1H23's performance met our expectations
The company announced 1H23 results: revenue of 13.58 billion yuan, +5.0% year-on-year; net profit of 1.54 billion yuan, corresponding to profit of 0.61 yuan per share, -24.1% year-on-year, in line with our expectations. Among them, exchange earnings were approximately 198 million yuan. We believe that the rise in raw material prices and the decline in the prices of threonine and lysine are the main reasons for the year-on-year decline in earnings. By sector, 1H23's revenue from food additives/animal nutrition/high-grade amino acids/colloids was 65.6/40.9/8.27/1.63 billion yuan, respectively. The revenue share was 48.3%/30.1%/6.1%/12.0%, gross margin was 14.8%/14.5%/36.1% /61.1%, respectively, and gross margin was -6.1/-14.9/-3.8/+10.5ppt, respectively. We believe that the profit of xanthan gum in colloids has increased significantly. Revenue from high-grade amino acids has increased relatively well, while the decline in exports and prices of 1H23 threonine and lysine in the animal nutrition sector has led to a decline in profits. In terms of raw materials, the average prices of corn and coal were 2,397 and 421 yuan/ton, respectively, +6.0%/+3.2%.
Development trends
Wait for the supply and demand of amino acids to improve. The Ministry of Agriculture and Rural Affairs issued the “Three-Year Action Plan for Reducing and Replacing Soybean Meal with Feed” 1 in 2023, which aims to reduce the proportion of soybean meal used in feed from 14.5% in 2022 to less than 13% by 2025. We believe that alternative actions to reduce the amount of soybean meal are conducive to increasing demand for lysine, etc. As of August 30, 2023, the price of lysine rose 8.1% month-on-month to 10,000 yuan/ton. We believe that the price of lysine is expected to rebound at 2H23 as the start of the industry continues to decline and inventories are gradually falling to a low level. As of August 30, 2023, the price of threonine rose 0.5% month-on-month to 11,000 yuan/ton. We believe that with industry inventories gradually falling to a low level and downstream export demand gradually improving, the price of threonine is expected to fluctuate and rise at 2H23.
I'm optimistic that xanthan gum profits will fluctuate at a high level. The current price of xanthan gum is 43,500 yuan/ton, down 13% month-on-month, mainly because major suppliers Fufeng and Meihua both released new production capacity this year. However, looking at downstream demand, the global economy is slowly recovering. We think crude oil prices are expected to continue to be high in the context of OPEC production cuts, demand in the xanthan gum industry is expected to continue to be booming, and profits are expected to fluctuate at a high level.
Expand new production capacity and establish marketing centers to reduce costs and improve efficiency. The company announced that it is expected to add 400,000 tons of MSG production capacity in 4Q23, further consolidating the leading position of MSG. At the same time, the company announced the establishment of three marketing centers in America, Europe and Southeast Asia to directly serve overseas customers. We believe that continued capital expenditure and cost reduction and efficiency will push the company's profit to a new level.
Profit forecasting and valuation
Maintaining the 2023/2024 profit forecast, the current stock price corresponds to a price-earnings ratio of 3.1/2.9x for 2023/2024, respectively. Maintaining outperforming industry ratings and target prices, the corresponding price-earnings ratio for 2023/2024 is 4.2/3.9x, respectively, and there is 33.9% upside compared to the current stock price.
risks
Competition intensified, and downstream consumption recovery fell short of expectations.