Profitability grew rapidly in 2023, and the company's profit increased in the first quarter of 2024 compared to the same period last year. Bailong Chuangyuan is a leading manufacturer of prebiotics, dietary fiber, and healthy sweetener products in China. The company's main products include oligofructose and galactose in the prebiotic sector, resistant dextrin and polydextrose in the dietary fiber sector, and allodonose in the healthy sweetener sector. On the evening of April 26, 2024, the company released its 2023 annual report and 2024 quarterly report. The report shows that in 2023, the company achieved operating income of 868 million yuan, a year-on-year increase of 20.3%, achieved net profit of 193 million yuan, an increase of 28.0% over the previous year, and achieved net profit of 176 million yuan after deduction, an increase of 24.6% over the previous year. In the first quarter of 2024, the company achieved operating income of 255 million yuan, a year-on-year increase of 29.6%, a year-on-month increase of 17.6%, and realized a net profit of 53.543 million yuan to mother, an increase of 20.5% year-on-year and 3.6% month-on-month.

The penetration rate of dietary fiber terminal products has increased, and the company's demand for resistant dextrin and polyglucose products continues to grow. According to Grand View Research, the global dietary fiber market reached 18.064 billion yuan in 2019, and is expected to reach 22.913 billion yuan by 2026, with a CAGR of 8.9%. Along with the trend of food health, demand for dietary fiber ingredients is growing rapidly. At the company's product sales level, in 2023, the company's dietary fiber sector achieved operating revenue of 444 million yuan, an increase of 31.1% year on year, and realized gross profit of 173 million yuan, an increase of 49.1% year on year. Furthermore, in 2023, the company's functional sugar drying project with an annual output of 20,000 tons was fully put into operation. The company's liquid dietary fiber products can be processed into 5,000 tons of resistant dextrin (powder) and 7,000 tons of polydextrose (powder) products per year, increasing the gross margin level of the company's products.

Overseas demand for alloone sugar is growing rapidly, and the investment of new production capacity will drive the company's profits upward. In 2023, the company's health sweeteners sector achieved operating income of 137 million yuan, a year-on-year increase of 44.9%, and achieved gross profit of 0.3 million yuan, an increase of 10.0% year-on-year. The increase in revenue and profit in the healthy sweeteners sector was mainly due to the rapid increase in demand for alloone sugar products in overseas markets. As a next-generation healthy natural sweetener, allodonose has a history of 10 years since it was approved for use overseas. It has significant advantages in many aspects such as taste, health, and functionality. Currently, it is mainly used in many fields such as baking, candy, drinks, condiments, and pharmaceuticals. Bailong Chuangyuan achieved mass production and sales of alloone sugar for the first time in 2019, and is the earliest company in China to lay out alloone sugar products. At present, the company's old aloxone sugar production line is fully produced. In order to meet the needs of downstream food production and processing enterprises, the company has built a project with an annual output of 15,000 tons of crystalline sugar, which can be used to produce allodonose crystalline sugar products. Currently, the project is progressing in an orderly manner and is expected to be successfully put into operation in May 2024. The release of new production capacity will drive the company's profits upward.

The layout and investment of the Thai production base has the advantage of reducing costs and enhancing the company's international competitiveness.

On October 20, 2023, the company issued an “Notice on Investing in the Construction of a Production Base in Thailand”. The report stated that the company plans to invest 452 million yuan in the construction of a functional sugar production base project in Thailand. The aloxone sugar production line also produces crystalline sugar products such as allodonose, crystalline fructose, and isomalt; resistant dextrin production lines can co-produce prebiotic products such as oligofructose, oligosomalt, and oligogalactose. The main advantages of investing in the Thai production base include reducing raw material costs, avoiding trade risks, reducing export tariffs, and enhancing the company's international competitiveness.

Risk warning: the risk that the progress of the project under construction falls short of expectations; the risk of fluctuating raw material prices; the risk of increased market competition; the risk that downstream demand falls short of expectations.

Investment advice: Lower profit forecasts and maintain a “buy” rating. In our review of the company's 2023 performance report, we estimated that the company's revenue for 2023-2025 would be 888/14.31/1,483 billion yuan, respectively, and net profit of 1.93/3.58,424 million yuan respectively. After comprehensively considering the company's progress in production of new dietary fiber and healthy sweeteners, we carefully lowered our profit forecast. The company's revenue for 2024-2026 is expected to be 12.65/16.51/1,946 billion yuan, respectively, and net profit to mother of 2.81/383/466 million yuan, respectively. The current stock price corresponds to PE 23.3/17.1/14.0X, respectively. (See the text section for details on the basis of the downgrade and business split).

The company is in a leading position in China in the field of prebiotics, dietary fiber, and healthy sweeteners (allodonose). The end customers include leading companies in the food and beverage industry such as Nongfu Spring, Wahaha, and QUEST. Currently, the company's products are in short supply, prices are stable, and 30,000 tons of dietary fiber and 15,000 tons of crystalline sugar projects are about to be put into operation, driving the company's profits upward. In the future, the company's planned production base in Thailand and the launch of other new products will continue to guarantee the company's growth. Maintaining a “buy” rating given the company's leading position in the industry and continued growth over the medium to long term.