Unload the burden of historical debt and reinvigorate a new life under Guoheng's trading
The company was successfully listed as the “first MSG stock” in 1998, but due to many changes in ownership, the company went bankrupt and restructured in 2019 under national welfare management, resolved historical debt issues in 2020, and resumed healthy growth in the main business. Currently, the company has formed a product structure dominated by monosodium glutamate and chicken essence, combined with other compounds, wheat flour series, and the water industry, and is starting a second growth curve in computing power.
The competitive pattern in the monosodium glutamate industry is stable, and companies at various levels compete at various levels 1) China accounts for more than 70% of the world's MSG production capacity, with a market size of 18.4 billion yuan in 2021. It is mainly exported to Southeast Asian countries. Along with the transfer of overseas MSG production capacity, demand for MSG exports is expected to be further boosted. 2) The MSG production side experienced three rounds of capacity integration. The three leading MSG manufacturers, Fufeng/Meihua/Yipin, monopolized 89% of the country's production capacity, and second-tier companies represented by Lotus Health formed a misplaced competitive trend with downstream clients, empowering each other on the MSG raw materials and channel side. 3) The overall supply and demand of the industry are strong. The supply-side MSG manufacturers continue to expand production capacity. Demand for MSG on the demand side of the food industry and the catering side is rigid. With the expansion of the market size of prepared dishes and the improvement of overseas layout, the MSG demand ceiling has been further opened. The domestic MSG market growth rate is expected to be higher than 5.7% in 2023-2029.
Internal reform dividends have been released, and the main business upgrade path is clear 1) As a brand, the “Lotus” brand has a deep consumer perception base. Since 2022, the company has returned to the eyes of consumers with the image of “the light of domestic goods”. Organizationally, after restructuring and listing, the company initiated internal organizational reforms to improve the quality and efficiency of its existing business by optimizing redundant employees/reforming the remuneration system/establishing a “horse racing mechanism”. In the supply chain, the company started strategic reserves of raw materials and optimized logistics routes to further reduce production costs, and quickly respond to channel layout through the marketing team, thereby achieving high channel stickiness. 2) MSG main business: The company explores the stock market/opens up an empty market to obtain incremental growth through household and catering channels, guarantees gross profit space through upstream and downstream bargaining power, and promotes product upgrading, and completes both volume and price increases. 3) Polymodulation and aquatic products: Using the synergy of MSG, the gross margin is stable at around 20%, and is introduced into the terminal market through channel reuse to undertake the upgrading of MSG consumption. At the same time, the company entered the packaged water segmentation circuit online to find new performance growth points. 4) Computing power business: In 2023, the company aimed at the opportunity of mismatch between computing power supply and demand, and laid out the computing power leasing business. Currently, procurement is developing steadily.
Profit forecasting
We are optimistic that since the majority shareholders have joined the company, they will continue to carry out internal reforms, resolve the burden of history, go to battle lightly, and actively develop a second growth curve. EPS is expected to be 0.07/0.12/0.19 yuan in 2023-2025, and the current stock price is 80/47/30 times PE, respectively, maintaining a “buy” investment rating.
Risk warning
Downside macroeconomic risks, food safety risks, growth in main businesses falling short of expectations, new business progress falling short of expectations, and rising costs.