Net profit for 1Q24 was -43.34% YoY, in line with our expectations

Quanyin Hi-Tech announced 1Q24 results: 1Q24 revenue +9.0% YoY to $673 million, and net profit to mother of -43.3% YoY to RMB18 million. The performance is basically in line with our expectations. We believe that short-term fluctuations in performance are partly due to 1Q as a traditional low sales season. On the other hand, they are also affected by declining corn prices, increased production costs, and increased investment.

Development trends

Traditional off-season sales are compounded by low corn prices. Corn seeds are under pressure, and rice seeds are growing steadily. 1) The seed industry is clearly seasonal. The company's sales of rice and corn seeds generally start pre-sale in August every year. During the 4Q peak season, revenue and profit are confirmed centrally until sales end in June of the following year. We believe that 1Q24 is a traditional low season. The share of revenue and performance is small, and there are certain fluctuations due to the pace of delivery, etc. 2) On the other hand, domestic corn prices declined in 1Q24. According to Huiyi.com, the average spot price of 1Q24 corn was -15% and -8% year-on-season, and the overall prosperity of the corn seed industry was weak. We believe that the company's 1Q24 corn seed sales may be under pressure as a result, and rice seed sales are expected to continue to grow steadily.

3) Overall, the company has expanded its production area in 23 years, and currently has sufficient inventory. We believe that with strong product and marketing support, the 4Q24 peak sales season performance is worth paying attention to.

Rising costs are compounded by spending, putting pressure on 1Q24 profitability in the short term. 1) Gross profit margin: The gross margin of the 1Q24 company was -3.1 to 19.4% year on year. We believe that low corn prices in 1Q24 may affect seed sales, and the high production costs last year have increased current sales costs. 2) Expense ratio: In 1Q24, sales/management (including R&D) /finance expense ratios were +1.0/+0.7/+0.7ppt, respectively. We believe it was mainly due to companies increasing market development efforts while loan interest rates increased year-on-year. 3) Other income: Other revenue in 1Q24 was +104% year-on-year to $16 million, mainly due to the year-on-year increase in government subsidies received. 4) Under the combined influence, the company's profitability was under pressure in the short term, and the 1Q24 net margin was -2.4ppt to 2.6% year-on-year.

Focus on the company's rice growth trend, genetically-modified and conventional corn layout, and overseas market development. 1) In terms of the traditional seed industry, the company's rice seed industry has the dual advantages of variety innovation and marketing. We believe that the domestic market share of the main varieties is expected to increase steadily and gradually open up new overseas market space in Central Asia; the corn seed industry adheres to the “endogenous+extension” drive, and the acquisition of Hebei in 23 years can be expected to increase its variety reserves and regional layout. 2) In terms of biological breeding, the 3 genetically-modified corn varieties that the company participated in the application were approved and publicized this year; at the same time, the company is actively cooperating with major shareholders in biological breeding research and development. Overall, in the long run, we believe that the company's dual layout in the traditional seed industry and biological breeding will help achieve the goal of entering the top ten global seed industry and the top three in the country's corn seed sales revenue in 25 years.

Profit forecasting and valuation

The current stock price corresponds to 21/17 times P/E for 24/25. We kept our net profit of 33/410 million yuan unchanged in 24/25, and our target price of 10.5 yuan. The target price corresponds to 30 times P/E in 24 years, with 43% upward space. Maintain an outperforming industry rating.

risks

Competition in the industry; intellectual property disputes; risk of contract farming operations; promotion of overseas projects fell short of expectations.