Event: the company issues semi-annual report. The income in the first half of the year was 1.193 billion yuan, an increase of 3.41% over the same period last year, and the net profit of returning home was 90 million yuan, down-20.80% from the same period last year. In the second quarter alone, the income was 608 million yuan, an increase of 5.9% over the same period last year, and the net profit of returning home was 54 million yuan, down-1.1% from the same period last year.
The recovery of revenue growth is mainly due to the higher-than-expected growth of flavors and spices and the improvement of food ingredients compared with the previous month: from a sub-business point of view, since the company's food ingredients business is mainly carried out through two subsidiaries of AIP Technology and Shanghai Pujia, according to the financial data of the subsidiary, the overall revenue of ingredients is expected to be roughly the same as the same period last year, but the performance improved in the second quarter. The growth of flavor and spice revenue is slightly higher than previously expected, and the revenue growth rate in the first half of the year is expected to be more than double-digit, mainly due to the good performance of downstream customers, while the company is also actively opening up new customers.
Competition in ingredients has eased, and profitability has been repaired: gross profit margin in the second quarter was 21.5%, a year-on-year decline of 0.4pct, which was significantly narrower than 3.8pct in the first quarter. We believe that on the one hand, the most competitive moment in the industry is slowly passing, the company has also taken the initiative to adjust to the new environment, and the price reduction of Fonterra products has been weakened; at the same time, with the gradual promotion of new products, the awareness and acceptance of new brands continue to increase, and the promotion efforts during the promotion period will also be weakened, and the recovery of product prices will lead to the recovery of gross profit margin. As the company's promotion and promotion is mainly reflected in the price side, so the overall cost investment is relatively stable. The sales expense rate in the second quarter was 5.32%, an increase of 0.24pct over the same period last year; the sum of the three rates was 10.06%, a decrease of 0.56pct over the same period last year, with little change as a whole.
With the steady progress of capacity construction in Indonesia, we look forward to a further breakthrough in the construction of the ingredient manufacturing end: last year, the company acquired Hangzhou Tianshun for the first time and began to lay out the food ingredient production end, in order to weaken the restrictions of upstream brands and enhance the profitability of the ingredients business. At present, Tianshun's Indonesian production capacity construction has come to an end, and it is expected to enhance the company's comprehensive strength in the industrial chocolate field after it is put into production. It is expected that the company will continue to promote the construction of ingredient manufacturing end through endogenesis or epitaxy.
Investment advice: maintain the previous profit forecast, the company's revenue is expected to grow to 7.0% and 9.8% in 2017-18, net profit growth is 4.3% and 5.9% respectively, maintain the investment rating of overweight-B, with a six-month target price of 16.5 yuan, equivalent to a dynamic price-earnings ratio of 25 times in 2018.
Risk hint: the competition in the batching business is intensified, and the speed of building the manufacturing side is lower than expected.
