Performance review

The 2022 results are in line with our expectations

The company announced its 2022 results: revenue of 27.48 billion yuan, +27.6% year on year; net profit of 3.86 billion yuan, corresponding to profit of 1.52 yuan per share, +201.5% year-on-year, net profit after deducting exchange gains and losses was about 3.51 billion yuan, in line with our expectations. By sector, the revenue of food additives/animal nutrition/high-grade amino acids/colloids was 133.0/95.8/12.0/ 2.24 billion yuan respectively, accounting for 48.4%/34.9%/4.4%/8.1% respectively, gross margin was 19.5%/27.9%/32.0%/54.6%, and gross margin was +5.8/+9.9/-9.5/+21.9ppt, respectively. In terms of raw materials, the average prices of corn and coal were 2,312 and 421 yuan/ton respectively, -1.6%/+16.9%, respectively.

Among them, 2H22's revenue was 14.11 billion yuan, +17% year on year, +6% month on month; net profit was 1.84 billion yuan, +166% year on year, -9% month on month.

Development trends

I am optimistic that MSG and xanthan gum will maintain high profit levels. Looking at supply, the monosodium glutamate industry has a stable oligopoly pattern. According to Zhuochuang information, the production capacity of CR3 in 2022 is about 80%; looking at demand, we think that optimizing food and beverage consumption with the epidemic is expected to recover, driving the level of additive consumption. The current market price of MSG is 9550 yuan/ton, and the price difference between MSG and corn is 3,405 yuan/ton, +4% month-on-month. We are optimistic that MSG will maintain a high profit level this year. The current price of xanthan gum is 51,500 yuan/ton, an increase of 39% over the same period last year. We are optimistic that in the context of continuing high crude oil prices, demand in the xanthan gum industry will continue to be booming and profits will grow steadily.

High dividends to share growth. The company announced that the annual dividend for 2022 is expected to be HK$0.697, with a full-year payout rate of 40%, compared to the 2021 dividend rate +5ppt. Based on the closing price of the last trading day of 2022, the dividend rate is 14.7% compared to +6.7ppt in 2021. We believe that the company values shareholder returns, maintains a high dividend rate on the basis of reasonable arrangement of capital expenses, and has good investment value.

Reduce costs and increase efficiency, and promote internationalization. The company looks forward to the future: 1) Continue the “double high” strategy to implement internationalization and ensure the high-quality operation of existing production capacity; 2) Continue to improve production technology to reduce unit production costs; 3) Set up three major marketing centers in America, Europe and Southeast Asia to directly serve overseas customers; 4) Improve logistics systems, further optimize logistics processes and reduce logistics costs; 5) Transform chemical factories to reduce production costs; consider increasing production capacity for major products to strengthen market position; 6) Conduct feasibility studies to establish production bases in other locations to continue advancing the internationalization plan.

Profit forecasting and valuation

Due to the increase in new production capacity for threonine and lysine and the decline in product prices, we lowered our net profit in 2023 by 7% to 3.18 billion yuan, and the net profit for 2024 was 3.30 billion yuan. The price-earnings ratio corresponding to the current stock price in 2023/2024 is 3.0/2.8 x, respectively. We are optimistic that the company will still maintain high dividends, have good investment value, and outperform industry ratings and target prices. The corresponding price-earnings ratio for 2023/2024 is 3.9/3.6x, respectively, and there is room for an increase of 30.3% from the current stock price.

risks

Competition intensified, and downstream consumption recovery fell short of expectations.