Performance review

1Q23 performance falls short of market expectations

The company announced 1Q23 results: revenue of 88 million yuan, +16.2% year-on-year, net profit of 14 million yuan, -38% year on year, net profit of non-return mother of 0.07 million yuan, -48% year on year. Revenue performance fell short of market expectations, mainly because the Spring Festival brought some revenue into 4Q22 ahead of schedule; performance fell short of market expectations, mainly because gross margin performance fell short of expectations.

Development trends

Revenue growth in 1Q23 declined month-on-month due to multiple factors. The company's revenue in 1Q23 was +16.2% year on year, and the year-on-year growth rate (58%) from 4Q22 declined. We expect that part of the revenue will be credited to 4Q22 ahead of schedule during the Spring Festival, delays in progress in the new national standards for overseas customers, price adjustments, etc. Looking at categories, we expect the overall growth rate of ARA and DHA to be better than SA in 1Q23, mainly because ARA and DHA are being increased by some new national standards, and SA products are still being disrupted by downstream demand; by region, we expect 1Q23's overseas revenue growth performance to be weaker than domestic, mainly due to lagging progress in the new national standards for overseas customers, and a year-on-year decline in the share of overseas revenue in 1Q23.

Structure, price cuts, and discount costs dragged down gross profit margins, putting pressure on 1Q23 profit performance. The gross margin of the 1Q23 company was -9.1ppt to 38.4% year-on-year, mainly due to changes in customer structure, product price reductions, and additional depreciation and amortization expenses; in terms of rates, due to the reduction in the company's investment in 1Q23 related exhibition expenses, the sales rate was -1.8ppt compared to the previous year. In addition, the reduction in equity incentive expenses also made the management fee rate -0.9 ppt year on year, and the R&D rate +0.5ppt year on year. Overall, the 1Q23 company's operating profit margin was -13.2 ppt year on year, and the net interest rate was -14.4 ppt year on year, putting pressure on profit performance.

Operations are under pressure in the short term, so it is recommended to pay attention to the company's subsequent operating progress. The company's revenue performance fell short of expectations due to multiple factors. As registration of new national standards progresses and new production capacity is put into operation in 2Q23, we expect the company's revenue performance to improve starting in 2Q23. Looking ahead to 2023, due to competitive pressure and additional amortized expenses, we expect gross margin in '23 may still be uncertain. The current pessimistic expectations may have been basically reflected. The company expects that if subsequent revenue increases and the share of overseas revenue with high gross margins increases, the subsequent gross margin is expected to be better than the 1Q23 level. Considering the revenue scale effect, we expect that declining rates may partially hedge against gross margin pressure. It is recommended to pay attention to the company's business progress under the release of the new national standard in 2Q23 and the expansion of overseas markets in the second half of the year.

Profit forecasting and valuation

Considering that revenue and gross margin fell short of expectations, net profit for 23/24 was reduced by 10.1%/10.2% to $127/165 million. The company's current transaction is 30.3/23.5 times the 23/24 P/E; the target price was lowered by 13% to 40 yuan, corresponding to 37.7/29.2 times 23/24 P/E and 24.4% upward space, maintaining outperforming the industry rating.

risks

Competition is intensifying, overseas and new business expansion falls short of expectations, and customer concentration is high.