Core views

The implementation of the new national standard in the first three quarters of 2023 led to a significant increase in revenue from ARA and DHA products, and the company's revenue increased throughout the year. The company's revenue growth rate in the fourth quarter of 2023 was clearly under pressure due to factors such as the decline in the new population, compounded by factors such as inventory removal by leading downstream companies to reduce channel pressure. Benefiting from the dual benefits of the launch of the new national standard and the expiration of DSM's ARA patent, sales and revenue of the main products ARA and DHA have both achieved good growth. The company's performance growth rate improved markedly in the first quarter of '24, with contributions mainly from DHA products and orders from overseas customers. DSM's patent protection expires in June 2023, and the company's international business team actively participated in overseas business development. Judging from some archived data, the new population is also expected to stabilize in 2024, and there is a bottoming upward trend.

occurrences

The company released its 2023 annual report and 2024 quarterly report

The company achieved operating income of 444 million yuan in 2023, an increase of 2.4% over the previous year, and net profit to mother of 91 million yuan, an increase of 42.0% over the previous year.

The company achieved revenue of 120 million yuan in Q4 of 2023, a year-on-year decrease of 25.7%, net profit to mother of 31 million yuan, and loss of 13 million yuan during the same period.

The company achieved operating income of 120 million yuan in Q1 of 2024, an increase of 33.3% year on year, and net profit to mother of 024 million yuan, an increase of 69.9% year on year.

Brief review

The 2023 results are in line with expectations. DHA and overseas orders contributed to the first quarter's revenue. The implementation of the new national standard in the first three quarters of 2023 led to a sharp increase in revenue for ARA and DHA products, and the company's revenue increased throughout the year. In the downward trend in the new population, the company's revenue growth rate in the fourth quarter of 2023 was clearly under pressure due to factors such as inventory removal by leading downstream companies to reduce channel pressure. Benefiting from the dual benefits of the launch of the new national standard and the expiration of DSM's ARA patent, sales and revenue of the main products ARA and DHA have both achieved good growth. In '23, ARA and DHA revenue of 302/78 million yuan was +18.2%/+23.1% year over year, gross margin level was 45.0%/43.9%, -4.39/+4.06 pcts year over year. In terms of customer structure, the company's domestic revenue in '23 was 270 million yuan, up 17.2% year on year, and overseas revenue was 160 million yuan, down 3.8% year on year. The gross profit margin for the whole year remained stable at 42.4%. The company's performance growth rate improved markedly in the first quarter of 2024, mainly due to DHA products and orders from overseas customers.

Accelerating overseas market layout, new hMOS products are expected to land in the second half of the year. DSM patent protection expires in June 2023, and overseas downstream customers are also increasing their suppliers to ensure the safe supply of raw materials. The company's international business team actively participated in overseas business development, visiting customers in Switzerland, the Netherlands, France, Indonesia, Germany, the United States, etc., and participated in large-scale exhibitions with international influence, closely contacting overseas customers, and actively introducing products such as algae oil DHA, hMOS, and SA on the basis of introducing ARA products. Using ARA as a breakthrough in cooperation, the company is gradually promoting the evaluation and approval of the company's algae oil DHA products in the field of infant formula, and is also actively promoting cooperation with international customers in the field of dietary supplements. In terms of new products, on October 7, 2023, hMOS was first approved domestically for use in infant formula and infant formula. The company actively lays out the hMOS market. Product research and development, regulatory approval, customer development and capacity construction are being carried out simultaneously. It has successfully passed the biosafety review by the Ministry of Agriculture and entered the food safety review by the Health and Health Commission. It is expected that product orders will be placed in the second half of '24.

The newborn population is expected to stabilize in 2024, driving a recovery in downstream demand. Under the influence of factors such as increased urbanization, residents' desire to have children decreases, the number of new births continues to decline, and the company's downstream infant formula industry is under pressure as a whole. However, in recent years, external factors have also impacted short-term fertility intentions, and short-term pressure on spending power levels has also had an impact. With the elimination of short-term external factors and subsequent recovery in spending power levels, combined with policy support, residents' desire to have children is expected to pick up. The number of new births in 2023 was 9.02 million, down 5.7% from 2022. Judging from some archived data, the new population is also expected to stabilize in 2024, and there is a bottoming upward trend. The elimination of factors influencing short-term childbearing intentions is expected to slow the downward trend in the newborn population and drive the recovery of the company's downstream infant formula industry.

Profit forecast: The company is expected to achieve revenue of 5.2, 61, and 70 billion yuan in 2024-2026, and achieve net profit of 1.04, 1.23, and 140 million yuan, corresponding to 24-26 PE of 24X, 20X, and 18X, maintaining the “increase” rating.

Risk warning:

1. Risk of a sharp rise in raw material prices: The raw materials required for the company's production are mainly glucose, yeast powder, lactose, corn syrup, etc. The supply is affected by various factors such as the global economic and political environment, wars, regions, and climate. A sharp rise in prices may adversely affect the company's production costs and profitability.

2. Overseas customer expansion falls short of expectations: DSM's patent has expired, and the company has a lot of room for future overseas market development. If market development is adversely affected by policy changes in overseas countries or disputes with competitors, etc., customer expansion is blocked, and the company's performance growth falls short of expectations.

3. Increased risk of market competition: Foreign DSM companies maintain a leading position in the world. If competitors increase competition by lowering sales prices, etc., it will cause the risk of price fluctuations of the company's products and reduce the company's profit level.

4. Information disclosure and regulatory risk: On September 6, 2023, the Hubei Securities Regulatory Bureau issued a warning letter against Jiabiyou Biotechnology (Wuhan) Co., Ltd., Yi Dewei, Wang Huabiao, and Yi Huarong, mainly due to inaccurate disclosure of the company's 2022 performance report on February 28, 2023, and the capital increase to the participating company Australia's Famaco Nutrition Co., Ltd. on June 21, 2021, which constituted untimely review and disclosure of transactions. The company said it will further strengthen its study of the “Administrative Measures on Information Disclosure of Listed Companies” and related laws and regulations to avoid the recurrence of such incidents. The receipt of the warning letter will not affect the normal operation and management activities of the company.