Incidents: On October 28, 2023, Andisu released its three-quarter report for 2023. The company's operating income for the first three quarters of 2023 was 9.614 billion yuan, down 10.98% year on year; net profit was -034 million yuan, down 103.01% year on year; net profit after deducting non-net profit was -61 million yuan, down 105.32% year on year. The corresponding company's 3Q23 operating income was 3.266 billion yuan, up 3.45% month on month; net profit was -68 million yuan, down 312.48% month on month.

The company's business was under pressure, and 3Q23 earnings fell sharply month-on-month. The company's overall gross sales margin for the first three quarters of 2023 was 19.51%, down 9.63pcts from the same period last year. The company's financial expenses for the first three quarters rose 122.30% year on year; sales expenses increased 6.87% year on year; R&D expenses increased 17.73% year on year; and management expenses increased 10.53% year on year. The company's net profit for the first three quarters fell year on year. The net profit margin was -0.36%, down 10.98 pcts from the same period last year. The company's Q3 performance was under pressure, and Q3 net profit fell sharply month-on-month, mainly due to falling sales prices for functional products and provisions brought about by non-operating factors.

The company's cash flow situation is good. The net cash flow from the company's operating activities in the first three quarters of 2023 was 1,793 billion yuan, up 125.44% year on year, mainly due to strict working capital and cash management.

Net cash flow from investing activities was -1,260 million yuan, a year-on-year decrease of 2.15%. Net cash flow from fund-raising activities was -392 million yuan, a year-on-year decrease of 1273.08%. The balance of cash and cash equivalents at the end of the period was $958 million, a year-on-year decrease of 40.63%. Accounts receivable fell 18.11% year over year, and the turnover ratio of accounts receivable fell, from 5.54 in the same period in 2022 to 5.32 times. Inventories fell 28.95% year on year, and inventory turnover increased from 3.25 times in the same period in 2022 to 3.62 times.

One of the leaders in the global animal nutrition industry. Andisu is one of the leaders in the global animal nutrition industry. Andisu provides solutions for premix plants, feed processing plants, breeding farms, one-stop breeding enterprises, and food production for animals including poultry, pigs, ruminants, and aquatic animals. Andisu's business spans the world. The company serves about 4,200 customers in more than 110 countries around the world. The sales team is distributed in seven regions: Europe/CIS, Middle East/Africa, the Indian Subcontinent, North America, South America and Central America, Asia Pacific and China.

Actively implement the “double pillar” strategy. In recent years, the company has been actively implementing the “double pillar” strategy, which is to accelerate the development of special business while continuously consolidating its leading position in the methionine industry. According to products, the company is divided into two categories: functional products (such as methionine, vitamins, ammonium sulfate, and sodium sulfate) and specialty products.

Among them, in terms of functional products (such as methionine, vitamins, ammonium sulfate, and sodium sulfate), Andisu is the world leader in liquid methionine, the world's second-largest methionine producer, and one of the few methionine producers in the world that can simultaneously produce liquid and solid methionine. At the same time, the company is committed to providing customers with a full range of high-quality and fully traceable vitamin solutions, and has a unique competitive advantage in the vitamin industry.

Special products include 1) the ruminant business is mainly rumin-coated methionine for ruminants; 2) the monogastric business includes products that improve digestive performance (enzyme preparations), products that improve animal health (probiotics, short and medium chain fatty acids, plant extracts), antioxidants (organic selenium), palatability products, mycotoxin management products, and feed preservation products suitable for monogastric animals; 3) aquatic product additives and innovative alternative protein products. Accelerating the development of the specialty products business is the second largest business pillar of the company's development. Through the endogenous organic development of existing product lines, the continuous introduction of new products, and external mergers and acquisitions, Andisu aims to become one of the world's leaders in animal nutrition specialty products.

The global methionine market is highly concentrated in production capacity. Major participants in the global methionine industry include Evonik, Andisu, Novus, Xinhecheng, Sumitomo, Ningxia Ziguang, Seagate, and Hebang Biotech. Demand for methionine in the Asia-Pacific region, including China, is growing rapidly due to factors such as population growth, rising economic standards in developing countries, and the continuous development of modern livestock farming. Currently, the scale of pork, poultry, and livestock production in China ranks among the highest in the world, and the rapid development of related farming industries has led to a rapid increase in demand for methionine.

Despite the impact of the pandemic, the methionine market has continued to grow in recent years. The global market demand for methionine in 2022 has reached 1.6 million tons. Based on previous data, normal market growth will mean an additional demand of about 200,000 tons every two years.

Andisu is the world leader in liquid methionine and the second largest producer of methionine in the world. According to the company's 2022 annual report, Andisu has two major production platforms (located in Europe and Nanjing, China), with a methionine production capacity of 818,000 tons/year, an increase of 260,000 tons/year over the end of the previous year. Among them, in 2022, the European production platform expansion project successfully increased annual production capacity by 80,000 tons, including adding new production lines to the Burgos plant and Les Roches plant and additional supporting investment in existing intermediate production facilities over the past two years; in September 2022, the Nanjing Liquid Methionine Plant Phase II project successfully started and climbed the slope successfully, increasing annual production capacity by 180,000 tons. Currently, the total production capacity of the Nanjing production platform is 350,000 tons/year, making it one of the largest and most cost competitive liquid methionine production platforms in the world.

The price of methionine rebounded, which boosted the company's performance. Under the pressure of expanding production capacity in the global methionine industry, methionine prices fell markedly in the first half of 2023. Entering the third quarter, Evonik announced a reduction in methionine production in the fourth quarter of 2023 and the first half of 2024. Methionine prices rebounded. According to iFind data, as of 2023-12-6, the average price of methionine 1-4Q23 in China was 18265/16913/18166/21138 yuan/ton, respectively. We believe methionine prices have rebounded and are expected to be maintained in the short term, which favors the company's performance.

