Lianhua Technology released its 2022 annual report. In 2022, the company achieved operating income of 7.865 billion yuan, an increase of 19.41% over the previous year, and realized 508 million yuan of net profit after deduction, an increase of 76.21% over the previous year. The company's non-recurring profit and loss is mainly the company's business interruption insurance compensation of 318 million yuan, which is included in non-operating income.

The increase in the company's revenue in 2022 was mainly due to the fact that revenue from the pharmaceutical sector maintained rapid growth, increased demand in the global plant protection market, increased orders for the company's plant protection business, and improved operations. 1) Looking at revenue by product, the revenue of pharmaceuticals, plant protection, and functional chemicals in 2022 changed 20.57%, 21.59%, -10.35% to 14.67, 57.93, and 222 million yuan; 2) By product gross margin, the gross margin of pharmaceuticals, plant protection, and functional chemicals in 2022 changed year-on-year - 7.61, 1.60, and -3.95 pcts to 33.05%, 24.91%, 20.78%; 3) Sales prices of herbicides, insecticides, fungicides, pharmaceuticals and functional chemicals changed year-on-year respectively 11.59%, -0.52%, 5.60%, 43.60%, -17.57% to 197,000 yuan/ton, 316,000 yuan/ton, 324,000 yuan/ton, 1,206 million yuan/ton, 18,000 yuan/ton. 4) The production capacity of herbicides, insecticides and fungicides is 2,105, 8265 and 6097 tons, respectively, with production capacity under construction of 0, 3,300 and 1,750 tons; pharmaceutical production capacity is 2,446 tons, production capacity under construction is 70 tons; functional chemicals are 1,8131 tons, with production capacity under construction of 30,000 tons. 5) The sales, management (including R&D), and financial expenses rates in 2022 were -0.06, -1.53, and -0.92 pcts to 0.16%, 15.00%, and 0.61%, respectively. In total, the three cost rates changed -2.51 pct to 15.77%.

Focusing on the vision of “becoming the world's leading chemical and technology solution provider”, the company adheres to the path of differentiated development and continues to improve its core competitiveness. 1) In the functional chemicals sector, the company is actively expanding the field of new energy chemicals and continuously developing new processes for products. By the end of 2022, there were 2 new energy products awaiting commercialization in the pipeline, and product verification had been completed for downstream customers. There were 4 pilot stages and 10 small trial stages. In 2022, the company further deepened cooperation with customers in various emerging fields such as personal care, electronic chemicals, battery chemicals, photovoltaic-related chemicals, and environmentally friendly materials, and laid a solid foundation for steady and rapid growth. 2) Plant protection business sector, global demand for plant protection products increased in 2022, the company's commercial product orders were plentiful, and sales rose steadily. The company is actively expanding cooperation in the field of “biochemistry” plant protection, and a series of projects have already entered the product incubation pipeline. 3) In the pharmaceutical business sector, the number of commercialized, phase 3, and other clinical stage products of the company in 2022 was 18, 39, and 67, respectively, with revenue of 10.3, 3.1 and 130 million yuan respectively. In 2022, the company provided CDMO services at different clinical and commercialization stages to customers around the world. The business pipeline continued to advance, while increasing investment in R&D forces to gradually establish R&D technology platforms such as PROTAC and Linker.

Profit forecasts and reference ratings. We expect the company's EPS to be 0.79, 0.93, and 1.11 yuan respectively in 2023-2025. Referring to the valuations of comparable companies in the same industry, we believe that the reasonable valuation multiplier is 21-23 times PE in 2023, and the corresponding reasonable value range is 16.59-18.17 yuan, maintaining superior market ratings.

Risk warning. Risk of falling product prices; investment of production capacity under construction falls short of expectations; macroeconomic downturn.