Incident: Recently, Haodang released the 2018 Annual Report and the 2019 Quarterly Report. In 2018, the company achieved operating income of 1,150 million yuan, a year-on-year decrease of 4.81%; net profit attributable to shareholders of listed companies was 62,036,500 yuan, an increase of 15.89% over the previous year, and basic earnings per share of 0.04 yuan/share. In the first quarter of 2019, the company achieved operating income of 269 million yuan, a year-on-year decrease of 15.47%, and achieved net profit attributable to shareholders of listed companies of 9.3653 million yuan, a year-on-year decrease of 10.18%, and basic earnings per share of 0.006 yuan/share.

Comment:

The company's revenue declined year-on-year due to a decrease in sales of fresh sea cucumber. The company harvested 2892.67 tons of sea cucumber in 2018, down 27.22% from the previous year. Among them, the year-on-year decline in foreign sales led to a 40.07% year-on-year decline in the company's aquaculture business revenue in 2018, which affected the company's total revenue growth rate to turn negative. The high temperature reduction in sea cucumber production in Liaoning in 2018 affected the further tightening of industry supply and demand. The price of sea cucumber caught in autumn reached a relatively high level in the fourth quarter. Stocked sea cucumbers had a clear price advantage over fresh sea cucumbers. The sale of stocks caused sales of fresh sea cucumbers to be blocked. Moreover, starting in the third quarter, the sea participated in large-scale purchases of semi-finished sea cucumbers at low prices, further exacerbating the industry's high inventory pressure, which in turn caused fresh sea cucumbers to be priceless during the fishing season. The company's fresh sea cucumber business adopts a sales and production model. The harvest volume is determined by the demand of downstream processors. Due to the high pressure to remove the industry's inventory, the company's fresh sea cucumber production and sales in 2018 were under some pressure. Looking at it now, spring fishing prices for South China Sea ginseng are high, and stocks are being removed quickly, which has some guiding significance for northern sea cucumbers that have just entered the spring fishing season. As industry stocks continue to be removed, supply and demand in the industry continue to be tight, and fresh sea cucumber prices and sales will gradually pick up upward. We expect the company's fresh sea cucumber harvest to return to around 35 million tons in 2019, with an average annual foreign sales price of about 140 yuan/kg.

The gross profit of sea cucumbers declined significantly due to the amortization of all seed costs. The method for accounting for the cost of the company's sea cucumber business is that seedlings of different specifications are fully amortized during the breeding and harvesting year according to different production periods, indicating that each year the company's fresh sea cucumber business costs are determined by historical annual sowing conditions rather than the amount harvested in that year. Affected by this, there was no significant change on the cost side of the company's sea cucumber farming business in '18 when revenue from the sea cucumber farming business fell significantly year on year. As a result, the gross margin of the company's sea cucumber business in '18 fell sharply by 17.04 percentage points from the previous year to 26.15%. Affected by changes in downstream demand preferences, the company has adjusted the sea cucumber seed investment model since 2016, changing the ginseng seedlings placed in the surrounding sea base from small sizes in the past to large sizes. The growing seedlings increased the survival rate of sea cucumbers and effectively reduced the cost of seedlings. Considering the continuous maturity of the company's seedling investment experience and methods, as well as the further increase in ginseng seed production, we expect the company's annual investment and seed cost to grow steadily, and as the sales market continues to improve, the company's sea cucumber business revenue and profit are expected to recover.

Costs were reduced during the period, and growth was strengthened by the expansion of ginseng seedlings production. The company's 18-year revenue and comprehensive gross margin both declined year-on-year, but net profit continued to grow steadily, mainly benefiting from an effective reduction in expenses during the period. The company's expenses rate for the 18-year period was 21.95%, down 3.71 percentage points from the same period last year. It was mainly related to the suspension of some major health services. Furthermore, the company is increasing investment in the expansion of nursery production capacity and breeding business. It plans to invest in the construction of a 400,000-square-meter modern sea cucumber nursery, and increase investment in the construction of artificial reefs, the construction of dam guards, and the renovation of ponds. In the long run, we believe that the expansion of the company's nursery production capacity will have an important impact on the development of the company's main business. In addition to directly increasing the company's performance through the sale of seedlings, it can optimize the company's seedling model for cultivating sea cucumbers more flexibly and efficiently, and gradually transition from small-sized seedlings to large-sized ones, thus effectively increasing the scale of farming and reducing farming costs.

Earnings forecast and ratings: We expect the company's diluted earnings per share for 19-21 to be $0.06, $0.08, and $0.09 respectively. Maintain an “increase in holdings” rating for the company.

Risk factors: extreme weather risk, risk of product price fluctuations, scale expansion falling short of expectations, channel expansion falling short of expectations, risk of policy changes, etc.