The single-cell bioprotein project was successfully tested and produced. FeedKind developed by the company is a nutritious, safe and reliable single-cell protein product. It is a sustainable product that can bring additional value to the Asian aquaculture market and provide a higher level of sustainability for the feed supply chain. The Chongqing plant is the first large-scale production unit in the world to produce single-cell bioprotein using fermentation technology. The company team continues to carry out a rigorous and meticulous debugging process over and over again throughout the production process. Since the project with an annual output of 20,000 tons of single-cell bioprotein began trial production in early 2023, the company's local team has accumulated rich driving experience and is expected to achieve results in the near future. Meanwhile, the company expects FeedKind products to complete product registration in China by the end of 2023.

Specialty products continue to grow iteratively. The company's specialty products include 1) ruminant business; 2) monogastric business; 3) aquatic product additives and innovative protein replacement products.

Among them, ruminants (rumen-coated amino acid products), based on the world's leading methionine technology, the company developed and launched two types of rumen-coated methionine: stermin? and Mestre? They are all considered to be rumen-coated methionine with excellent properties in ruminants. It can effectively improve milk quality and yield while improving the overall health of dairy cows, making milk production more sustainable.

At the same time, according to the plan, the company has launched two new products to complement the existing products. One is RumenSmart? (Available in North American, Latin American, European, and Middle East/African markets); another product is a coated lysine product, Smartamine? ML (already available in North America, Mexico, South Africa, and Pakistan). These new products enrich Andisu's ruminant product portfolio and complete a balanced amino acid nutrition program.

The monogastric animal business includes products that improve digestive performance (enzymes, hemolytic lecithin, etc.), products that improve animal health (such as gut health products, Heli Selenium, Antelai, Health Care, etc.), and other products (palatability products, mycotoxin management, feed preservation products), etc. Among them, Andisu is one of the world's leading suppliers of non-amylopolysaccharidase recognized by customers, and has a development history of more than 25 years. The company's product Luo Xiebao? It has been a leading brand in the field of non-amylopolysaccharidase for over 25 years. Rosabel Advance? It is a non-amylated polysaccharide enzyme launched by Andisu in 2015. Thanks to its excellent production efficiency, the product's business is growing rapidly. In 2019, Andisu officially launched Rosabel AdvancePHY? An innovative composite product containing the above two types of enzyme preparation products at the same time. In October 2021, Andisu launched the latest enzyme preparation product, Luo Xebao Phyplus? This product is a milestone for the company in the field of solutions to improve digestive performance. Is this product related to Rosabel Advance? Combined use will enhance the competitiveness and sustainability of the customer's poultry business.

Aquaculture and innovative alternative protein products. The company promotes the sustainability of fish and shrimp farming in key markets by providing innovative nutrition and health solutions. The fishery products market, particularly in Asia, is a huge growth opportunity for Andisu. Andisu is accelerating growth by steadily strengthening its business in Asia, Latin America, and new regions such as the Middle East and Africa. Kaidisu, a joint venture founded by Andisu and Kellers, develops and innovates the aquaculture industry in China and Southeast Asia? Protein has the potential to become a potential disruptor in the aquaculture feed industry. At the same time, it also prompted Andisu to successfully enter the alternative protein business, a new field with great potential for development.

Strengthen R&D innovation and cooperation. The company's research and innovation capabilities continue to grow, and has established three R&D centers, located in Nanjing, China, and Lyon and La Rochelle in France. The R&D center located in Lyon, France, will integrate all chemical, engineering, nutritional, and analytical capabilities; the other R&D center in LaRochelle, France, integrates and develops product formulation capabilities (packaging, drying, additive protection, etc.). The R&D centers in Nanjing, China and La Rochelle, France are all fully operational. Furthermore, the company has been closely cooperating with many international laboratories, universities and R&D institutions, continuously strengthening ties with the scientific community, actively encouraging the spirit of innovation, and attracting outstanding scientific talents by sponsoring research and innovation projects in different technologies. According to the company's semi-annual report for 2023, the company has recently established two long-term partnerships with Peking University and Tianjin University to launch disruptive technology and product development in bioengineering and innovative crystallization technology, after establishing a poultry nutrition research cooperation project with the University of Arkansas in Fayetteville in the US, aquaculture nutrition research with Nanyang Technological University in Singapore, and a ruminant research project with the University of Wisconsin, the company recently established two long-term partnerships with Peking University's School of Chemical Engineering and Tianjin University, respectively, to conduct collaborative research on disruptive technologies and product development in bioengineering and innovative crystallization technology.

Investment suggestions: The company is expected to achieve operating income of 137.41/153.77/17.147 billion yuan in 2023-2025, respectively, and realized net profit of 223/13.45/2.06 billion yuan, corresponding to EPS of 0.08/0.50/0.75, respectively. The PE multiples corresponding to the current stock price are 94.7X, 15.7X, and 10.5X respectively. We are based on the following aspects: 1) methionine prices have rebounded, the company continues to expand methionine production, and product profitability has rebounded; 2) the company's methionine product liquid and solid product development focuses on strengthening the company's product competitiveness, overseas production capacity layout, and global development to strengthen future business growth; 3) the high gross profit of specialty products, and high value-added products such as ruminant specialty products are beneficial to the company's performance growth. We are optimistic about the company's release of new production capacity and long-term growth in Quanzhou, covering it for the first time, and giving it an “increase in holdings” rating.

Risk warning: risk of raw material price fluctuations; risk of macroeconomic fluctuations; downstream demand falling short of expectations; exchange rate fluctuations and other risks.