Key points of investment
The company released its annual report for '22 and the quarterly report for 2023. The performance fell short of expectations: the company's revenue in '22 was 369 million yuan, +1.25% year on year; net profit of the mother was 110 million yuan, +0.32% year on year; net profit of the non-return mother was 98 million yuan, +18% year on year. 23Q1 The company's revenue was 72 million yuan, -16% year on year; net profit of the mother was 0.2 million yuan, -14% year on year; after deducting the net profit of the non-return mother was 18 million yuan, -9% year on year. Performance fell short of expectations.
The compounding business continues to be sluggish, dragging down the company's performance: the company's redistribution revenue in '22 was -28% year on year, and the share of revenue fell 19pct to 47% year on year. Affected by poor demand for downstream room temperature acid, the compounding business shrank in '22, compounding the company's product price reduction, and compounding gross margin in '22 was -3.8pct to 42% year-on-year. Demand for room-temperature acid terminals continued to be sluggish in 23Q1. At the same time, the pace of downstream orders was impacted after the prices of the main composite raw materials increased a lot. We expect the 23Q1 compounding business revenue and gross margin to decline significantly year-on-year, dragging down overall revenue and profits.
The second curve is the rise in probiotics, and structural optimization drives an increase in gross margin: the epidemic catalyzed and production capacity expanded. In '22, the company's edible probiotic business was +87% compared to the same period last year, and the revenue share was +17pct to 38% year on year. We expect the company's probiotic business to continue to grow rapidly in 23Q1. The gross margin of the company's edible probiotics was -0.1pct to 63% year-on-year in '22. Since the gross margin of the probiotic business was higher than the compound mix, the increase in share drove the company's gross margin to +1.7 pct to 52% year on year. Under cost dilution, the net interest rate of Jinhua Galaxy, the main subsidiary of the company's probiotic business, reached 41% in '22, +10.7pct over the previous year. Considering the high capacity utilization rate of the 23Q1 company, we expect the profitability of the 23Q1 company's probiotic business to remain high, and the continuous increase in revenue share will drive the 23Q1 company's gross margin to +1.1pct to 52.5% year-on-year.
Expenses are relatively stable, and profitability has increased: in '22, the company's sales/management/R&D/finance expense ratio was +0.5/-2.5/-1.5/+0.9pct compared to the previous year, and the year-on-year decline in the management expense ratio was mainly due to a decrease in equity incentive expenses. Overall, the company's net interest rate attributable to the parent in '22 was -0.3 pct to 29.8% year on year, and the net interest rate attributable to the parent after excluding non-financial items such as asset disposal income was +3.8pct to 27% year-on-year. In 23Q1, the company's sales/management/R&D/financial expenses ratio was +4.3/+0.2/+0.1/-5.4pct over the same period last year. The sales expenses ratio increased year-on-year or because the company increased its own brand building. In 23Q1, the net interest rate of the company to the mother was +0.5pct to 27.8% year on year, and profitability continued to increase.
Probiotic business potential can be expected in '23, waiting for the inflection point of compounding: post-pandemic consumer health awareness increased, demand for probiotics was strong, and probiotic business goals for '23 are still expected to be achieved. A low base is compounded by a recovery in consumption. Downstream demand for room temperature acid is expected to pick up from 23Q2, and the company's remixing business is expected to reach an inflection point.
Profit forecast and investment rating: The company's 23Q1 performance fell short of expectations. We lowered the 23-25 revenue forecast to 4.6/62/800 million yuan (the previous 23-24 forecast was 52/7 million yuan), +26%/34%/29% year on year, and the net profit forecast returned to the mother to 1.5/22/290 million (the previous forecast for 23-24 was 18/240 million yuan), +36%/48%/32% year on year. The corresponding PE was 32/22/16x, respectively, downgraded to the “increase in holdings” rating.
Risk warning: raw material prices have risen sharply, industry competition has intensified, consumption recovery falls short of expectations, high customer concentration, and new customer development falls short of expectations
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