Incident Overview

The company released its report for the first quarter of 2023. During the reporting period, the company achieved operating income of 527 million yuan, +1.45% year on year, and achieved net profit attributable to shareholders of listed companies of 36.92 million yuan, +16.20% year on year.

Analytical judgment:

Many factors affected the decline in net profit attributable to the mother in '22. The overall 2023Q1 performance improved, and the company released a report for the first quarter of 2023. During the reporting period, the company achieved operating income of 527 million yuan, +1.45% over the same period last year, and achieved net profit attributable to shareholders of listed companies of 36.92 million yuan, +16.20% year on year. In 2022, the company achieved revenue of 2,123 million yuan, +2.15% year on year, of which: veterinary chemicals achieved revenue of 994 million yuan, -7.71% year on year; veterinary biological products achieved revenue of 330 million yuan, +13.19% year on year; pharmaceutical feed additives achieved revenue of 20 million yuan, -39.42% year on year; environmental protection business achieved revenue of 567 million yuan, +10.76% year on year; other businesses achieved revenue of 115 million yuan, +27.05% year on year. In 2022, the net profit of the mother was 75.5434 million yuan, or -19.63% year on year. The main reasons for the year-on-year decrease in net profit of Guimu are: (1) the rise in product costs due to the rise in upstream raw material prices of the main product; (2) the company's downstream pig breeding industry is sluggish, industry losses are severe, and farmers' willingness to purchase animal insurance products has decreased, limiting the increase in the price of the company's products and volume sales; (3) the appreciation of the US dollar is large, and the stock of debt debt between the company and foreign subsidiaries has increased due to the expansion of the range of exchange rate fluctuations.

Upstream and downstream are jointly squeezing the profits of veterinary drug products. The new production capacity is expected to be put into operation within the year. In 2022, the company's veterinary chemicals will achieve revenue of 994 million yuan, a year-on-year decrease of 7.71%, accounting for 46.35% of revenue. The company's veterinary chemicals gross profit margin in 2022 was 28.07%, a decrease of 5.51 pct compared to 2021. The main reasons are: (1) the rise in upstream raw material prices has led to a further increase in product costs; (2) the downturn in the downstream aquaculture industry, the rise in product costs cannot be transmitted downstream, and the company's profit margins are continuously compressed. The company's main veterinary chemical product is chlortetracycline. According to the company's 2022 annual report, the company's annual production capacity of chlortetracycline is about 55 thousand tons, accounting for about half of the global production capacity. We believe that there will be a broad market space for chlortetracycline in the future. Based on: (1) In December 2019, the Ministry of Agriculture and Rural Affairs issued a notice on matters related to the revision of relevant veterinary drug product quality standards and changes in approval numbers, abolished 15 quality standards for pharmaceutical feed additives and other varieties with only growth-promoting uses, cancelled 558 approval numbers for related veterinary drug products, and changed the company's product, chlortetracycline, from feed additives to veterinary drugs for continued use at breeding sites. (2) At present, large-scale and intensive farming is being further strengthened, and pig prices have been mired in a loss range for many months in a row, and production capacity is being removed. We think it is expected that pig prices will rise within the year, which will drive up demand for chlortetracycline products. In addition, the company is also laying out oxytetracycline, doxycycline hydrochloride, and other novel antibiotics. The new production capacity is scheduled to be put into operation in the first half of 2024. At that time, the production capacity of veterinary chemicals will double from the current level, fully guaranteeing the growing demand for products such as gold mycin in the next few years.

We believe that as future demand improves and the company's new production capacity is put into operation, the market share of chlortetracycline products is expected to rise further, stabilizing the company's leading position.

The vaccine sector is steadily improving. Cow and sheep's bruxism vaccine is expected to become a large single product. In 2022, the company's veterinary biological products achieved revenue of 330 million yuan, +13.19% over the same period last year, accounting for 15.55% of revenue. The gross margin of the company's veterinary biological products in 2022 was 67.56%, a decrease of 5.06 pct from 2021. The company's veterinary biological products are mainly divided into four tracks: (1) pig vaccine; (2) cattle and sheep vaccine; (3) pet vaccine; and (4) diagnostic reagents. Vaccines for pigs include major varieties such as porcine blue ear, swine rings, porcine mycoplasma pneumonia, and diploid vaccine. Vaccines such as African swine fever are being developed. Among the cattle and sheep vaccines, the disease vaccine is applying for a new veterinary drug certificate. According to the company's customs clearance activity record for March 2023, the company expects to obtain a new veterinary drug certificate and production approval number within the year. According to the company's May 2022 customs clearance activity record, the company's sick vaccine has unique advantages over previous vaccines, including: high biosafety, non-infecting humans, and can be used by pregnant animals. Based on the above characteristics, we believe that listed vaccine companies can significantly increase the company's revenue and profits. In terms of production capacity, according to the company's investor relations activity records, after the company's Inner Mongolia base was put into use, the annual production capacity of the vaccine for the disease was about 400 million sheep. In the pet sector, vaccines for cats are currently being researched and distributed to China. Downstream of the division is mainly pig breeding. While the pig breeding market was relatively sluggish in 2022, revenue continued to grow and maintained a high gross profit margin. We believe that in the future, with the steady development and application of the company's new products, revenue is expected to continue to grow steadily, which can contribute considerable profits to the company when vaccine gross margin is high.

Investment advice

We believe that in terms of chlortetracycline: (1) 2022 annamycin products are compressed by both upstream and downstream profits, and are expected to see improvements this year; (2) the concentration and level of intensification of farming continues to increase, and demand for gold mycin will continue to improve in the future; (3) the company's new veterinary drug production capacity is expected to be put into operation within the year, which will further help the company increase its market share and consolidate the leading position of goldenmycin. Taking into account the above, when demand for chlortetracycline improves and production capacity is released, gold mycin products will continue to contribute to revenue and profit elasticity. In terms of vaccines: The company currently has four tracks. Vaccines for pigs are developing steadily. Vaccines for cattle and sheep are currently applying for a new veterinary drug certificate. The company expects approval within the year. Since the company's disease vaccine has unique advantages, it is expected to become the company's new product at that time, contributing revenue and profit elasticity to the company. Looking at the medium to long term, the rapid development of the company's mobile insurance sector business will be a strong driving force to support the company's continued high performance growth. However, pig prices have continued to decline since mid-late October 2022. The company's downstream farming industry market has continued to be sluggish so far. The industry's willingness to use animal insurance products is low due to widespread losses, affecting the transmission of the company's upstream cost increase to downstream and reducing profit margins. Affected by special circumstances, the cattle and sheep brucellosis vaccine application, which should have been approved last year, fell short of expectations. It is expected to be approved this year, affecting the company's revenue and profits this year. Based on this, we lowered the company's 2023/2024 revenue of 3,596/4,633 million yuan to 2,463.292 billion yuan, and the company's 2023/2024 net profit of 311/402 million yuan to 180/231 million yuan. The new forecast was that the company's 2025 revenue was 4,029 million yuan, and the net profit of the head mother was 291 million yuan. The company's 2023/2024 EPS was lowered from 0.40/0.52 yuan to 0.23/0.30 yuan, new forecast The company's 2025 EPS was 0.37 yuan, and the stock price of 4.87 yuan on April 27, 2023 corresponds to 23/24/25 PE 21/16/13X, respectively.

Risk warning

Risk of rising raw material prices, risk of abnormal exchange rate fluctuations, risk of policy disturbance, research and development risk, risk of new products falling short of expectations.