The slow delivery schedule of corn seeds is dragging down profits, and the boom is expected to remain high throughout the year

Quanyin Hi-Tech released its quarterly report. 2024Q1 achieved revenue of 673 million yuan (yoy +8.99%, qoq -73.60%) and net profit of 177.445 million yuan (yoy -43.34%, qoq -93.26%). The company's revenue and profit were mostly confirmed in the fourth quarter of each year. The year-on-year decline in 24Q1 profit was mainly due to the fact that the delivery progress of corn seeds did not meet expectations. In 23Q3, the company maintained a high increase in advance payments, which indicates that seed sales are expected to remain high in 2024. We expect the company's 2024/25/26 net profit to be 3.78/5.02/590 million yuan, and EPS to be 0.40/0.53/0.62 yuan, respectively. Referring to 2024, the average PE value is 29 times the average PE compared to the company Wind. Considering that the competitive pattern at the seed end is more scattered than the trait end, and the company commercializes genetically modified seeds or has a first-mover advantage, we will give the company 25 times PE in 2024, with a target price of 10 yuan to maintain the “buy” rating.

Export and contract farming increased revenue, and the slow delivery schedule of corn seeds dragged down profits. Due to the seasonality of seed sales, the company's revenue and profit are generally confirmed in the fourth quarter of every year. The month-on-month decline in 24Q1 revenue and profit is mainly due to seasonal effects. On a year-on-year basis, the company's contract agriculture and overseas development strategy progressed smoothly. The increase in seed exports and food orders in 24Q1 led to an 8.99% year-on-year increase in the company's revenue. However, due to the fall in the high price of agricultural products, especially corn, the overall seed market this year showed a rapid start and slow progress. The company's corn seed delivery schedule did not meet expectations, and sales declined year on year.

Affected by extreme agricultural weather and rising land rents in 2023, the company's seed production costs may also increase slightly. At the same time, the company's gross margin for contract farming and overseas business is relatively low, and the gross margin for corn seeds is relatively high. The increase in seed production costs combined with changes in the business structure led to a decline in gross margin. The overall gross margin of the 24Q1 company was about 19.74%, a year-on-year decline of about 3.08 pcts. In addition, the 24Q1 company's fee rate also increased by 2.41 pct to 19.17%, which may be mainly affected by the seed market's performance falling short of expectations and increasing sales and promotion difficulties. We believe that the short-term profit decline does not change the trend where the company's profit is expected to increase in 2024. Combined with the 23Q3 advance payments +23% year-on-year increase, the company's seed sales are expected to remain high in the 2023-2024 business year.

The main seed business continues to expand. It is expected that the Quanyin (Nancheng) Seed Finishing Center will be officially put into operation in September 2023 on the GM Commercial Express. The processing capacity of the Jiuquan Seed Processing Center in Gansu will also be gradually released, and the company's seed production area is expected to continue to increase. In particular, in terms of corn seeds, the company completed the acquisition of a controlling interest in Hebei New Era. The latter corn seeds have a high market share in Beijing, Tianjin, and Tang, and the company's corn seed industry is expected to expand and strengthen further. 2024 is the first year of commercialization of genetically modified corn. The company relies on Syngenta and has considerable advantages. Up to now, Syngenta has each been approved for 3/5 genetically-modified corn characters/variety certification numbers, and Quanyin has also been approved for 3 varieties, which is expected to occupy a first-mover position. The company adheres to scientific research. The genetically-modified insect-resistant corn project it has led has been in reserve for many years, and is expected to further develop its synergetic advantages with Syngenta in the field of biological breeding.

Risk warning: The promotion progress of genetically-modified varieties/seed industry supervision/food price performance fell short of expectations, and serious natural disasters occurred.