The results for the full year of 2023 fell short of our expectations. 1Q24 reversed losses month-on-month. The company announced full-year 2023 and 1Q24 results: the company achieved operating income of 3,614 billion yuan in 2023, a year-on-year decrease of 14.83%, realized net profit attributable to shareholders of listed companies of 73.1139 million yuan, a year-on-year decrease of 72.13%, and realized deduction of non-net profit of 85.7963 million yuan, a year-on-year decrease of 66.21%.

1Q24's quarterly revenue was 860 million yuan (QoQ +4.2%, YoY -15.8%), and net profit to mother was 7.9036 million yuan (QoQ turned loss into profit, YoY -91.3%). Overseas pesticide channel stocks were high in 2023, and product prices declined significantly, but the company's original drug production volume continued to grow rapidly. Beginning in 2024, the pressure on overseas channel inventory has been relieved, and the operating rate of the company's Yichang base has increased. We believe that the company's performance is expected to gradually improve.

Development trends

Domestic sales continued to grow positively in 2023. The company's domestic business achieved revenue of 1,705 billion yuan for the full year of 2023, an increase of 16.76%; direct exports achieved revenue of 1,124 billion yuan, a year-on-year decrease of 47.92%.

By product, the company's herbicides/insecticides/biocides revenue was 17.31/14.41/341 million yuan, YoY -4.03%/-25.61%/-19.03%, respectively; gross margins were 19.27%/7.12%/17.83%, respectively, +5.34/ -11.94/+2.27pct, respectively. The overall average sales price of the original drug was 107,900 yuan/ton for 1H23, and 2H23 dropped to 89,200 yuan/ton. In the first three quarters of 2023, the operating rate of pesticide companies continued to decline, and production fell by about 30%; main business revenue decreased by 20.1% compared to the previous year, and total profit decreased by 63.7% compared to the previous year; the number of companies with cumulative losses and cumulative losses increased by 43.9% and 164.3%, respectively. As industry competition intensifies and environmental pressure increases, China's pesticide industry is entering a new round of integration. We believe that 2024 may be a more competitive year for the pesticide industry, but the company's main layout of products such as fluorosulfonamol (6,400 tons/year), imidacloprid (3000 tons/year), and S-isopromethamine (13,000 tons/year) has a good segmentation pattern, and profitability is relatively guaranteed, and it is expected to stand out during this round of consolidation.

Increased production capacity helps the company move through the cycle. The company has set a revenue target of 4 billion yuan for 2024, an increase of 10.67% over 2023. During the year, the company will accelerate convertible bond raising projects and the company's riverside factory vacuation and relocation and renovation projects. We believe that additional production capacity such as the Changqing Nantong project with an annual output of 5,000 tons of refined promethoxamine is expected to be gradually released, and the company's raw drug production is expected to maintain steady growth.

Profit forecasting and valuation

2024 will be a more competitive year for the pesticide industry. We lowered our 2024 profit forecast by 66% to 120 million yuan, and introduced a new profit forecast of 181 million yuan for 2025. Currently, the company's stock price corresponds to the 2024/25 price-earnings ratio of 28.2/18.7x. Taking into account the adjustment of profit forecasts and the release of the company's new production capacity, the product segmentation pattern is relatively good. We have maintained an outperforming industry rating and lowered the target price by 30% to 6.3 yuan, corresponding to 34.2 times the 2024 price-earnings ratio and 22.6 times the 2025 price-earnings ratio. There is 21.2% room for an upward trend compared to the current stock price.

risks

The inventory removal cycle exceeded expectations, and the progress of new projects fell short of expectations.