The company released its semi-annual report for 2023. In the first half of 2023, it achieved operating income of 1,425 million yuan, up 6.14% year on year, net profit of 172 million yuan, down 3.94% year on year, after deducting non-return net profit of 195 million yuan, up 8.59% year on year, mainly due to losses of 20 million yuan from settled forward foreign exchange settlements. Among them, in the second quarter of 2023, we achieved operating income of 683 million yuan, up 5.77% year on year, net profit of 79 million yuan, up 12.35% year on year, net profit of non-return income of 109 million yuan, up 47.33% year on year.

Pesticide prices continued to weaken in the second quarter, and are expected to bottom out in the third quarter. Since China's pesticide exports have exceeded the average growth rate of global pesticide usage in the past three years, multinational enterprises are facing inventory removal problems, so China's pesticide prices continued to weaken in the second quarter. According to data from Zhongnong Lihua, in 2023 Q2 herbicides, the average prices of chlorofluoropyrioxyacetic acid, cyanofloxacin, and oxalate were 13.58, 13.85, and 22.5 million yuan/ton, respectively, down 13.98%, 15.62%, and 3.91% from the previous year, respectively, down 24.91%, 29.76%, and 13.33% from the previous year; among insecticides, the average prices of thiamethylamine and licidecylurea were 8.79, 182,800 yuan/ton, respectively, down 26.17% and 14.06% from the previous year, respectively With the exception of ethylene oxalate, the prices of the main products of the above companies have all fallen below 1% of their historical value since 2018. However, with the gradual recovery of downstream demand and the removal of inventories, we believe the pesticide industry is expected to rebound steadily in the third quarter.

Trial production of oxazolone is imminent, seizing market opportunities. Recently, substantial progress has been made in the new project at the company's Huaibei base. It is about to complete the installation of equipment with a new production capacity for oxazolone. It is expected to be put into trial production in October. The design production capacity is 500 tons/year. Currently, there is no current domestic production capacity for oxazolidone. After the company is completed and put into operation, it will seize the current lead and open up market space. Furthermore, the innovative drug genoxazole glycyrrhizamide developed independently by the company is also progressing steadily, and is expected to be put into production within 2023. Production of pentafluorosulfonoxamide at the Nanjing base, as well as bifluorosulfamide, oxazoloxamide, and chlorphenamide at the Huai'an site is also expected to be put into production within 2023. On the basis of the stability of the original old product market, the company closely grasps market demand trends for various new products, actively expands new products with a strong market, enriches the product line, ensures continuous growth in performance, and can be expected for future growth.

Maintain profit forecasts and maintain “buy” ratings. The company is a leader in the pesticide segment. It is expected to grow with the launch of many new products and innovative pharmaceutical production capacity in the future. We expect the company's operating income to be 31.89, 37.64 billion yuan, and 4.457 billion yuan in 2023-25, and net profit at the parent level of 387, 4.83 million yuan, and 581 million yuan. The corresponding PE will be 12X, 10X, and 8X respectively, maintaining the “buy” rating.

Risk warning: product price fluctuations, production capacity release and construction falling short of expectations