Net profit to mother was +17.8% year-on-year, and the performance report was in line with our expectations

The company announced its 2023 performance report. Revenue in 2023 was +17.7% to 4.11 billion yuan, and net profit to mother +17.8% YoY to 270 million yuan; of these, 4Q23 revenue was +30.8% YoY to 2.56 billion yuan, and net profit to mother was +35.2% YoY to 260 million yuan. The rapid performance report is in line with our expectations. We believe that the increase in performance is mainly due to outstanding product performance, market development, and joint contributions from the Hebei New Era. Innovation and marketing help the company's main business achieve steady growth in sales and revenue.

Key points of interest

Taking into account variety innovation and marketing, the seed owner business maintained steady growth in 2023. The company has always insisted on combining innovation and marketing. According to the company's announcement, in 2023, the company closely focused on market demand to carry out scientific and technological innovation results, and the overall performance of varieties was outstanding. In 2023, a total of 64 hybrid rice, 8 hybrid corn, and 1 new cotton variety passed national approval, and the quantity and quality of varieties were double improved.

At the same time, the company deepened responsible management of business goals and implemented detailed marketing measures to increase market development efforts. Annual seed sales exceeded 200 million kilograms, an increase of more than 30% over the previous year. Among them, sales of rice and corn seeds were +17% and +30%, respectively, driving the revenue of seed owners to increase by more than 20% year on year.

At the industry level, China's seed industry is undergoing technological upgrading, industry expansion, and pattern optimization. Since the Central Commission for Deep Reform passed the “Seed Industry Revitalization Action Plan” in 2021, China's seed industry has continued to receive policy attention. Currently, according to the Ministry of Agriculture and Rural Affairs, the seed industry revitalization campaign has successfully completed the phased target task of “laying the foundation in three years”, and Document No. 1 of 2024 proposes “speeding up the promotion of seed industry revitalization actions” and “promoting the expansion of biological breeding industrialization.” We believe that the seed industry has entered a critical window for the iterative upgrading of the industry. Considering that sales of genetically-modified corn seeds have progressed smoothly since the beginning of the year, we believe that commercialization and promotion of genetically-modified seeds is expected to accelerate, and China's seed industry is expected to usher in a rapid expansion in market size and an accelerated concentration of competitive patterns.

At the company level, the dual advantages of variety and marketing help to break through in the short term, and the orderly promotion of biological breeding is conducive to long-term development. 1) In the short term, the company's rice breeding has both variety and marketing advantages. We expect that the main varieties such as Quanyou 822 and Quanyou Seedling are expected to help the rice market share steadily increase; furthermore, the company's corn seed industry insists on “endogenous” and “epitaxial” two-wheel drive. The acquisition of Hebei New Era in 2023 can be expected to increase its corn variety reserves and regional layout. 2) In the long run, the company aims to enter the top ten global seed industry and the top three corn seed sales revenue in the country by 2025, and announced that it is promoting the industrialized application of biological breeding in an orderly manner and actively developing biological breeding research and development and cooperation with major shareholders. We believe that cooperation between the company and major shareholders in the biological breeding business is expected to help it grow in the long term and achieve its development goals in 2025.

Profit forecasting and valuation

We basically maintained our net profit forecast of 280 million yuan for 23, and considering the downward pressure on food prices this year, lowered the 2024 forecast by 7% to 330 million yuan, and introduced a 2025 forecast of 410 million yuan. The current stock price corresponds to 19/16 times P/E for 2024/25. Considering the downward shift in the industry valuation center, the target price was lowered by 21% to 9.5 yuan, corresponding to 27 times P/E in 2024, with 42% upward space. Maintain outperforming industry ratings.

risks

Competition in the industry; intellectual property disputes; risk of contract farming operations; promotion of overseas projects fell short of expectations.