The company released its 2022 annual report. The company achieved annual revenue of 7.865 billion yuan, an increase of 19.41% over the previous year; the net profit of the mother was 697 million yuan, an increase of 120.93% over the previous year. Among them, the company achieved revenue of 1,964 million yuan in the fourth quarter, an increase of 6.33% over the previous year, and achieved net profit of 354 million yuan to the mother, an increase of 834.87% over the previous year. The company released its report for the first quarter of 2023. 2023Q1 achieved operating income of 1,957 million yuan, an increase of 15.61% over the previous year; it achieved net profit of 45 million yuan to its mother, a decrease of 39.85% over the previous year. I am optimistic about the continued development of the company's plant protection and pharmaceutical business and the layout of the new energy chemicals sector, and maintain the purchase rating.

Key points to support ratings

The performance of the plant protection business and pharmaceutical business grew steadily in 2022. In terms of main business, according to the 2022 report, Jiangsu Lianhua, a subsidiary of the company, achieved a steady increase in production capacity and operating rate in 2022, compounded by a boost in global demand for plant protection products. The company's commercial product orders were plentiful. The plant protection business achieved annual revenue of 5.793 billion yuan, an increase of 21.59% over the previous year; gross profit margin was 24.91%, an increase of 1.60 pct over the previous year. Furthermore, in 2022, the company provided global customers with CDMO services at different clinical and commercialization stages, including drug synthesis process development, process optimization, registration and verification production and commercial production. The business pipeline continued to advance. The pharmaceutical business achieved annual revenue of 1,467 billion yuan, an increase of 20.57% over the previous year; the gross profit margin was 33.05%, down 7.61 pct from the previous year. With the increase in downstream demand and the continuous optimization of the company's production process, the company's plant protection and pharmaceutical business is expected to continue to develop. On the other hand, 2022Q4 achieved non-operating income of 325 million, mainly because the insurance company confirmed compensation of the company's business interruption insurance compensation of 318 million yuan, which had a certain positive impact on the company's performance. The total fixed assets of the 2022Q4 and 2023Q1 companies increased by 1,643 million. As of the end of 2023Q1, the company's fixed assets were 5.621 billion, and the depreciation expenses of 2023Q1 increased by about 40 million over the same period in 2022, which affected current performance.

Actively expand business cooperation in various fields and improve core competitiveness. According to the company's 2022 annual report, in terms of plant protection business, the company continues to promote CDMO cooperation based on technological innovation with major strategic customers around the world and actively expands cooperation in the field of “biochemistry” plant protection. A series of projects have already entered the product incubation pipeline. In terms of the pharmaceutical business, the company has completed or is implementing a total of 15 verification projects in 2022, 2 of which are API projects and have received 10 customer audits, all of which have been recognized by customers for their good results; they have actively developed CRO business and completed connections with important customers. The company has developed business cooperation in various fields, which is expected to provide new impetus for the continuous development of all segments of the company.

The company actively lays out the field of new energy chemicals. According to the 2022 annual report, in terms of the functional chemicals business, there are 2 new energy products to be commercialized in the company pipeline in 2022, and product verification has been completed for downstream customers. There are 4 pilot stages and 10 mini-trial stages. According to the 2022 annual report, Dezhou Lianhua's “new electronic materials project with an annual output of 30,000 tons” has received EIA approval, and Linhai Lianhua's “annual production of 200,000 tons of electrolyte, 20,000 tons of LT612, 1,411 tons of lithium hydroxide solution, and 500 tons of three (trimethylsilicon-based) phosphate projects” is applying for EIA approval. According to investor research records, as of February 2023, the battery chemical project of Dezhou Lianhua, a subsidiary of the company, is undergoing installation, commissioning and production work as planned. According to information published on the company's official website, environmental protection facilities for the company's 20,000 tons/year lithium hexafluorophosphate project were completed in April 2023. The layout of new energy chemicals is expected to inject stronger impetus into the company's development.

valuations

EPS for 2023-2025 is expected to be 0.65 yuan, 0.93 yuan, and 1.35 yuan respectively, and the corresponding PE is 18.1 times, 12.7 times, and 8.7 times, respectively. I am optimistic about the continued development of the company's plant protection and pharmaceutical business and the layout of the new energy chemicals sector, and maintain the purchase rating.

The main risks faced by ratings

Production capacity construction fell short of expectations, pharmaceutical project verification risks, and raw material prices fluctuated greatly.