Third quarter results grew at an accelerated pace
Guangji Pharmaceutical released its three-quarter report. It achieved revenue of 554 million yuan in the first three quarters, an increase of 47.5% over the previous year; achieved net profit of 125 million yuan (loss in the same period last year), achieved EPS of 0.496 yuan, and operating cash flow per share was 0.243 yuan, in line with market expectations and within the performance growth range announced earlier (1-140 million yuan). Among them, Q3 achieved revenue of 237 million yuan and net profit of 67.93 million yuan (marginal profit for the same period last year), with a quarterly growth rate of 101% (47% in the second quarter).
The increase in performance stemmed from widening product price spreads and lower cost rates
Since this year, the price of the leading product, vitamin B2, has risen (according to data from the China Feed Industry Association, the average price of vitamin B2 (80%, market price) was 131 yuan/kg in the first three quarters of last year, 258 yuan/kg this year, an increase of 97% over the previous year), and the price of corn and other raw materials fell. The company's comprehensive gross margin in the first three quarters was 47.9%, a sharp increase of 21.5pct over the previous year, and the Q3 gross margin was 49.1%. On the other hand, as product prices rose and revenue increased, the company's expenses ratio declined significantly compared to the same period last year. Among them, the sales expenses rate fell 0.6pct to 3.4%, the management expenses rate fell 6.5 pct to 13.7%, and the financial expense ratio fell 2.0pct to 5.2%, driving performance growth.
The decline in corn prices helps companies expand their profit margins
Corn is the main raw material for the production of vitamin B2, accounting for about 70% of the cost; after the National Day holiday, domestic corn prices declined further along with the centralized listing of new-season corn. According to data from the National Bureau of Statistics, the latest domestic second-grade yellow corn price fell 18.4% year-on-year. In the medium term, domestic corn supply pressure still remains, which will help expand the company's profit space; in addition, as the main raw material for feed, falling corn prices also help reduce feed companies' sensitivity to rising vitamin prices.
Expected price increases in vitamin B2 storage
The peak season for downstream demand for vitamin B2 is approaching. Against the backdrop of increased industry concentration, mainstream companies represented by the company are more willing to raise prices. According to Boya Hexun data, 80% of feed grade product dealers are priced at 265-300 yuan/kg, and 98% of products are priced at 360-380 yuan/kg. At the same time, there is still great uncertainty about the actual commissioning of new production capacity such as Shengxue Dacheng, and there is potential for the price of vitamin B2 to rise further.
Maintain an “increase in holdings” rating
We expect the company's EPS in 2016 and 2017 to be 0.74 and 1.15 yuan respectively. The company's performance is flexible, and there are certain expectations of state-owned enterprise reform. Combined with the majority shareholders' second-tier market holdings increase price (17.84-19.69 yuan), the current stock price has a good risk-return ratio. Subsequent product price increases and the decline in raw material prices such as corn are potential catalysts to maintain the “increase in holdings” rating.
Risk warning: There is a risk that product price increases will not meet expectations, and there is a risk that the prices of raw materials such as corn will fluctuate greatly.