1H23 performance falls short of market expectations
The company announced 1H23 results, achieving revenue of 17.253 billion yuan (YoY -8.2%, HoH -7.2%); net profit of return home was 242 million yuan (YoY -133.1%, HoH -97.3%). Among them, sales prices fell 5% year on year, sales volume decreased by 10%, and sales of herbicides/insecticides/fungicide/fine chemicals were 76.3/47.49/34.76/13.98 billion yuan (YOY-13.6/1.5/8.9/ -28.4%). 1H23 gross margin was 22.6% (YOY-3.9 pcts, HOH-1.2 pcts), and net margin was -1.4% (YOY-5.3 pcts, HOH-0.7 pcts). Performance fell short of market expectations, mainly because: 1. Sales volume declined due to market depletion and extreme weather, weak downstream demand led to intense competition in the industry, lower sales prices, and a sharp drop in volume and price dragged down sales. 2. Amortization of the increase in book value of transferred assets related to China Chemical Group's acquisition of Syngenta in 2017 (non-cash). 3. 1H23's business performance was greatly affected by the exchange rate. 1H23's sales/gross profit/EBITDA were reduced by 91/60/41 million US dollars respectively. The exchange rate trend had a negative impact on the company's performance.
Development trends
Currently, the plant protection industry is affected by both supply and demand and the macro environment. On the supply side, prices of raw drugs and raw materials in China continued to fall at 1H23, market competition was intense, and sales prices also showed a downward trend.
On the demand side, channel inventory is still backlogged, and customers generally have a wait-and-see attitude, resulting in sales orders falling short of the same period in history and company expectations. At the same time, in the context of high US interest rates, channels are focusing on reducing inventory levels, and are inclined to shorten the procurement cycle and procure from producers in a timely manner to meet demand. Drought conditions in the Midwest region of the US and price pressure caused by channel de-inventory have also affected sales.
The company adjusted its short-term purchasing strategy and waited for the high inventory to be digested. The company's 2Q23 inventory level decreased compared to 1Q23. This stemmed from the company's consumption of high-priced inventory by controlling the pace of procurement. In 2023, the company will continue to adopt selective procurement measures, mainly promote high-margin products, and differentiate procurement priorities based on inventory and market demand. Under these measures, the company has effectively reduced 2Q23 procurement volume. We believe that controlling the pace of procurement by the company is conducive to continuous positive cash flow and reducing the adverse effects of high channel inventories. We expect that the pressure on channel inventory may ease in the second half of 2023.
Profit forecasting and valuation
The sentiment of the agrochemical industry fluctuated. We lowered our net profit in 2023 by 46% to 329 million yuan, and our net profit in 2024 by 19% to 718 million yuan. The current A-share price corresponds to 2023/2024 54.8 times/25.1 times the price-earnings ratio. Due to the lower profit forecast, we lowered our target price by 15.1% to 8.4 yuan, maintaining our outperforming industry rating, corresponding to 59.4 times the 2023 price-earnings ratio and 27.3 times the 2024 price-earnings ratio, which has room for 8.4% increase from the current stock price.
risks
Large exchange rate fluctuations, derivatives risks, loss of goodwill risks, large fluctuations in the price of original drugs, etc.