Due to the weakening demand for agricultural materials compounded by the downturn in industry sentiment, the company achieved net profit of 236 million yuan to its mother in 2019, -28.3% over the same period last year. Under the impact of the epidemic in the first quarter of 2020, the company achieved net profit of 131 million yuan to its mother, -4.8% year on year. Looking at the full year of 2020, it is expected that the plague of locusts and the spread of meadow moths will drive demand for pesticides. The company's EPS is predicted to be 0.27/0.33/0.36 yuan in 2020-2022, and the target price is lowered to 8.0 yuan to maintain the “buy” rating.
The industry sentiment was running weakly, and profits declined year-on-year in 2019. In 2019, the company achieved operating income of 4,058 million yuan, +1.3% year on year; net profit of the mother was 236 million yuan, -28.3% year on year. During the reporting period, most of the company's main businesses, such as pesticide formulations and plant nutrition, declined due to weak demand for agricultural materials compounded by a decline in industry sentiment. Among them, insecticides achieved revenue of 1,202 million yuan, +2.3% year on year; biocides achieved revenue of 831 million yuan, -10.3% year on year; herbicides achieved revenue of 472 million yuan, -11.7% year on year; and plant nutrition products achieved revenue of 994 million yuan, -1.9% year on year.
Affected by the pandemic, profits fell slightly year-on-year in the first quarter of 2020. In the first quarter of 2020, the company achieved operating income of 1,183 million yuan, +7.5% year on year; net profit of the mother was 131 million yuan, -4.8% year on year. The first quarter is usually the peak season for the company's product demand. Due to the impact of the epidemic in the first quarter of 2020, industry demand was impacted, leading to a year-on-year decline in company profits. In terms of profitability, gross profit margin was 29.9% in the first quarter, -2.0pct year on year; net profit margin was 10.8%, -1.8pct year on year.
With the spread of locusts and meadow greedy night moths, we are optimistic about the demand for insecticides throughout the year. We judge that the locust plague and the spread of night moths are mainly beneficial to pesticides: 1. Demand for pest control is expected to directly drive the increase in pesticide usage. Currently, most domestic pesticide companies account for a relatively large share of exports. Combined with the fact that some overseas production capacity is limited due to the impact of the epidemic, domestic pesticide companies are expected to fully benefit; 2. The spread of the pest may affect the supply of agricultural products, and rising agricultural product prices are expected to drive up agricultural demand further.
Risk factors: Decline in agricultural industry sentiment; sharp drop in product prices; epidemic control falls short of expectations.
Investment advice: Due to the impact of the pandemic on demand compounded by the fall in product prices exceeding expectations, the company's net profit forecast for 2020-2021 was lowered to 250/302 million yuan (the original forecast was 433/522 million yuan), and the forecast for net profit returned to the mother in 2022 was 329 million yuan. The corresponding EPS forecast for the 2020-2022 period was 0.27/0.33/0.36 yuan respectively. Considering the decline in performance expectations and the overall valuation level of the industry, the target price was lowered to 8.0 yuan (corresponding to 30xPE in 2020, the original target price was 12 yuan) to maintain the “buy” rating.
