The 2023 results fell short of our expectations, and the 1Q24 results exceeded expectations
The company announced 2023 results: revenue of 1,721 billion yuan, -12.9% year on year; net profit to mother of 45 million yuan, -74.7% year over year. Due to impairment of goodwill, the 2023 results fell short of our expectations. On a quarterly basis, 1-4Q23 achieved revenue of 3.28/4.39/4.62/491 million yuan, respectively, of -20.8%/-24.3%/-21.1%/+24.2%; net profit to mother of 0.18/0.27/0.18/-0.18 billion yuan, respectively, of -18.9%/-53.6%/-72.1%/-150.9%, respectively.
The company announced 1Q24 results: revenue of 499 million yuan (+52.0% YoY), net profit to mother of 43 million yuan (+136.0% YoY), asset disposal income of 43 million yuan. 1Q24 results were higher than our expectations.
Development trends
Biodegradable products performed brilliantly. The company's revenue in 2023 fell 12.9% year on year, mainly affected by inventory removal from overseas channels. Export sales revenue fell 35.2% year on year to 988 million yuan; domestic sales maintained rapid growth, with revenue increasing 62.5% year on year to 733 million yuan, mainly due to the rapid increase in the penetration rate of environmentally friendly tableware in China and the company's customer expansion. By product, revenue from plastic products, biodegradable products, and vegetable fiber products changed by -21.5%/+87.4%/+4.7% year-on-year to 13.01/2.62/94 billion yuan, respectively.
Gross margin stabilized in 1Q24. The company's gross margin in 2023 was -3.0ppt to 19.2% year on year, and profitability declined. We believe it was mainly affected by increased competition in the industry and changes in the regional structure of revenue. 1Q24 gross margin was +0.2ppt year over year, gradually stabilizing. In terms of expenses, the company's 2023 sales, management, finance, and R&D expense ratios were +0.4/+1.7/+0.1ppt to 5.4%/6.4%/0.2%/3.3%, respectively. Affected by declining gross margin, increased expenses, and asset impairment losses, the company's net interest rate to mother in 2023 was -6.4ppt to 2.6% year-on-year.
Export orders are expected to recover significantly in '24. According to data from the General Administration of Customs, the year-on-year growth rate of China's plastic tableware and kitchenware exports was corrected in December 2023, and the export value (in US dollars) increased 5.8% year-on-year in the first quarter of this year. We believe that, driven by multiple factors such as the inflection point of industry inventories, the low base for the same period last year, and the increase in Jialian's share by core customers optimizing the supply chain, the company's export orders are expected to recover significantly in 2024, while a recovery in capacity utilization is expected to drive the restoration of profitability.
I am optimistic about the company's development space for degradable plastic products. In recent years, under the impetus of environmental protection policies, degradable plastic tableware has spread rapidly in the field of tea and catering. With its leading production capacity layout and strong product strength, Jialian has established stable cooperation with many leading domestic tea and catering companies. We believe that the company's continued development of new customers and deepening cooperation will drive the company to rapidly release fully degradable plastic products.
Profit forecasting and valuation
Taking into account the rapid improvement in overseas demand and inventories and the contribution of asset disposal earnings, the 2024/2025 net profit forecast was raised by 17%/11% to $180/218 million, respectively. The current stock price corresponds to the price-earnings ratio 20/17 times for 2024/2025, respectively. Maintaining an outperforming industry rating, but considering changes in the company's profit quality in the short term, maintaining a target price of 25.00 yuan, corresponding to 27/22 times price-earnings ratios in 2024/2025, respectively, with 32% upside compared to the current stock price.
risks
Industry competition has intensified, international trade policies and exchange rates have changed, and raw material prices have fluctuated greatly.