Performance falls short of our expectations
Zhongmu Co., Ltd. announced its 2023 results: in 2023, revenue of 5.406 billion yuan, net profit to mother of 403 million yuan, net profit of -26.7% year-on-year, net profit of 279 million yuan, or -30.3% year-on-year; of these, 4Q23 achieved revenue of 1,247 billion yuan, -29.4%/-24.4% yoy, net profit of 6.09 million yuan, year-on-year/month-on-month. The performance fell short of our expectations, mainly due to deep losses in downstream farming, which dragged down demand for epidemic prevention and the slump in the API market.
Development trends
Farming and API markets are sluggish, and revenue from many sectors has declined. 1) Biological products: Achieved revenue of 1,009 billion yuan in 23 years, -16.8%. We believe that the decline in revenue was mainly due to lower pig prices, reduced farmers' desire for epidemic prevention and vaccine demand, increased bargaining power of downstream breeding groups, and a decline in government procurement of vaccines for Qianyuan birds; 2) Chemicals: 23 years of revenue of 1,244 billion yuan, -12.1% year over year, mainly due to low API prices, part of production capacity was in a climbing period, putting pressure on the chemical sector as a whole; 3) Feed: Revenue of 1,026 million yuan in '23, compared to -6.9%. Impact; 4) Trade: Revenue in '23 was -0.5% YoY to $2,084 billion, which was generally flat.
The decline in profitability is due to pressure on the gross margins of vaccines and chemicals. 1) Gross profit margin: The company's 23-year gross margin was -1.9ppt to 19.1% year over year, mainly due to product price pressure in the biological products and chemicals sector, and gross margin was -3.0pp/ -4.7ppt to 46.1%/21.5%, respectively; 2) Expense ratio: The company's expenses were generally stable, with 23-year sales/management/R&D/finance expense ratios +0.3pp/+0.2ppt/-0.2ppt/+0.3ppt, respectively. In addition, the company obtained investment income of 144 million yuan by reducing some of its Jindawei shares.
Under the combined influence, the company's net profit margin was -1.9ppt to 7.5% year-on-year in '23.
With the release of chemical production capacity and the advancement of vaccine research and development, performance is expected to recover as pig prices rise. 1) In terms of chemicals, the company acquired 65% of Zhongmu's shares in Chengdu to fill the gap in injectable veterinary medicine, enhance the overall competitiveness of chemicals, and is expected to continue to contribute to revenue and performance. We believe that the company's chemical sector has some potential for growth; 2) In terms of biological products, the company is actively expanding non-oral vaccines, new pig pseudorabies inactivated vaccines, bovine nodular dermatosis inactivated vaccines, and cat triple vaccines; in addition, the company and the Chinese Academy of Sciences are expected to open up room for growth; in addition, the company and the Chinese Academy of Sciences are expected to open up room for growth. If commercialization is successfully implemented, it is expected to be the first to benefit; 3) Exports On the business side, the company announced that it has completed the initial registration or renewal of 20 products in nearly 30 countries and regions. We believe that the company's exploration of the overseas blue ocean market will help raise the ceiling for medium- to long-term development.
Profit forecasting and valuation
Based on short-term pressure on the company's business, we lowered our 2024 net profit forecast by 26% to 568 million yuan, and introduced a 25-year forecast of 664 million yuan. The current stock price corresponds to 2024/25 18/15 times P/E.
Based on profit forecast adjustments, the target price was lowered by 26% to 11.5 yuan, corresponding to 21/18 times P/E in 2024/25, with 18% upside. Maintain an outperforming industry rating.
risks
Downstream economy is sluggish; raw material prices fluctuate greatly; risk of epidemic; R&D falls short of expectations.