Focus on the main business, expand and strengthen the seed industry, and welcome a boom in the development of the vaccination industry.
Since 2014, the company has actively adjusted its industrial structure, stopped deeply loss-making industries such as oil, etc., and focused its main efforts on developing the agricultural industry centered on seeds. In 2015, the seed business accounted for 67% of revenue. We believe that after the 2013-2015 adjustments, the seed industry has now begun to recover and is expected to start a new boom cycle. Especially in the context of the implementation of the new Seed Law, the implementation of the green channel policy, and the acceleration of industry integration, nurturing and promoting strong enterprises in the integrated seed industry faces good development opportunities.
The accelerated introduction of new varieties is expected to lead to an increase in the performance of the seed business.
Dunhuang Pioneer is the core asset of the company's seed industry and the main source of profit for the company. Its main variety, Xianyu 335, is currently maturing, but it still has obvious advantages. In addition, Dunhuang Pioneer introduced regionally advantageous varieties such as Xianyu 508 and Xianyu 402, and has newly approved reserve varieties such as Xianyu 1111, 1225, and 1219. Continued introduction of new varieties is expected to enable Dunhuang Pioneer to maintain a strong regional position, and Dunhuang Pioneer's performance is expected to steadily pick up. The parent company is actively promoting a strategy focused on the seed industry and increasing R&D in the seed industry. At present, an R&D system led by the company's research institute has been initially established, and major corn varieties with development potential have been developed, such as Jixiang 1, Dongfanghong 1, Feitian 358, Dunyu 328, Dunyu 12, Dunyu 13, Dunyu 15, and Long 213. Moreover, with the implementation of the green channel, the company's new varieties were launched at an accelerated pace. In 2016, 45 new corn hybrids entered the trial and approval process. We believe that the core of competition in the seed industry lies in the continuous introduction of high-quality new varieties. With the continuous introduction of the company's new products, the company's seed business profits are expected to return to growth.
Constant growth helps the company develop, and mergers and acquisitions open up room for growth.
In 2015, the company raised 465 million yuan in a non-public offering, with a fixed price increase of 6 yuan/share to promote seed R&D and marketing construction, which is conducive to the development of the company's seed business and reduces the company's financial expenses. In October 2016, the company plans to cooperate with Angju Asset to establish an agricultural industry merger and acquisition fund. The fund size is tentatively set at 1,503 billion yuan, and the company's investment as an underdog does not exceed 200 million yuan. The agricultural fund will be the main body of the company's future mergers and acquisitions. We believe that in the context of accelerating industry integration, mergers and acquisitions are an inevitable path for seed companies to grow bigger and stronger. In the future, the company is expected to seek high-quality agricultural industry projects through agricultural funds, and inject them into listed companies after maturity to achieve the company's leapfrog development.
Food processing promotes product structure upgrades, and the cotton industry achieves efficiency optimization. Coupled with rising cotton prices, performance is expected to improve.
In terms of food processing, the company has stopped its deeply loss-making oil processing business. Currently, it is focusing on the production and sale of tomato products and dehydrated vegetables, and is actively promoting product structure upgrades to develop overseas markets to increase the profit level of the food processing business. In the first half of 2016, the gross margin of the company's food processing business reached 17.01%, an increase of 3 percentage points over 2015. Looking at the cotton industry, due to falling cotton prices, the company has suspended cotton purchases and processing operations since 2015, mainly storing and managing national cotton reserves.
In 2016, cotton prices bottomed out, rising from less than 12,000 yuan/ton in the first half of the year to nearly 16,000 yuan/ton at present. The recovery in cotton prices in 2016 is expected to drive a profit recovery in the cotton purchase and processing business. Overall, the company's food processing sector and cotton sector are undergoing positive changes, and future performance is expected to improve.
Give it an “increase in holdings” rating. The company's strategy to expand and strengthen the seed industry is progressing steadily, and R&D strength and variety development capabilities have been greatly improved. It is expected to share the dividends of the seed industry boom cycle. Furthermore, the company's market capitalization is small, and expectations of mergers and acquisitions based on industrial funds are strong. Excluding investment income from Donghai Securities's equity sales and mergers and acquisitions, it is expected that in 2016-2018, the company's earnings per share will be -0.22 yuan, -0.02 yuan, and 0.04 yuan, giving it an “increase in holdings” rating.
Risk warning: 1. Develop risks; 2. The implementation of industrial funds falls short of expectations