Key points of investment:

The company is mainly engaged in breeding, planting and processing of precious Chinese herbal medicines, including ganoderma lucidum, dendrobium officinale, and saffron. The core products produced include Ganoderma lucidum spore powder, ganoderma lucidum spore powder granules, iron maple powder, ganoderma lucidum extract, etc. The main revenue and profit come from Ganoderma lucidum spore powder products.

In the first three quarters of 2023, the company achieved operating income of 543 million yuan, an increase of 6.89% over the previous year; realized net profit attributable to shareholders of listed companies of 139 million yuan, an increase of 7.09% over the previous year; and realized net profit attributable to shareholders of listed companies of 118 million yuan, an increase of 7.07% over the previous year. Basic earnings per share are $0.71. Among them, in the third quarter, the company achieved operating income of 171 million yuan, an increase of 8.24% over the previous year; net profit attributable to shareholders of listed companies was 49.125 million yuan, up 2.09% year on year, and net profit after deduction of net profit was 408.8889 million yuan, down 7.94% year on year. Basic earnings per share are $0.25.

The company's revenue and net profit growth in the first three quarters did not meet expectations. The main reasons were: 1) the peak in January 2023 after the epidemic was released, and late January coincided with the Spring Festival, which affected the company's sales during the Spring Festival; 2) consumer purchasing power declined after the pandemic, making it difficult to acquire new customers; 3) the company's brand promotion ability and sales capacity still needed to be improved.

According to the minutes of the performance exchange conference call for the third quarter of 2023 announced by the company on October 29, from a regional perspective, the revenue of the Zhejiang region from January to September 2023 was 348 million yuan, accounting for 65.42%, an increase of 5.04% over the previous year; on August 31, 2023, the company signed a strategic cooperation agreement with the Zhejiang Swimming Team, named the 19th Hangzhou Asian Games Zhejiang team swimming team. At the same time, the company is also the official Ganoderma lucidum product supplier for the 19th Asian Games. This all contributed to the growth of product sales within the province; revenue outside the province was 5896 million yuan 10,000 yuan, accounting for 11.08%, down 11.79% year on year; Internet revenue was 125 million yuan, accounting for 23.5%, up 22.21% year on year.

In terms of profitability, the company's gross margin for the first three quarters of 2023 was 82.59%, down 2.36 percentage points from the same period last year. Considering the company's entire industry chain layout from product selection to sales, fluctuations of 2 percentage points in gross margin are normal. By product, the gross margin of Ganoderma lucidum spore powder products was 87.73%, down 1.53 percentage points from the same period last year; the gross margin of dendrobium officinale products was 79.13%, up 0.03 percentage points from the same period last year; and the gross margin of other products was 74.77%, down 6.26 percentage points from the same period last year.

Looking at the period expense ratio, the company's sales expense ratio for the first three quarters of 2023 was 42.51%, down 7 percentage points from 4.0 in the same period last year; in the fourth quarter, with the arrival of the peak sales season, the sales expense ratio should have increased; the management expense rate was 12.54%, up 1.24 percentage points from the same period last year; the R&D expense rate was 7.34%, which is basically the same period last year; the financial expenses rate was -1.99%, with plenty of capital. Looking at the number of days of turnover of accounts receivable, the number of turnover days for the first three quarters was 54.43 days, an increase of 15.29 days over the same period last year.

Lower the company's profit forecast. Earnings per share for 2023, 2024, and 2025 are estimated to be 1.52 yuan, 1.72 yuan, and 2.09 yuan respectively, corresponding to the closing price of October 31 of 36.50 yuan. Dynamic PE is 24.01 times, 21.22 times, and 17.46 times, respectively, downgrading the company's rating to “increased holdings.”

Risk warning: Industry policy risk, risk of sales falling short of expectations, risk of R&D progress falling short of expectations.