The performance of 1H23 is in line with our expectations, and we believe that the prosperity of 2H23 pesticides is expected to stabilize and pick up.

The company announced its results for the first half of 2023: operating income of 2.004 billion yuan (YoY-5.9%), net profit of 173 million yuan (YoY-14.5%), and non-return net profit of 176 million yuan (YoY-12.9%).

Among them, the income of herbicides / pesticides / fungicides was 939 million yuan, respectively, and the gross profit margin of YoY-4.4%/-7.8%/-6.7%; was 26.1%, 16.7% and 21.4%, respectively, compared with the same period last year. + 10.0/-8.0/+3.5pct. 2Q23 has a quarterly operating income of 982 million yuan (QoQ-3.9%, YoY-19.2%) and a net profit of 82.12 million yuan (QoQ-9.2%, YoY-32.5%). In the context of the declining prosperity of the industry, the company's diversified product structure reflects strong business resilience, and 1H23 performance is in line with our expectations. We believe that the 2H23 pesticide industry boom bottom or now, Hubei Yichang base of new production capacity is expected to help the company to achieve steady growth throughout the year.

Trend of development

Exports are blocked, product prices continue to decline, and the 1H23 pesticide industry continues to be under pressure. Since the second half of 2022, China's pesticide industry is facing multiple difficulties, such as weakening external demand, high inventory in overseas channels, intensified domestic competition and so on. The prices of major pesticide products and the profitability of enterprises are under continuous pressure. The direct and indirect export income of the company's 1H23 was 7.30 yuan and 204 million yuan respectively, down 29.0% and 17.4% from the same period last year. The hindrance of exports continued to put pressure on the performance of China's pesticide enterprises. According to the Zhongnong Lihua crude drug price index, the current crude drug price has returned to the bottom of the previous round of history in 2014-16. We believe that as the competition pattern of the industry tends to be steady, the profitability of pesticide enterprises is expected to return to the right track. As of the first half of 2023, the company has obtained pesticide registration and production license for more than 30 kinds of crude drugs and more than 130 kinds of preparations. the diversified layout and strong adaptability of products are the core competitiveness of the company.

The new capacity contributes to the steady growth of the company. In the first half of 2023, the company actively promoted the production and commissioning of the Changqing Hubei production base project, in which the project with an annual output of 10000 tons of Metolachlor has been put into production. The project with an annual output of 1000 tons of bifenthrin and an annual capacity of 2000 tons of fenvalerate has been put into trial production. In the first half of 2023, Changqing (Hubei) Biotechnology Co., Ltd., a subsidiary of the company, achieved an operating income of 488 million yuan (YoY+342%) and a net profit of 41.09 million yuan (YoY+989%). We believe that the smooth commissioning of Changqing Hubei production base and the withdrawal and relocation of the plant area along the river are expected to promote the sustainable and healthy development of the company.

Profit forecast and valuation

2H23 pesticide industry boom bottom or now, the company's diversified product layout and new production capacity, the whole year is expected to maintain steady growth, we maintain 2023 Universe 2024 profit forecast of 315,000,000 yuan.

The company's current share price corresponds to a 24-year price-to-earnings ratio of 14.6 pound 13.2x. We maintain the outperform industry rating and maintain the target price of 9.0 yuan, corresponding to 18.5 times 2023 price-to-earnings ratio and 16.8 times 2024 price-to-earnings ratio, which has 26.9% upside compared to the current stock price.

Risk

The destocking cycle exceeded expectations and the progress of the new project was lower than expected.