Incident: On April 21, 2023, Lianhua Technology released its 2022 annual report. The company's total revenue for 2022 was 7.865 billion yuan, up 19.41% year on year; net profit from Homo was 697 million yuan, up 120.93% year on year; net profit after deducting non-net profit was 508 million yuan, up 76.21% year on year. The total revenue of the corresponding company in 4Q22 was 1,964 million yuan, down 10.71% from the previous month; net profit from the original mother was 354 million yuan, up 156.58% from the previous month.

The plant protection and medicine dual sector is driving overall revenue growth. The company's operating income increased 19%, and net profit increased 121% year-on-year, mainly related to the following 3 aspects: 1. The company's plant protection market demand increased in 2022, the company's plant protection division cooperated closely with customers, increased orders, and improved operations; 2. The company's non-recurring profit and loss in 2022 was mainly due to the company's business interruption insurance compensation of 318 million yuan included in non-operating income. After deducting income tax expenses, the impact on net profit was 238.5 million yuan; 3. The company calculated in 2021 due to the acquisition of Project Bond The total goodwill impairment provisions formed by Holdco Limited's 100% equity and the asset impairment provisions for the corresponding asset group were $70,5939 million. There were no such matters in the company in 2022.

By sector, the company's revenue in the plant protection/pharmaceutical/functional chemicals sector in 2022 was 57.93/1,467/220 million yuan respectively, YoY was 21.59%/20.57%/-10.35% respectively, gross margin was 24.91%/33.05%/20.78%, respectively, 1.93/-7.61/ -4.96ppt, year-on-year, respectively. The increase in the company's revenue is mainly related to the rapid increase in revenue in the plant protection and pharmaceutical sectors. Sales expenses fell 15.31% year over year, due to the company's control of sales expenses; management expenses increased 1.81% year over year, with little change; and financial expenses fell 52.46% year over year, mainly due to income from US dollar exchange. R&D expenses increased 24.47% year on year due to the company's increased R&D investment. The company achieved a significant increase in net profit in 2022, with a net interest rate of 9.36%, an increase of 4.46 pcts over the previous year.

The company's cash flow situation is stable. Net cash flow from operating activities was $639 million, down 13.42% year on year; net cash flow from investment activities was -1,729 million yuan, up 12.57% year on year; net cash flow from fund-raising activities was $1,051 million, up 32.69% year on year. The balance of cash and cash equivalents at the end of the period was $469 million. Accounts receivable increased 10.24% year over year, and the accounts receivable turnover ratio declined, from 5.98 times to 5.62 times. Inventories increased 29.2% year over year, and the inventory turnover ratio declined, from 2.34 times to 2.25 times.

Benefiting from the expansion of market size and increased competitiveness, the plant protection sector is showing a rapid development trend. Benefiting from rising demand for food brought about by population growth and the tense relationship between food supply and demand brought about by local regional conflicts, higher prices of agricultural products and higher farmers' willingness to grow, the overall scale of the global agrochemical industry market showed an expansion trend in 2022. Within the industry, due to the continuous increase in safety and environmental protection standards for original drug and intermediate suppliers, backward small and medium-sized production capacity has gradually been eliminated. The advantages of leading suppliers have become more obvious, and industry concentration has further increased. The company is a pioneer and leader in the plant protection CDMO industry in China. It has carried out CDMO business based on technological innovation with many international agrochemical/plant protection companies, and is committed to providing chemical and engineering solutions for the global plant protection industry. At the same time, the company actively optimizes production processes and pollutant treatment processes, strengthens research on green nitrification, fluoridation, hydrogenation and enzymatic catalysis, meets customer safety and environmental protection requirements, and further enhances market competitiveness. In 2022, the company had plenty of orders, and sales revenue from the pesticide business segment reached a record high. The subsidiary Jiangsu Lianhua got rid of the impact of the safety accident and gradually increased its operating rate, achieving operating income of 2.170 million yuan and net profit of 443 million yuan, turning a loss into a profit. The company will make full use of its multi-base layout, deepen all-round cooperation with customers, actively expand the original business scale, and also lay out the “biochemistry” field, continue to enrich the pipeline's product line, and expand cooperation with leading enterprises in this field. Recently, due to the expansion of domestic pesticide production capacity and high overseas inventories, the overall price of domestic pesticide products showed a downward trend. We believe that in 2023, the company's plant protection sector will be dragged down by the overall situation of the pesticide industry in the short term, and revenue growth will slow down, but in the medium to long term, the increase in overall downstream global agrochemical demand and the increase in the concentration of the global plant protection industry have brought about an increase in demand in the global pesticide CDMO industry. There is still a possibility that the company's pesticide CDMO development prospects will maintain a high growth rate in the future.

