Q1 Delivery schedule drags down profits and maintains “gain” rating

Denghai Seed Industry released its quarterly report, achieving revenue of 232 million yuan (yoy -11.57%, qoq -74.12%) and net profit of 30.1336 million yuan (yoy -32.61%, qoq -81.22%) in Q1 2024. Due to the seasonality of seed sales, the company's revenue and profit are generally confirmed in the fourth quarter of each year; the year-on-year decline in Q1 revenue and profit is mainly due to the slow overall seed delivery schedule this year. Looking ahead to the whole year, the traditional seed business boom is expected to be maintained, the amount of genetically-modified corn seeds is expected to drive the company's volume and profit to rise, and profit growth can be expected throughout the year. 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 31x PE, considering that the company has a leading number of genetically-modified corn varieties and a first-mover advantage, we gave the company 32x PE in 2024, with a target price of 10.88 yuan, maintaining the “gain” rating.

The seed delivery schedule affects short-term profits. The annual profit growth can be expected to be affected by the late Spring Festival this year compared to 2023, and the fall in high prices for agricultural products, especially corn. The overall seed sales progress this year is slow. We analyzed that the year-on-year decline in the company's 24Q1 revenue and net profit to mother may also be mainly affected by the progress of corn seed delivery. On a month-on-month basis, due to the seasonality of seed sales, the company's revenue and profit are generally confirmed in the fourth quarter of each year. The month-on-month decline in 24Q1 revenue and profit is mainly due to seasonal effects. Looking ahead to the whole year, on the one hand, the overall spot price of domestic corn fell slightly from 202Q4 to 2023Q3 (the previous planting year), which is expected to support the traditional seed industry in 2023/24; on the other hand, 2024 is the first year of commercialization of genetically-modified corn in China, and the planting scope and production area of genetically modified varieties are expected to expand year by year. We expect the company to record profit growth year by year.

The advantages of corn varieties are undiminished. The amount of genetically modified products is expected to drive Yangli Shuangli Company 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, according to our preliminary research, the price increase for genetically-modified seeds under market-based sales may have been 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.