2023 results are in line with our expectations
Fufeng Group announced its 2023 results: revenue of 28.01 billion yuan, +1.9% year on year; net profit to mother of 3.14 billion yuan, corresponding to profit of 1.24 yuan per share, -18.6% year on year, in line with our expectations. By business segment, the company's food additives/animal nutrition/high-end amino acids/colloid business segments achieved revenue of 135.0/89.0/19.7/2.83 billion yuan respectively, accounting for 48.2%/31.8%/7.0%/10.1% of revenue; gross margin was 16.0%/17.1%/39.6%/59.1%, respectively, with year-on-year changes of -3.5/-10.8/+7.6/+4.5ppt. In terms of raw materials, the prices of corn and coal were 2,342 yuan/ton and 412 yuan/ton, respectively, with a year-on-year change of +1.3%/-2.1%. In terms of dividends, the company's annual dividend for 2023 was HK$0.58 per share (including an interim dividend of HK$0.23 and a final dividend of HK$0.35), corresponding to the annual dividend of 42.5%. The year-on-year increase of 2.5ppt was mainly a special dividend from the sale of Shenhua Pharmaceutical.
2H23 achieved revenue of 14.22 billion yuan, -0.1% year-on-year and +3.1% month-on-month; net profit to mother of 16.1 billion yuan, -12.5% year-on-year and +4.4% month-on-month.
Development trends
The popularity of monosodium glutamate and xanthan gum has declined, so we will wait for the demand for amino acids to pick up. 1) MSG: Downstream demand is relatively stable, with additional production capacity on the supply side lowering prices. According to Zhuochuang information, the current market price of MSG is 8,150 yuan/ton, down 1,000 yuan/ton compared to the average price in 2023. 2) Xanthan gum: According to Zhuochuang information, the price of 1H23 xanthan gum reached a record high of 52,000 yuan/ton. As the industry's new production capacity was put into production and high-price orders were delivered one after another, downstream customer acceptance of high prices gradually declined, and the 2H23 xanthan gum boom declined. Up to now, the market price is 25,000 yuan/ton. Looking ahead to 2024, we believe that the gross margin of xanthan gum may gradually return to a reasonable level. 3) Amino acids: 1Q is generally low in demand, and lysine/threonine prices are under pressure. According to Boya Hexun, the current Lai/threonine market price is 10,300/10,450 yuan/ton. Compared with 2H23, the average price of lysine is 1,300 yuan/ton. Threonine is basically flat, waiting for demand to pick up to drive the industry boom to pick up.
Continue to strengthen supply chain and operation management to strengthen integration advantages and continue to promote internationalization. According to the company's announcement, 400,000 tons of MSG production capacity have now been put into trial production. Due to upstream production capacity for raw materials such as ammonia synthesis, the company expects production costs to continue to decrease compared to the industry. At the same time, in 2024, the company will continue to strengthen its supply chain and operation management to maintain the company's cost advantage. Furthermore, the company expects to determine the location of production sites in the US and Eastern Europe in 2024, improve the global layout and continue to promote internationalization.
Profit forecasting and valuation
Due to declining prices of products such as monosodium glutamate and xanthan gum, we lowered our 2024 profit forecast by 8.6% to 3.01 billion yuan, and introduced a profit forecast of 3.09 billion yuan for 2025. The current share price corresponds to the 2024/25 price-earnings ratio of 3.8/3.5x. Considering the allocation value of the high dividend target, we kept our outperforming industry rating and target price of HK$5.8 unchanged, corresponding to the 2024/25 price-earnings ratio of 4.3/4x and an upward margin of 14.4%.
risks
Competition intensified due to the investment of additional production capacity, and downstream consumer demand fell short of expectations.