Pharmaceutical CDMO business cooperation continues to deepen, create an integrated service model, and focus on CDMO business growth. Research investment in the global pharmaceutical industry continues to increase. In order to pursue efficiency and cost control, large enterprises have outsourced more R&D and production work to CDMO companies and integrated new drug development service companies, providing more capacity for the CDMO market. The Chinese CDMO industry is developing rapidly in this context. At the same time, as pharmaceutical companies' requirements for partners continue to increase, services for the early stage of drug development (CRO business) have shown a state of rapid development. In 2022, the company's pharmaceutical business achieved rapid development, providing global customers with CDMO services at different clinical stages and commercialization stages. The number of commercialized/phase III clinical/other clinical-stage products of the company was 18/39/67 respectively, +1/-6/-2, respectively. Revenue was 1,027/310/130 million yuan respectively, YoY +37.85%/+103.95%/-59.38%. The company has completed or is implementing a total of 15 verification projects, 2 of which are API projects. Product materials have continued to expand since registration. Currently, innovative drug registration intermediates and APIs account for nearly one-half.

At the same time, the company followed the development trend of the industry, accelerated the deployment of the CRO business, completed the initial work of setting up the CRO business, and built a corresponding team, which is conducive to expanding the scope of services, deepening cooperation with customers, and forming a complete chain of services with the original CDMO business. We believe that the company's pharmaceutical CDMO business concentrates on leading customers in the industry, concentrates on commercial-stage projects, and uses CRO business to increase customer stickiness. Considering the increase in the number of projects the company undertakes in the future, the company's pharmaceutical sector revenue is expected to maintain a high growth rate.

The accelerated layout of the functional chemicals business is expected to create a new revenue growth curve. With the rapid development of downstream emerging industries such as new energy and new materials, the demand for functional chemicals is growing rapidly. At the same time, the influence of geopolitical factors has caused the market to shift from relying on external circulation to domestic demand growth. The trend of import substitution is obvious, and there is huge room for development in China's functional chemical materials market. The company focuses on developing a range of upstream products in the fields of electronic chemicals, battery chemicals, high-performance polymer materials, and personal care and cosmetics. Taking new energy functional chemicals as an example, the company enhances the competitiveness and development potential of its own products and processes through continuous development of new processes. Currently, there are 2 new energy products to be commercialized in the pipeline, and downstream customers have completed product verification. There are 4 pilot stages and 10 pilot stages. The company's 20,000 tons of lithium hexafluorophosphate and 10,000 tons of LiFSi projects continued to advance. We expect that with the company's continued investment in the functional chemicals sector, downstream demand for new energy materials is still growing at a good rate, and is expected to become the company's new business growth curve in the future.

Project construction is progressing steadily, and production capacity in various sectors has been steadily increasing. The company has many projects under construction, with a production capacity of 3,300 tons of plant protection (pesticides and intermediates), 1,750 tons of plant protection (biocides and intermediates), 70 tons of pharmaceuticals (APIs and intermediates), and 30,000 tons of functional chemicals.

Projects that have obtained EIA approval include a new electronic materials project with an annual output of 30,000 tons, a fine chemical project with an annual output of 4100 tons, an annual output of 800 tons of cyanaminobenzamide (LT822), 20 tons of morpholinopyridine hydrate (LT520), a technical improvement project with an annual output of 100 tons of cyclopropylpyrimidine (LT234), 100 tons of clobenzotetrazolidone (LT220), 80 tons of aldehyde indole (LT289), 100 tons of naphthalonitrile (), 10 tons of remibutinib (RMBT) production project, with an annual output of 200,000 tons of electrolytes LT167 Projects such as 20,000 tons of LT612, 1,411 tons of lithium hydroxide solution, and 500 tons of tris (trimethylsilyl) phosphate. With the gradual advancement of the above projects, we believe that the number of the company's products has further increased and the product layout is more extensive, which is beneficial to the company's future performance.

Investment suggestions: The company is expected to achieve operating income of 8.415/111.16/13.101 billion yuan in 2025, respectively, and realized net profit of 537/975/1,233 million yuan respectively. The corresponding EPS is 0.58/1.06/1.34, respectively. The PE multiples corresponding to the current stock price are 23X/13X/10X respectively. We are based on the following three aspects: 1) In the medium to long term, the increase in overall downstream demand for global agrochemicals and the increase in the concentration of the global plant protection industry has brought about an increase in demand in the global pesticide CDMO industry. The company's pesticide CDMO development prospects still have a lot of room for growth, and there is still a possibility that it will maintain a high growth rate in the future, which benefits the company's performance; 2) The company's pharmaceutical CDMO business concentrates on leading customers in the industry, concentrates on commercial-stage projects, and uses CRO business to increase customer stickiness. Considering the increase in the number of projects the company undertakes in the future, the company's pharmaceutical sector's revenue is expected to grow at a high rate. profit Good company's future performance; 3) The company's lithium hexafluorophosphate and LiFSi projects continue to advance. The company continues to invest in the functional chemicals sector, downstream demand for new energy materials is still growing at a good rate, and is expected to become the company's new business growth curve in the future. We are optimistic about the progress of the company's pesticide CDMO, pharmaceutical CDMO, and new energy materials businesses. Covered for the first time, giving it a “buy” rating.

Risk warning: Downstream demand falls short of expectations; industry competition intensifies; new construction projects fall short of expectations; risks such as fluctuations in upstream raw material prices.