Event: The company released its semi-annual report for 2023. Revenue for the first half of the year was 5.288 billion yuan, -14.02%, net profit of 281 million yuan, year-on-year, -19.10%; revenue for the second quarter was 2,834 million yuan, -20.89%, +15.51%, month-on-year net profit of 162 million yuan, -22.8%, and +36.47%. The company's performance for the first half of the year was in line with market expectations.
In the first half of the year, the company achieved breakthroughs in agricultural production and area. The average wheat yield from its own base exceeded 1,200 kg for the first time, and Suzhou Suken expanded its land area by 42,000 mu; in June 2023, its wholly-owned subsidiary, Suken Grain and Oil, competed for bankruptcy and liquidation assets under the name of Jingjiang Longwei Grain and Oil Industry Co., Ltd. for 182 million yuan.
According to the announcement, the decline in profit stemmed from the continuous decline in market demand for agricultural products such as wheat, cooking oil, and rice during the reporting period, which led to a decrease in sales volume and a decline in operating income; falling sales prices for products such as wheat, cooking oil, etc., and rising production costs of stored rice at the beginning of the period led to a decline in gross profit; at the same time, sales volume of new wheat decreased compared to the same period last year, and this portion of revenue and gross profit was not realized in the first half of the year.
According to the company's semi-annual performance report data, self-produced wheat production in the first half of the year was +12.27%, but sales volume was -22.28%, sales volume from outside wheat was -24.18%, rice sales volume was -35.47%, and cooking oil sales volume was -32.93% year on year.
We judge that there are two reasons for the decline in sales volume. First, the domestic consumption environment was poor overall in the first half of the year; second, the decline in product prices in the first half of the year led to a sharp decline in trade and hoarding demand.
Wheat prices continued to fall in the first half of the year due to expectations of increased production, increased import volume, and sluggish demand for feed.
In Jiangsu, for example, wheat prices fell by 12.3% at the end of June compared to the end of 2022. Abnormal weather near harvest has brought expectations of high yield to nothing, and the enthusiasm for downstream procurement has increased. Since the end of June, wheat in Jiangsu has risen 4.3%. According to the US Department of Agriculture's August estimate, China's wheat production for 23/24 was 137 million tons, July was 140 million tons, and 22/23 was 138 million tons; the estimated global wheat inventory for 23/24 was 266 million tons, down 03 million tons from the previous year, with an inventory consumption ratio of 33.3%, the lowest level in nearly 9 years.
Rice prices fell slightly in the first half of the year. Take Jiangsu Japonica rice as an example. Prices at the end of June fell 2.9% compared to the end of 2022. According to data from the Food and Agriculture Organization of the United Nations in early August, the global rice price index hit the highest level in 12 years due to strong demand and India's export restrictions. Since the end of June, Japonica rice in Jiangsu has risen 5.9%. The US Department of Agriculture estimates that global rice stocks for 23/24 were 172 million tons, a year-on-year decrease of 202 million tons. The inventory consumption ratio was 32.9%, the lowest level in nearly 7 years.
On July 18, Russia withdrew from the Black Sea Food Agreement, heightening market concerns about global food supply. However, the USDA's August supply and demand report (compared to July) did not adjust Ukraine's wheat and corn export estimates for 23/24. They were still 10.5 million tons and 19.5 million tons, but lower than 16.8 million tons and 25.5 million tons in 22/23. On August 18, Ukraine and Romania signed an agreement to ensure that Ukrainian food can be exported through Romania. Furthermore, frequent anomalous weather has also increased uncertainty about global food supply.
Investment advice: Maintain a “buy” rating. Affected by falling agricultural product prices and low market demand, the company's performance in the first half of the year declined year on year. Wheat prices and rice prices are expected to return to prosperity in the second half of the year. As demand recovers, the rise in edible oil sales will also contribute to increased performance. Considering the decline in performance in the first half of the year and the stabilization of future grain prices, we lowered our performance forecast. We expect the company's operating income for 2023-2025 to be 113.8/120.6/12.92 billion yuan (the value before 2023-2024 was 150.7/16.86 billion yuan); net profit attributable to the parent company was 698/7.99/932 million yuan (the value before 2023-2024 was 12.1/1.15 billion yuan), and the current stock price corresponding to PE is 23.7/20.7/17.7 times, respectively.
Risk warning: Risk of fluctuations in raw material prices, risk of natural disasters, risk of changes in industrial policies and government subsidy policies. There may be a risk that the information used in the research report may be delayed or not updated in a timely manner.