Performance review

Deducting non-net profit in 2022 is in line with expectations

The company announced its 2022 results: operating income of 7.865 billion yuan (YoY +19.4%), net profit of 697 million yuan (YoY +120.9%), net profit after deducting non-return mothers increased 76.2% year-on-year to 508 million yuan. The non-recurring profit and loss was mainly insurance compensation due to the “March 21” incident in Xiangshui, Lianhua, Jiangsu. Revenue corresponding to 4Q22 was 1,964 million yuan (YoY +6.3%), and net profit to the mother was 354 million yuan (YoY +843.9%).

In 2022, the operating rate of Jiangsu Lianhua increased steadily, and the annual performance increased year-on-year. The company's pharmaceutical/plant protection/functional chemicals revenue was 14.7/57.9/220 million yuan, YOY +20.6%/+21.6%/-10.4%, respectively. The gross margin was 33.1%/24.9%/20.8%, YOY-7.6/+1.6/-4.0ppt, respectively.

Development trends

The pharmaceutical CDMO sector is expected to usher in a harvest period. In the company's business pipeline, the number of commercialized intermediates/phase 3 clinical/other clinical-stage products was 18/39/67, respectively. The year-on-year rate was +1/+6/-2, respectively, with revenue of 10.3/31/130 million, and YoY +37.8%/+104.2%/-59.2%. In 2022, the company continued to strengthen existing strategic customer relationships and actively develop new customers. According to the company's annual report, a total of 15 verification projects have been completed or are being executed, 2 of which are API projects. At the same time, the company increased investment in R&D and gradually established R&D technology platforms such as PROTAC and Linker in 2022.

We believe that a solid customer base and R&D strength have built a solid “moat” for the company's pharmaceutical CDMO sector. As the commercialization stage pipeline increases, the company's pharmaceutical CDMO sector is expected to enter a harvest period.

Jiangsu Lianhua turned a loss into a profit, and the losses of overseas subsidiaries are expected to narrow. Global agricultural product prices rose in 2022, and Jiangsu Lianhua's operating rate rose steadily, achieving revenue of 2.17 billion yuan (YoY +87.9%) and net profit of 4.4 billion yuan (including 320 million yuan in insurance compensation), turning a loss into a profit over the previous year. Revenue from biocides and intermediates in plant protection products increased dramatically. Herbicides and intermediates/insecticides and intermediates/biocides and intermediates achieved revenue of $23.6/12.3/1.54 billion respectively, and YoY +15.3%/-9.6%/+81.4%. Lianhetech Holdco Limited (Lianhetech Holdco Limited) lost 360 million yuan in 2022. We expect losses to narrow as supply chains for overseas customers are further consolidated.

The functional chemicals project is progressing in an orderly manner. By the end of 2022, the number of new energy products awaiting commercialization (verified) /pilot/small testing in the company's functional chemicals sector pipeline was 2/4/10, respectively. The 20,000 tons of lithium hexafluorophosphate and 10,000 tons of lithium bifluorosulfonimide projects are progressing in an orderly manner. Prices of new energy functional chemicals declined in 2023, and the company plans to stay demand-oriented and improve the competitiveness of products in the functional chemicals sector.

Profit forecasting and valuation

Prices of new energy functional chemicals have declined, and downstream pesticide sentiment has fluctuated. We lowered our net profit in 2023 by 20% to 734 million yuan, and introduced net profit of 2024 to 981 million yuan. The current stock price corresponds to the 2023/2024 price-earnings ratio of 16.5 times/12.3 times. Due to profit forecasts and industry valuation center adjustments, we lowered our target price of 26.5% to 19.65 yuan, corresponding to 24.7 times the 2023 price-earnings ratio and 18.5 times the 2024 price-earnings ratio, maintaining the outperforming industry rating. There is room for 50.0% upward compared to the current stock price.

risks

The development of pharmaceutical intermediates fell short of expectations, and prices of pesticide intermediates fell sharply.