Incident Overview
On August 19, 2020, the company issued an announcement stating that as of the announcement date, the company's holding subsidiary, Dishen Seed Industry in Huangfan District, Henan, signed a purchase and sale contract for 10,000 tons of “Panmai No. 8” wheat with Jiannanchun Winery in Mianzhu, Sichuan; at the same time, the company's holding subsidiary Shanxi Luyu Seed Industry and Jiangsu Yanghe Distillery reached a targeted planting cooperation agreement with a planting area of 1,000 acres of sorghum in April 2020.
Analytical judgment:
Although the proportion of the food and beverage business is small, profitability has increased significantly
In 2019, the company sold 889,600 tons of wheat seeds, with sales of 295 million yuan, the sales unit price was 3292.41 yuan/ton, and the gross profit margin of wheat seeds was 14.83%. Assuming that the unit price and gross margin of the 10,000 ton “Panmai 8” wheat purchase and sale contract signed between Geishen Seed Industry and Jiannan Spring Distillery remained unchanged, the corresponding sales volume was 32.9241 million yuan, accounting for 3.59% of the company's seed business gross profit, accounting for 0.64% of the company's total operating income, or 1.71% of the company's gross profit. However, the revenue and profit mentioned in the announcement accounted for 1% and 3% respectively, which meant that the unit sales price and gross margin both increased significantly. According to our estimates, the actual unit sales price is 5135.73 yuan/ton, and the gross margin is 16.71% (the actual gross margin may be higher than the estimated value). It can be seen from this that the profitability of the company's wine and food business has improved markedly compared to the traditional seed business.
In terms of sorghum, according to estimates of the yield of 1,000 kg of sorghum per mu, the company's holding subsidiary, Shanxi Luyu, and Jiangsu Yanghe Distillery involved about 500 tons of sorghum purchases. According to the current estimate of the average domestic sorghum market price of 2,330 yuan/ton, this targeted agreement is expected to generate revenue of 1,165 million yuan, accounting for 0.02% of the company's total operating income in 2019.
The industrial chain is fully equipped, and high growth in the wine and food business can be expected
Grain crops such as wheat and sorghum are important raw materials for liquor brewing. Traditional wine companies generally buy wine grains from intermediaries as the main raw material for brewing wine, but based on considerations such as food quality, food safety, source stability, and traceability, the future trend is for leading wine companies to concentrate on purchasing alcoholic beverages such as wheat and sorghum from leading upstream producers. The company has been in the wine and grain business for many years, and has many core competencies such as variety advantages, first-mover advantages, land resource advantages, and supporting advantages in the industrial chain, which can ensure the continuous and stable supply of high-quality wine and food. Combined with the company's business layout supporting the entire industry chain such as agrochemical business, financial services, agricultural insurance, warehousing and transportation, the company is expected to use the wine and grain business to achieve rapid expansion of contract farming.
Investment advice
Wheat and sorghum are the main raw materials produced by wine companies. The company is the absolute leader in wheat seeds in China, and is also the only domestic breeder involved in the sorghum seed business. The company has set up the wine and food business for many years, and has reached substantial cooperation with many domestic wine companies. We believe that the general trend is for leading wine companies to concentrate on purchasing raw materials such as wheat and sorghum from leading upstream producers, and that the company is expected to expand it into new profit growth points and that the performance flexibility is huge.
We keep our current profit forecast unchanged. We expect that in 2020-2022, the company's EPS will be 0.05/0.09/0.13 respectively, and the PE corresponding to the current stock price will be 129/73/49X respectively, maintaining the “buy” rating.
Risk warning
The risk of natural disasters, the risk of the spread of the epidemic, and the risk of seed sales falling short of expectations.