Summary:

1. The company plans to transfer Jinjian Pharmaceutical and concentrate on strengthening and expanding its main grain and oil business. In September, the company announced that it intended to transfer 100% of the shares of its subsidiary Jinjian Pharmaceutical, demonstrating the company's determination to transfer non-main business and focus on its main business. Since Jinjian Pharmaceutical has continued to lose money over the past few years, if this transfer is successful, it will improve the profit situation of listed companies.

2. The company's main businesses are developing steadily, and the edible oil business is growing well. The gross margin of the grain processing business has remained stable; sales of small-packaged rice and cooking oil have been growing steadily, and medium packaged edible oil has achieved rapid growth by benefiting from the increase in the penetration rate of catering channels; the dairy industry is actively exploring new channels, shifting from a single student milk to a complex channel, currently ranking in the top 7 in the Hunan low-temperature milk market; sales of candy jelly products have been growing steadily year-on-year for many consecutive quarters.

3. The financial situation is stable and the cash flow is sufficient. The debt ratio is reasonable, and the balance ratio has remained at 30% to 50% for many years; the net cash flow per share has improved year by year, and the share of net cash flow in revenue and profit has increased; the total share of the three fees has declined year after year, from 16.88% in 2013 to 9.90% in 2017, and rate control capacity has improved.

4. Policy changes bring potential benefits to the industry. The trusteeship acquisition policy has led to an oversupply of domestic grain and huge inventory pressure; upstream grain and oil processing enterprises buy raw materials at high prices and downstream participate in market competition at low prices. Profits are meager, making it difficult to survive. In recent years, the grain trusteeship market acquisition policy reform is expected to be strengthened, bringing potential benefits to downstream grain processing enterprises, and the company, as an industry leader, is expected to benefit significantly.

Profit prediction

The main business is developing steadily. Sales of branded rice have been growing steadily, production capacity of branded packaging oil has increased, sales channels for dairy products have been broadened, and sales of candy and jelly started late but have been rising steadily for many months; the profits of the four main businesses have been steady, which can basically make up for losses in noodle products and infusion products. The company's net profit loss for the first three quarters was 118 million. If the impact of Jinjian Pharmaceutical's 100% equity transfer is not taken into account, it is estimated that in 2018/2019/2020, the main business will contribute 0.99 million/08 million/080 million/023 million.

Whether or not Jinjian Pharmaceutical is transferred will have a great impact on the company's current and future performance. The assessed value of the total shareholders' equity of the pharmaceutical company is -417.438 million yuan. The final assessed value is based on the state-owned registration; the transfer of its shares will be based on the assessed value. After completing the state-owned registration procedures, the company will publicly list and transfer 100% of the shares of the pharmaceutical company in a property rights trading agency. The net asset book value of 100% of the pharmaceutical company's shares on the evaluation reference date was -95.64 million yuan, and the preliminary assessment added 53.9 million yuan. The company's proposed transfer price is not less than 1 yuan, and the final listing price is not lower than the assessed value registered with state-owned assets. The final transaction price is determined based on the results of the public listing.

The amount of debt the company holds for the pharmaceutical company is 299 million yuan (as of August 31, 2018, unaudited). The counterparty must assist the pharmaceutical company to repay not less than 257 million yuan in arrears of no less than 257 million yuan within one year (the final amount of arrears will be determined by exempting 417.438 million yuan from the actual debt amount at the end of the listing period). At the same time, according to the balance of arrears, the pharmaceutical company will pay interest according to the Bank of China's loan interest rate for the same period; if the pharmaceutical company is unable to repay the arrears on time, the counterparty immediately acts as principal on the arrears.

Assuming that 100% of the shares in the pharmaceutical company is successfully transferred this year, it will bring the company a one-time non-operating profit and loss of about 50 million yuan; in 2016, 2017, and January to June 2018, the operating profit of the pharmaceutical company was -18.19 million, -10.53 million, and 5.9 million yuan, respectively. If the transfer is successful within this year, it is equivalent to adding 10 to 20 million yuan in operating profit for the company every year. Furthermore, after the transferee assists the pharmaceutical company to pay off its debts, it will bring the company no less than 257 million in cash growth, which is expected to bring about 10 million in interest income in 2019; the combination of the above three aspects is expected to significantly increase the company's net profit from 2018 to 2020. Assuming that the transfer of 100% of Jinjian Pharmaceutical's shares is completed in 2018, the company's net profit for 2018/2019/2020 is estimated to be 41 million/28 million/33 million.

Using the PB valuation method, Beidahuang, Keming Noodle, Gaga Foods, Hunan Salt Industry, and Shuanghui Development were selected as comparable listed companies in the fields of food, pasta, condiments, meat products processing, etc., respectively. Their average PB value is 3.00 times, and the current PB of the company is 2.61 times. Considering that the company plans to transfer its main non-grain and oil business, profitability is expected to improve; at the same time, changes in the grain trusteeship market acquisition policy are beneficial to the development of the industry, and the company will benefit significantly. On the basis of net assets of 1.14 yuan per share reported for the third quarter of 2018, 3 times PB was given to arrive at a target price of 3.42 yuan, with 14% room for increase from the current price. For the first time, it was covered and given a “buy” rating.

Risk Reminder

1. Macro environmental risks. The company's main grain and oil business is greatly affected by the macro environment, such as policy adjustments, changes in tax rates and exchange rates, and the relationship between supply and demand. Adjustments and changes in the relevant macro-environment will have an obvious impact on the profit space of the company's products, and there are many unpredictable factors.

2. Market competition risk. As the agricultural supply-side structural reform process accelerates, mergers and integration within the industry intensify, and related industry leaders have accelerated their market layout with strong capital, resources, and brand advantages, etc., and the market competition facing the company has become more intense.

3. Risk of rising costs. As commodity prices rise and environmental requirements become more stringent, raw material procurement costs and environmental transformation costs continue to rise, and rising costs will have a certain impact on the company's operating costs.

4. Quality and safety risks. Since the company's grain and oil industry covers a wide area and has a long industrial chain, there are many uncontrollable factors, which may have a major impact on the company.