In the first half of 2023, domestic sugar prices and ketchup export prices continued to boom, and the company's revenue and net profit reached record highs. With the improvement of the refined sugar production capacity layout and the consolidation of diversified supply channels for sugar sources, the market share and profitability of the company's sugar business is expected to continue to increase. Furthermore, the domestic and international tomato products market continues to be booming, and the company's tomato business is growing rapidly. We expect the tomato business to contribute to higher performance. We maintain the company's EPS forecast for 2023-2025 at 0.52/0.58/0.65 yuan. Referring to the agricultural product processing sector, the average valuation of the agricultural products processing sector is about 25 times PE, which is comparable to the public company Wind's unanimous expectation in 2023. We gave the company 25 times PE in 2023, corresponding to the target price of 12 yuan, and maintained a “buy” rating.

Revenue and net profit due to income reached new highs. The company released its semi-annual report for 2023. 23H1 achieved operating income of 12.73 billion yuan, an increase of 6.3% over the previous year; net profit of 770 million yuan, an increase of 21.3% over the previous year, after deducting non-return net profit of 700 million yuan, an increase of 21.0% over the previous year. In the first half of 2023, domestic sugar prices rose sharply. The company accurately determined market trends, seized market opportunities, and reasonably controlled the pace of sales. Revenue and net profit both reached record highs.

Sugar business: Sugar prices continue to boom, and the company's competitive advantage is remarkable. Domestic sugar prices rose rapidly in the first half of 2023, and the company's revenue and profit both increased sharply. According to Choice data, the average domestic spot price of 23H1 white sugar was 6442 yuan/ton, an increase of 11.5% over the previous year. According to our estimates, the company's 23H1 sugar business achieved revenue of about 11.5 billion yuan, accounting for more than 90% of the company's total revenue, an increase of about 7% over the previous year. As the largest sugar company in China, the company has established a complete sugar industry layout at home and abroad. We believe that the market share and profitability of the company's sugar business will continue to increase. First, refined sugar processing capacity continues to rise. Currently, the company's sugar refining business has a production capacity of about 2 million tons. According to the company's announcement, the Zhangzhou sugar industry with an annual production capacity of 350,000 tons is currently under construction. In the future, the company's sugar refining capacity is expected to continue to increase. Combined with a higher operating rate, the company's performance is expected to further improve. Second, diversified supply channels for sugar sources. The company is the main channel for domestic raw sugar imports and controls raw sugar import quotas. By accurately judging business conditions, the company seizes the opportunity of low international raw sugar prices to establish a strategic inventory. In addition, the company will also expand new channels for sugar cane sources abroad, expand the sources of raw materials for sugar cane, and ensure a high and stable operating rate of self-produced sugar in the context of the continuous reduction in the area under domestic sugar cane cultivation.

Tomato business: Seize external opportunities, expand internal space, and continuously improve profitability. The company is currently the largest tomato processing enterprise in China and the second largest in the world. According to the company's announcement data, COFCO Tunhe, a wholly-owned subsidiary of 23H1, which is mainly in the tomato business, had revenue of 1.08 billion yuan, accounting for 8.5% of the company's revenue, an increase of 43.7% over the previous year; it contributed 260 million yuan in net profit, an increase of 236.6% over the previous year. The market boom for tomato products at home and abroad continues to rise, and the company's tomato business performance has reached a new high. 1) On the international side, ketchup exports continue to boom. Overseas ketchup supply is under pressure due to factors such as high production energy costs for European ketchup companies, frequent high temperatures and droughts, and production cuts in tomato cultivation; however, Chinese ketchup has advantages in terms of cost and quality, and the average export price continues to rise. According to data from the General Administration of Customs, the average export price of large barrels of ketchup in China at 23H1 was 1,140 US dollars/ton, an increase of 30.4% over the previous year. Due to the continuing impact of the Russia-Ukraine conflict, Europe's energy costs remain high. Coupled with the high temperatures and droughts in European tomato-producing regions this year, we expect that European ketchup supply will maintain a tight pattern, and that China's ketchup exports will continue to be booming. 2) On the domestic side, there is huge consumption space for tomato products. As domestic food and beverage consumption scenarios become more diverse and consumption habits for tomato products are gradually cultivated, we believe that the potential of the domestic tomato products market space will gradually be unleashed. According to Statista's forecast, the size of the ketchup market in China will grow rapidly. The per capita ketchup consumption CAGR from 2022-2028 is 4.6%, and the ketchup market size in 2028 will increase by 50% compared to 2022. Based on the large package export business foundation, the company continues to expand the domestic small package tomato products business.

We believe that the company's tomato business will contribute more performance to the company in the future.

Risk factors: trade policy changes; risk of natural disasters; risk of fluctuations in sugar prices; rapid recovery of ketchup supply in overseas markets; risk of drastic changes in exchange rates; geopolitical risks, etc.

Profit forecasting, valuation and rating: Benefiting from the boom in domestic sugar and ketchup prices, the company's 23H1 revenue and net return profit reached record highs. We believe that as the company's refined sugar production capacity continues to increase and the supply of diversified sugar sources is consolidated, the competitive advantage of the company's sugar business will become more and more significant, and its market share and profitability will continue to increase.

Driven by the boom in the ketchup market at home and abroad, the tomato business is expected to contribute more performance to the company. We maintain the company's EPS forecast for 2023-2025 at 0.52/0.58/0.65 yuan. Referring to the agricultural product processing sector, which is comparable to the average valuation of listed companies (Arowana, Bailong Chuangyuan, Daodaoquan) in 2023 Wind's unanimously expected average valuation of about 25 times PE, gave the company 25 times PE in 2023, corresponding to a target price of 12 yuan, and maintained a “buy” rating.