (-19.04%), accounting for Compared to 12.51%, gross margin was 79.39% (-2.44pct), of which sales of health food products were 1.23 billion tablets/capsule (-11.01%).

The increase in caffeine prices was the main driver of the company's performance in '22, and it is still at a high level. In 2022, the company's functional ingredients business had revenue of 2.24 billion (+62.1%) and gross margin of 38.34% (+4.97pct). Among them, the caffeine API business saw a steady increase in price: the company sold 14,000 tons of caffeine products in '22, an increase of 14.3% over the previous year. The unit price of caffeine began to rise markedly in August '21, and reached an average unit price of 17.2 US dollars/kg by June '22, compared to July '21 (9.2 US dollars/kg) ) An increase of more than 85%. As of February '23, the unit price of caffeine had declined, but it was still high, at $13.7 per kg.

The acquisition of Shiyao Shengxue plans to expand the health business. The company completed the acquisition of 100% of Shiyao Shengxue's shares. Shiyao Shengxue is one of the main manufacturers of third-party acarbose APIs in China, and is also an important supplier of anhydrous glucose. After the technical reform is completed, it is expected that Shiyao Shengxue will become the largest third-party acarbose API manufacturer in China. As the share of downstream reagent companies expands, the company's API share will expand accordingly. According to the performance promise, after the acquisition was successful, the performance promises for 2022-2024 were no less than 81 million yuan, 91 million yuan, and 102 million yuan respectively after deducting non-net profit. As a platform for Shiyao Group to lay out the big health sector, the company is expected to take on other major health-related sectors such as vitamin APIs and traditional Chinese medicine under the Shiyao Group in the future. There are still expectations in terms of outreach.

Profit forecast: The company is expected to achieve net profit of 7.7/84/93 billion yuan in 2023-2025, an increase of 5.6%/10%/10.4% over the previous year. The company is a leading manufacturer of caffeine APIs. In the context of post-epidemic recovery, the company's health food business will achieve restorative growth, and the company will complete the acquisition of Shiyao Shengxue, expand businesses such as acarbose, increase profitability, and give it an “increase in holdings” rating.

Risk warning: Risk of falling caffeine prices; increased risk of industry competition; declining caffeine exports.