Key points of investment:

The company released its 2023 annual report: During the reporting period, the company achieved revenue of 2.39 billion yuan (YoY -20%), net profit attributable to mother of 192 million yuan (YoY -54%), net profit margin of 223 million yuan (YoY -48%), gross profit margin of 22.41% (YOY-3.14pct), net profit margin of 8.05% (YOY-6.22pct), sales, management and financial expenses ratio of 8.60% (YOY+2.96pct). Among them, in a single quarter of 23Q4, the company achieved revenue of 410 million yuan (YoY -49%, QoQ -26%) and net profit of 0.11 billion yuan (YoY -110%, QoQ -138%). The main reasons were: 1) weak downstream procurement demand and declining product prices; 2) Q4 calculated asset impairment losses and other expenses. 23Q4's gross sales margin was 15.88%, with year-on-month changes of -13.77pct and -3.37pct, net margin of -2.91%, and year-on-month changes of -17.92pct and -8.58pct, respectively. The company plans to distribute a cash dividend of 1.2 yuan (tax included) for every 10 shares to all shareholders.

Demand for downstream procurement has been lukewarm since 2023, and prices of major products have fallen sharply, causing the company's performance to continue to be under pressure. According to the company's 2023 report, during the reporting period, the company achieved sales volume of 8877 tons (YoY +23%), revenue of 1,711 million yuan (YoY -6%), gross profit margin of 23.02% (YoY -3.83pct), average price of 23H1 about 2012,000 yuan/ton, 23H2 about 182,400 yuan/ton, a year-on-month decrease of 9.34%; pesticide intermediates achieved sales volume of 2,236 million tons (YoY -47%), gross profit margin (25.91%) YoY -4.65pct). In terms of average price, 23H1 was about 140,400 yuan/ton, and 23H2 was about 127,900 yuan/ton, down 8.87% from month to month. In addition, the formulation business achieved revenue of 160 million yuan (YoY -4%), gross profit margin of 22.98% (YoY-3.53 pct); agrochemical trade products achieved revenue of 196 million yuan (YoY -50%), and gross profit margin of 12.49% (YoY 0.15pct). Looking at specific products by product, according to Zhongnong Lihua original drug data, the average market prices for some of the company's main products in 2023 were: isooctyl chlorofluoropyridoxate 122,500 yuan/ton (YoY -33%), oxalkyne 22,800 yuan/ton (YoY -13%), pentafluorosulfonamide 1,284,400 yuan/ton (YoY -28%), thiamethoxam 92,500 yuan/ton (YoY -28%).

The construction of the three major production bases is progressing in an orderly manner to inject growth momentum, and new innovative products are poised to develop potential for growth. Construction of the company's Huaibei base began in 2021. The first batch of production workshops for lichococcus and propyne fluoroxamine has begun normal production. Production workshops for the innovative pharmaceutical products genoxazole glycyrrhizamide and benzoxazolone have begun construction, and projects such as isoxazolone have also been planned. According to the company's announcement, the production workshop for thiacloxamide and cyanofloxacloxide at the Nanjing base will be put into operation in 2022, and the production plants for pyrazole and difluorosulfonamide at the Huai'an base will be put into operation at the end of 2022 and the beginning of 2023, respectively. In addition, the Huai'an base is also planning chlorobenzamide and oxazolacloxamide projects. As of the 2023 annual report, the company's fixed assets are 1,888 billion yuan, and projects under construction are 396 million yuan. As the construction of the company's three major production bases progresses in an orderly manner, in particular the continuous production capacity investment at the Huaibei base, it will support the company's continued growth in the next few years. At the same time, the company continues to innovate. Dozens of new pesticide candidates have now been discovered, and many innovative products are ready to go in the R&D pipeline. Among them, the novel green rice field herbicide FG001 has completed registration tests, the novel green herbicide FG009 has already begun registration-related tests, and the novel green fungicide FG201 will soon begin registration-related tests.

Investment analysis opinion: Industry competition intensified, product prices declined, and the company's 2024-2025 net profit forecast was lowered to 2.41 million yuan and 335 million yuan (original values were 3.50 million yuan and 458 million yuan), and the net profit forecast for 2026 was 445 million yuan. The current market value corresponding PE is 12, 8, and 6X, respectively. According to Wind's constant forecast, comparable companies Yangnong Chemical and Beismei's average PE in 2024 was 14X, and Zhongqi Co., Ltd. maintained an “increase” rating for the time being.

Risk Warning: 1) The progress of the new project fell short of expectations; 2) Product prices fell sharply; 3) Raw material prices rose sharply; 4) Recently, the company received attention from the Shenzhen Stock Exchange due to the “Notice Concerning the 2022 Profit Distribution and Plans to Transfer Capital from the Capital Provident Fund to Share Capital”.