Description of the event

On the afternoon of April 21, 2024, Huaheng Biotech released its 2023 Annual Report and 2024 Quarterly Report. In 2023, the company achieved revenue of 1,938 billion yuan, an increase of 36.63%; realized net profit of 449 million yuan, an increase of 40.32% year on year; realized deducted non-net profit of 438 million yuan, an increase of 44.28% year on year. In Q1 2024, we achieved revenue of 501 million yuan, +25.12%/-12.72% year-on-year; realized net profit of 87 million yuan, a year-over-year/month-on-month change of +6.62%/-32.56%; and realized deducted non-net profit of 86 million yuan, a year-over-year/month-on-month change of +9.70%/-30.08%.

Production capacity continues to expand, and the gradual release of major products helped steady growth in performance. The company achieved a sharp increase in revenue in 2023, mainly due to the expansion of production capacity of the company's main products, and continued expansion. In 2023, the production and sales of the company's amino acid products increased sharply, with production volume reaching 78,700 tons, up 22.67% year on year, and sales volume reached 77,200 thousand tons, up 29.87% year on year, achieving revenue of 1,465 billion yuan, up 25.62% year on year; vitamin products achieved revenue of 218 million yuan, up 574.96% year on year. The company's revenue in Q1 2024 was slightly lower than expected, mainly due to falling prices for valine products and falling short of expectations in project production line commissioning. According to statistics, the average price of valine in Q1 in 2024 was 15,550 yuan/ton, down 17.42%/30.49% year-on-year.

The company's gross sales margin was 40.52% in 2023, a slight increase from 38.66% gross sales margin in 2022. Among them, the gross sales margin of the amino acid sector was 43.32%, a slight increase from the 2022 gross profit margin of 42.37%. The gross sales margin in Q1 2024 was 33.58%, and there was a certain decline from 38.67% in Q4 in 2023, mainly due to pressure on valine prices. Overall, despite short-term pressure on the price of valine, the company's main product, and a decline in gross margin, combined with increased product volume and production and sales, the company's performance can still be expected.

The product matrix gradually expanded, and the production schedule was in line with expectations, opening up growth space. During the reporting period, the company successfully expanded new products including new bio-based material monomers (1,3-propanediol, succinic acid), amino acid products (isoleucine, tryptophan, arginine), and malic acid. The company's Chifeng base project with an annual output of 50,000 tons of biobased 1,3-propanediol, a 50,000 ton biobased succinic acid project, and the Qinhuangdao base project with an annual output of 50,000 tons of malic acid were successfully put into operation. 2024 will accelerate the Chifeng base biomedical construction project to alternately produce 25,000 tons of valine, arginine, and 1,000 tons of inositol per year, and the Bayannaoer project to alternately produce 60,000 tons of three-chain amino acids, tryptophan, and 10,000 tons of refined amino acids per year. The commissioning of several new projects will rapidly expand the company's product matrix and inject momentum into growth.

Investment advice

According to the market conditions of the company's main products, we adjusted the company's performance expectations. The company's net profit for 2024-2026 is 6.03, 8.41, and 1,129 million yuan respectively (previous value 2024-2025 was 505 million yuan and 744 million yuan respectively), with year-on-year growth rates of 34.2%, 39.5%, and 34.3%. The corresponding PE is 27, 20, and 15 times, respectively. Maintain a “buy” rating.

Risk warning

(1) Risk of fluctuations in raw material prices;

(2) Projects under construction fall short of anticipated risks;

(3) The international situation and the risk of exchange rate fluctuations;

(4) Industry competition heightens risks.