Key points of investment

Huakang Co., Ltd. released 2023Q1 results, which slightly exceeded expectations

Under the Russian-Ukrainian “black swan” incident, export substitution in China's sugar substitute industry has continued to be interpreted since 22Q2, and the company has continued to benefit strongly as an invisible champion. 2023Q1 achieved revenue of 650 million yuan, an increase of 60.4% over the previous year. Among them, crystal alcohol achieved revenue of 500 million yuan, an increase of 63.8% over the previous year, and achieved net profit of 90 million yuan to the mother, an increase of 79.0% over the previous year. Both revenue and profit achieved high growth. The high growth rate in performance stemmed from the low base for the same period last year, which was due to a shortage of supply of crystalline alcohol products such as sorbitol since the beginning of the year. According to data from the General Administration of Customs, China's sorbitol and xylitol exports increased by 81.5% and 27.1%, respectively, in January-January this year, and the sugar replacement order transfer dividend continued.

Gross margin has risen, and the level of fee control continues to be steady

In terms of gross margin, 2023Q1 achieved a gross profit margin of 23.22%, a sharp increase of 4.16 pcts over the previous year, mainly due to product structure optimization, that is, the share of high-margin crystalline alcohol revenue continues to rise. In terms of cost ratio, 2023Q1's sales expenses ratio was 1.19% and management expenses ratio was 3.01%, which was basically the same as the previous year; the absolute value of R&D expenses was 119 million yuan, compared to 22 million yuan in the same period last year. In terms of net interest rate, the net interest rate of the 2023Q1 company was 13.84%, +1.44pcts compared to the previous year. The increase was weaker than gross margin mainly due to a decrease in non-recurring profit and loss. The company achieved investment income of 13 million yuan in joint ventures and joint ventures in the same period last year.

Export substitution dividends are expected to continue for a long time, seize historical opportunities and forge ahead 1) Order transfers are not just short-term catalytic; export substitution of sugar is expected to become a long-term trend. Benefiting from order transfer dividends from the Russian-Ukrainian incident, 2023Q1 achieved overseas revenue of 392 million yuan (+78.8% year-on-year). According to data from the General Administration of Customs, since last year, the export value of sorbitol, an important sugar substitute, to Russia has been rising quarterly. The 22Q2 to 23Q1 quarters were 87%/70%/17%/43%, respectively. Currently, the amount of sorbitol exported to Russia accounts for 16% of China's total sorbitol exports from 5% in Q1 last year. The rapid rise in scale, combined with the stable supply that has continued for more than a year, we expect that China's sugar substitute manufacturers have already gained the trust of new customers and have formed a certain degree of stickiness, and the transfer of orders is expected to be sustainable for a long time.

2) Direct sales account for over 90%, deeply tied to high-quality customers, and production capacity is expected to be rapidly digested after the new plant is launched. The company's intention to issue convertible bonds to invest in the construction of a new plant has been accepted by the Shanghai Stock Exchange. The project is expected to have a total production capacity of 1 million tons, with a construction period of 2 years in the first phase. It is intended to cover high-margin products such as aloxone sugar, sorbitol, maltitol, etc., with the aim of further enriching the product structure and consolidating competitive advantage. The company mainly uses a direct sales model all year round, with direct sales revenue accounting for 91% of 23Q1. It has formed a deep bond with high-quality customers. We are optimistic that production capacity will be rapidly digested after the new plant is launched, and performance will be quickly released.

Profit forecasting and valuation

The company's main business is sugar substitute manufacturing. We expect the company to achieve revenue of 26.08/29.22/3.353 billion yuan in 2023-2025, an increase of 18.54%/12.05%/14.76% over the previous year. The estimated net profit of the mother is 4.02/502/591 million yuan, the year-on-year growth rate is 26.03%/24.67%/17.74%. The corresponding EPS is 1.76/2.20/2.59 yuan/share, and the corresponding PE is 16/13/11 times. Considering that the sugar-free era has just arrived in China, demand for sugar substitutes is on the rise. Combined with the company's broad prospects and certain competitiveness, it maintains a “buy” rating.

Risk warning

Fluctuations in product prices, exchange rate fluctuations, fluctuations in shipping costs, intensification of market competition, etc.