The agrochemical industry is booming, and the company's 2023 performance declined by 12.77%. In 2023, the company achieved operating income of 11.478 billion yuan, a year-on-year decrease of 27.41%; realized net profit of 1,565 billion yuan, a year-on-year decrease of 12.77%, slightly lower than our previous expectations (1,641 billion yuan). The decline in the company's performance in 2023 was mainly affected by the downward cycle of the global agrochemical industry. The rapid expansion of production capacity in the domestic pesticide industry in 2023 led to increased market competition, compounded by the global pesticide market channel removal cycle, sluggish demand in the pesticide market, and a cliff-style decline in the prices of most pesticide products. According to Zhongnong Lihua Original Pharmaceutical, out of the hundreds of pesticide products it tracks in 2023, 92% of the products fell, and 8% of the products remained flat, with no rising varieties. As of December 31, 2023, the price index of Zhongnong Lihua's raw materials fell 37% year on year, the herbicide index fell 41.7% year on year, the pesticide index fell 36.4% year on year, and the biocides index fell 29.7% year on year.
Pesticide prices continued to decline in the first quarter of 2024, and industry sentiment is expected to gradually pick up as the peak demand season arrives.
According to Zhongnong Lihua Original Pharmaceutical, on March 24, 2024, the Zhongnong Lihua Original Drug Price Index reported 77.80 points, a sharp drop of 25.8% from last year, down 0.94% from the previous month, and 2.98% from the beginning of the year. Pesticide prices continued to decline in the first quarter, but the rate of decline slowed down. On the demand side, March of the previous year was the peak export season for pesticide products in China. According to Zhuochuang Information, from January to January 2024, China's total pesticide export volume was 423,800 tons, an increase of 57.47% over the previous year, with a cumulative export value of 1,242 billion US dollars, an increase of 5.93% over the previous year. We believe that the current global pesticide market removal cycle is gradually coming to an end. Under the traditional peak demand season for pesticides in the first half of the year and the expectation that overseas stocks will be replenished, the pesticide industry's prosperity is expected to gradually pick up, and the company's profitability is expected to improve to a certain extent. In the future, we need to continue to pay attention to changes in pesticide market prices and the progress of the industry's production capacity clearance.
Make every effort to promote the Liaoning Youchuang project. It is expected that the first phase of the project will be put into operation by the end of 2024. In 2023, construction began on the Liaoning Youchuang Project, a wholly-owned subsidiary of the company. The project includes hot pesticides such as the herbicide oxime, the fungicide flusazolol hydroxylamide, and the insecticide Kung Fu methrin. Among them, Flusazol hydroxylamide is an innovative drug from Syngenta.
According to a report from the World Agrochemical Network, the first phase of the project is expected to be put into operation before the end of 2024, and the entire first phase of the project is expected to be completed and put into operation by the end of 2025. We believe that with the gradual release of production capacity in the company's Huludao project, the contribution to the company's performance will gradually become apparent, and we are optimistic about the company's medium- to long-term growth.
Risk warning: raw material prices fluctuate; downstream demand falls short of expectations; projects under construction are progressing less than expected, etc.
Investment advice: Lower the profit forecast and lower the investment rating to an “gain” rating. Considering the rapid expansion of domestic pesticide production capacity in the past two years, most types of pesticides are facing an oversupply problem. At the same time, the increase in production of raw materials in India is also crowding out the market space of domestic pesticide companies, making it difficult for the pesticide industry to increase rapidly and drastically.
As a result, we lowered the company's profit forecast. We expect the company's net profit to be 17.66/20.09/2,187 billion yuan in 2024-2026 (the original value was 20.73/2.271 billion yuan in 2024/2025), and EPS was 4.35/4.94/5.38 yuan, corresponding to the current stock price PE of 11.9/10.4/9.6X, and downgraded the investment rating to an “increase” rating.