Incident: On March 26, 2024, Yangnong Chemical released its 2023 annual report. The company's revenue for 2023 was 11.478 billion yuan, down 27.41% year on year; net profit to mother was 1,565 billion yuan, down 12.77% year on year; net profit after deducting non-net profit was 1,506 billion yuan, down 22.05% year on year. The corresponding company's 23Q4 revenue was 2.204 billion yuan, down 0.14% from the previous month; net profit to mother was 204 million yuan, down 13.67% from the previous month.

Comment: Pesticide prices are at the bottom, and the company's revenue is under pressure in the short term. According to the company's 2023 annual report, the company's revenue for the original drugs/formulation/trade sector in 2023 was 73.84/16.76/22.24 billion yuan, YoY was -22.20%/-1.22%/-49.06%, respectively, and gross margin was 30.16%/27.39%/9.96%, respectively, a year-on-year change of -1.37/-19.67/+4.05pcts. In 2023, the company's sales volume of original drugs was 96,500 tons, up 10.43% year on year; sales volume of preparations (undiscounted) was 35,700 tons, up 2.36% year on year. The decline in the company's revenue is mainly related to the decline in product prices. According to the company's main business data for 2023, the average sales price of the company's original drug in 2023 was 76,500 yuan/ton, down 29.54% year on year; the average price of the preparation was 46,900 yuan/ton, down 3.50% year on year. The company's sales expenses ratio was 2.00%, down 0.19pcts; the management expense ratio was 4.51%, down 0.81 pcts year on year; financial expenses ratio was -0.51%, up 1.05 pcts year on year; R&D expenses rate was 3.64%, up 0.49 pcts year on year.

The company's cash flow from various activities has changed greatly. Net cash flow from operating activities was $2,395 million, up 12.73% year on year; net cash flow from investment activities was $3,545 billion, down 141.33% year on year; net cash flow from financing activities was -495 million yuan, up 2.33% year on year. The balance of cash and cash equivalents at the end of the period was $528 million, a year-on-year decrease of 75.55%. Accounts receivable fell 18.95% year on year, and the accounts receivable turnover increased, from 5.93 times in the same period in 2022 to 6.06 times; inventory fell 23.73% year over year, and inventory turnover decreased, from 6.35 times in the same period in 2022 to 6.10 times.

Short-term overcapacity combined stocks are at a high level, and the pesticide industry pattern needs to be reshaped. Pesticide demand is still resilient in the long run. Domestic pesticide production capacity is concentrated, and the overall market shows a situation where supply exceeds demand. Inventory within superposition channels is still high, competition in the pesticide market has intensified, and product prices have dropped sharply. According to data from China Agricultural Lihua, as of March 31, 2024, the price index for the original drug was 78.00 points, a sharp drop of 24.1% from last year and 0.39% from the previous month. Of the hundreds of pesticide raw drug products tracked, 85% of the products fell compared to last year. As the mergers and acquisitions of leading agrochemical companies come to an end, multinational companies such as Syngenta Group, Bayer, BASF, and Cody Huawei Group 1 will account for more than 60% of the global pesticide market. The upstream intermediate and drug supplier pattern will also show a concentrated trend. After optimizing production capacity, companies with no competitive advantage will launch the market, leading companies will receive more orders, and the pesticide industry pattern will gradually improve. In the long run, as the world's population increases and the amount of cultivated land per capita decreases, food security issues are becoming more and more prominent, and people are placing higher demands on the yield of crops per mu. Pesticides play an obvious role in improving food production efficiency, and the market size continues to expand. According to S&P Global Commodity Insights data, the global pesticide market grew from US$35.575 billion to US$87.7 billion from 2006 to 2022, with a compound annual growth rate of about 5.80%. We believe that the continued increase in demand for pesticides and the reshaping of the supply pattern will drive pesticide prices to gradually return to a reasonable position.

The company is deeply involved in the methrin series products, and the competitive advantage is obvious. Pyrethroid series products are the company's core products. Prices of pyrethrin products dropped significantly in 2023. According to CNPC data, from January 1, 2023 to January 7, 2024, the price of high-efficiency cypermethrin raw materials fell by 36.26% from 182,000 yuan/ton to 116,000 yuan/ton; biphenthrin raw materials fell from 245,000 yuan/ton to 146,000 yuan/ton, a decrease of 40.41%; the original drug cypermethrin dropped by 33.33% from 8.4,000 yuan/ton to 56,000 yuan/ton. According to the company's 2023 annual report, the company has been deeply involved in methrin products for many years, and has made breakthroughs in a number of key methrin technologies, filling 20 technical gaps at home and abroad, and breaking foreign monopolies. The company has formed a complete tree of methrin series products, with more than 50 products and complete support for key intermediates. Currently, the variety and scale of pyrethroids produced by the company ranks first in the national pesticide industry. The number of types of pyrethrin products ranks among the highest in the world, and the domestic market share of sanitary methrin is about 70%. We are optimistic about the company's technical and market advantages in methrin products, and expect the market share to expand further.

The company accelerates project construction and accurately controls quality standards. According to the company's 2023 annual report, the company has completed the equipment commissioning of the Youjia Phase 4 Phase 2 project by the end of November 2023 to accelerate the completion of the Youjia Phase 5 project; the company will focus on promoting the construction of the Youchuang project in Liaoning in 2023, have completed the roofing work of 37 buildings by November 2023, and plans to complete the installation and commissioning of the Huludao Phase 1 Phase 1 project in 2024 to accelerate the follow-up of the second phase project; in addition, the company has completed the installation and commissioning of the formulation plant and the construction of the headquarters office building and the Plant Protection Research Institute process technology center for the company Subsequent high-quality development strengthens potential. We are optimistic about the construction progress of the company's various projects, and it is expected that the completion of the project will contribute to the company's performance.

Investment advice: We expect Yangnong Chemical's revenue for 2024-2026 to be 139.34/156.59/17.032 billion yuan, up 21.40%/12.38%/8.77% year on year, and net profit to mother will be 16.85/19.73/2.261 billion yuan respectively, up 7.64%/17.09%/14.61% year on year, corresponding EPS of 4.15/4.85/5.56 yuan respectively. Combined with the company's closing price on April 8, the corresponding PE was 13/11/10 times, respectively. We are based on the following three aspects: 1) We believe that the continued increase in demand for pesticides and the reshaping of the supply pattern will drive pesticide prices to a reasonable position gradually. 2) We are optimistic about the company's technical and market advantages in methrin products, and expect the market share to expand further. 3) We are optimistic about the construction progress of the company's various projects. It is expected that the completion of the project will contribute to the increase in the company's performance and maintain the “buy” rating.

Risk warning: risk of raw material price fluctuations, risk of demand falling short of expectations, project construction risk, product price risk