Short-term performance is clearly under pressure due to multiple factors such as sluggish downstream demand and credit impairment accruals. The company achieved operating income of 1,020 billion yuan in 2023, -0.31% year-on-year. The main reason was the decline in demand for veterinary drugs due to losses in downstream farming and tight capital, and the company's sales revenue for chemical preparations declined. The company achieved net profit of 16.788 million yuan in 2023, or -68.18% over the same period. On the one hand, the API project was in the production capacity climbing period and the production process was still being optimized, and gross margin was under pressure due to low capacity utilization and high production costs; on the other hand, individual customers experienced operating risks, which led to a year-on-year increase in current credit impairment losses of nearly 30 million yuan; in addition, increased office building depreciation led to a year-on-year increase in management expenses of about 20 million yuan.
On a quarterly basis, the 24Q1 company achieved operating income of 207 million yuan, -10.24% year on year, and achieved net profit attributable to the owner of the parent company - 16.4056 million yuan, compared to -210.43%. The pressure on performance was due to the fact that the downstream pig farming boom in Q1 remained sluggish, and the main business revenue growth rate and gross margin were under pressure; second, because the company's fair value change revenue decreased by about 20 million yuan year-on-year due to the company's investment in Tianbang Foods shares.
By business: In 2023, the company's veterinary chemical formulation business revenue was 718 million yuan, -7.24% year on year, gross margin was 26.79%, +3.13pcts year on year. The main reason is that the price of upstream veterinary APIs fell a lot during the reporting period, benefiting from the cost side. Revenue from veterinary APIs was 210 million yuan, +77.21% year-on-year, and gross margin was -0.22%. Revenue grew rapidly with the release of production capacity. However, due to low capacity utilization in new investment projects and the fermentation level and process process still needed to be improved, the cost side was under obvious pressure, which in turn led to a lower gross margin.
New construction projects have been implemented one after another, and are expected to benefit the right side of the pig cycle in the future, steadily releasing performance. In terms of production capacity, the company's “1000 tons of tylosin per year project” and the “tylosin production line expansion project with an annual output of 1,000 tons and an annual output of 600 tons of tylosin” have been fully put into operation. The technology and process are being continuously improved, production efficiency is steadily improving, and the comprehensive production cost is close to the industry average. In terms of products, the company's next-generation antimicrobial drug, tediloxin injection, has been successfully marketed and sold; the company's “Stable Blue Plus and Exemption” program is effective in preventing blue ear disease. In the future, with the release of tylosin production capacity, cost and quality advantages may be further highlighted.
Downstream pig farming during the year was affected by the loss of production capacity in the early stages and is expected to recover in 2024H1. The company relied on high-quality products and relatively stable group customer relationships or direct benefits to steadily release performance.
Risk warning: An uncontrollable outbreak occurred during the farming process, and the process optimization progress of the newly invested project fell short of expectations.
Investment advice: As a leading domestic veterinary drug formulation, most of the company's revenue comes from veterinary drugs for pigs. Subsequent performance is expected to recover with high elasticity, driven by a recovery in downstream animal protection demand and successive commissioning of new production capacity.
Considering that there is still uncertainty about the subsequent pig price market, we lowered the company's net profit forecast for 2024-2025 to 0.7/160 million yuan (originally 100/280 million yuan) based on conservative and prudential principles, and forecast net profit to mother for 2026 to 80 million yuan, corresponding to the current stock price PE of 37.1/15.6/30.9X, maintaining a “buy” rating.