Incident: The company released its 2023 annual report and 2024 quarterly report. In 23, the company achieved operating income of 1.09 billion yuan, a year-on-year decrease of 23%; realized net profit of 192 million yuan, a year-on-year decrease of 50%; and net profit after deduction of 148 million yuan, a year-on-year decrease of 58%.

In Q1 '24, the company achieved operating income of 330 million yuan, an increase of 4.2% over the previous year; achieved net profit of 90 million yuan, an increase of 76% over the previous year; and realized net profit of 60 million yuan after deduction, an increase of 41% over the previous year.

The sluggish economy and rising costs dragged down performance. The Q1 2014 report showed significant cost reduction results, and the company's performance declined significantly in '23, mainly due to the slump in the company's VD3 main business and the decline in profitability of Huayuan Pharmaceutical due to falling prices of pharmaceutical products. According to Boya Hexun data, the average price of VD3 (500,000 IU/g) in 2023 fell 22% to 56,000 yuan/ton compared to '22. Furthermore, after the company's Jinxi Science and Technology Park project was put into operation, the company increased investment in R&D to promote the “one vertical and one horizontal” development strategy. Convertible bonds also brought additional financial costs, and the cost burden increased significantly.

In Q1, the company achieved significant year-on-year growth. Of net profit due to intangible asset disposal, 31.38 million yuan contributed to net profit from intangible asset disposal, and net profit after deducting non-return to mother increased by about 17.84 million yuan over the same period last year, mainly due to reduced sales and management expenses. The main business of VD3 is tepid, and the price has remained at 56,500 yuan/ton for 24 years.

Lay out synthetic biology projects, and continue to advance convertible debt projects

The company established a bioengineering company, carried out biosynthesis project construction, and continued to increase investment in R&D to complete the dual layout of chemical synthesis and biosynthesis. Among the company's convertible bond raising projects, the VB6 project with an annual output of 5,000 tons and the biotin project with an annual output of 200 tons aim to be put into operation by the end of 24, and the calciferol API and formulation project has entered the implementation stage. Huayuan Pharmaceutical will also further expand terminal hospitals and broaden sales channels.

The VD3 main business still has high barriers and high growth logic

The company's VD3 main business still has long-term high barriers and high growth logic. The company has lanolin-NF grade cholesterol-VD3/25-hydroxy-VD3 industry chain layout. The unique chemical synthesis technology of 25-hydroxy VD3 complements large-scale production of NF grade cholesterol. The unique 24-dehydrocholesterol purification technology, cost advantages of the entire industry chain, and a limited NF grade cholesterol market have built a strong entry barrier for the 25-hydroxy VD3 industry. In September '22, 15.6 tons of 25-hydroxy-VD3 crystals were completed and put into operation in Jinxi Science and Technology Park. The industrial advantage is stable, and the downstream feed and health products market for 25-hydroxy-VD3 continues to open up.

Profit Forecasts, Valuations, and Ratings

We expect the company's revenue for 2024-26 to be 16.26/3.4 billion yuan, respectively, with year-on-year growth rates of 45%/64%/30%, respectively, and net profit to mother of 4.1/6.0/ 790 million yuan, respectively. The year-on-year growth rates are 113%/45%/33%, EPS is 0.76/1.10/1.46 yuan/share, respectively, and the 3-year CAGR is 60%. The company has a full VD3 industry chain layout, with strong entry barriers and a clear growth path, but due to the slow implementation of the active VD3 business and the downturn in the company's main business. We maintain the company's 24-year target price of 11.5 yuan and maintain the “hold” rating.

Risk warning: The VD3 market continues to be sluggish, the 25-hydroxy-VD3 market is progressing less than expected, 25-hydroxy-VD3 production technology iterations, and information asymmetry in corporate governance