23Q4 revenue and profit increased by double digits, maintaining the “Overweight” rating

Denghai Seed Industry released its annual report, achieving revenue of 1,552 million yuan (yoy +17.06%) and net profit of 256 million yuan (yoy +1.01%) in 2023; of these, Q4 achieved revenue of 898 million yuan (yoy +17.84%, qoq +426.75%) and net profit of 160 million yuan (yoy +13.85%, qoq +671.81%). We expect the company's net profit to be 3.00/3.72/471 million yuan in 2024/25/26, respectively, corresponding to EPS of 0.34/0.42/0.53 yuan. Referring to the comparable company's 2024 30x PE, considering that the company has a leading number of genetically-modified corn varieties and a first-mover advantage, we gave the company 31x PE in 2024, with a target price of 10.54 yuan, maintaining the “gain” rating.

Corn seed sales or volume and price both increased, and Q4 revenue profit double-digit growth. The company's revenue growth in 2023 mainly benefited from the steady growth of the corn seed business and the rapid growth of other businesses such as rice and wheat. In 2023, the company's corn seed business achieved revenue of 1,353 billion yuan, or mainly due to an increase in seed sales and a slight increase in sales prices; revenue from the rice and wheat seed business grew by about 69% and 25%, respectively. However, due to factors such as weather effects and rising land rents, the cost of growing seeds such as corn was still rising in 2023, and the cost of raw materials for the company's seed industry rose 32% year on year, causing the company's gross margin of corn seed to fall by about 4.07pct to 29% year on year, driving the company's overall gross margin down about 3.11 pcts year on year, continuing to cause the company's net profit to grow significantly less than revenue growth. In 23Q4, the company's revenue maintained double-digit growth. Although gross margin continued to decline year-on-year and was about 3.52 pct, profits still achieved double-digit growth, or mainly benefited from a double increase in the sales volume and price of corn seeds in the new season.

The advantages of corn varieties are undiminished. The amount of genetically modified products is expected to drive Liangli Shuangli as a leading hybrid corn company, which has obvious advantages in corn research and development, variety reserves, and variety pricing. In terms of varieties, the competitive advantage in the high-yield, anti-decay, and disease-resistant varieties represented by the company Denghai 605 is obvious, driving the average sales price of the company's corn seeds to be higher than that of the industry. In terms of R&D and storage, the company has ranked among the highest in the industry in terms of the number of corn varieties examined in recent years, and high-quality varieties are expected to provide impetus for the company's continued development in the future. In terms of transgenics, 2024 is the first year of commercialization of genetically modified corn in China. The cultivation range and production area of genetically modified varieties are expected to expand year by year. According to our preliminary research, the price increase for genetically-modified seeds under market-based sales may be better than expected. We expect the penetration rate of genetically modified corn in China to increase rapidly in the next 3 years, and with the support of technology, China's seed industry is expected to expand its market space. Considering that Denghai has the highest number of genetically-modified corn varieties (or second only to Longping) and that corn varieties have obvious advantages, we believe that the company's genetically-modified corn seed sales are expected to gradually increase, and drive an increase in corn seed sales and gross margin.

Risk warning: The promotion progress of genetically modified varieties falls short of expectations, the effect of increasing GM production falls short of expectations, seed industry supervision falls short of expectations, serious natural disasters have occurred, food price performance has fallen short of expectations, etc.