The company released the 2023 Annual Report and the 2024 First Quarter Report. In 2023, Denghai Seed Industry achieved operating income of 1.55 billion yuan, +17.1% year-on-year, and realized net profit of 256 million yuan to mother, +1.01% year-on-year. Among them, 23Q4 achieved operating income of 90 million yuan, +17.8% year on year, and realized net profit of 160 million yuan to mother, +13.9% year over year. 24Q1 achieved operating income of 230 million yuan, -11.6% year-on-year, and realized net profit of 30.134 million yuan, or -32.6% year-on-year. Due to the significant year-on-year drop in corn prices in 24Q1 and the overall slow sales progress of corn seeds, the company's performance fell short of our previous expectations (in our quarterly report forecast, we expect the company to achieve a net profit of 45 million yuan in 24Q1).

Corn seed revenue grew steadily in 2023, and the year-on-year increase in seed production costs put pressure on profits. In '23, the corn seed industry achieved revenue of 1.35 billion yuan, or +15.3%, accounting for 87.2% of revenue. According to the company's 22/23 business year operating report, the sales volume of corn seeds in the 22/23 sales season was +13.5%, and the unit sales price was +3.9% year-on-year, but the industry's planting costs continued to rise in '23, and mu preservation increased by about 5%-6% year on year (National Agricultural Technology Promotion Center). As a result, the company's gross margin of corn seeds fell 4.1 pct year on year to 29.2%, and the comprehensive gross margin fell 3.1 pct to 28.8%. The company continued to implement cost reduction and efficiency. The sales expense ratio and management expense ratio were -0.06pct/-0.37pct, respectively, 4.6%/7.0%, while continuing to increase R&D investment. The R&D cost ratio was +0.55pct, 4.3% year on year, and the financial cost ratio was -2.14%, +0.01 pct year on year. The company's expense ratio increased slightly by 0.13pct during the 23-year period, but asset impairment losses were -80.7% year-on-year (mainly due to the impairment of the equity investment in nuclear company Denghai Liangyu in the previous period), so the decline in net interest rate in '23 was less than the gross profit margin (19.3% in '23, -2.5pct year on year). The price of corn fell sharply in 24Q1. The average spot price was -15.4% year-on-year and -8.4% month-on-month. As a result, farmers' enthusiasm for planting decreased, and the overall sales progress of corn seeds was slow. 24Q1 Company's comprehensive gross margin was 26.1%, -6.3pt year on year, net margin was 13.8%, and -5.37pct year on year. The book inventory balance is 766 million yuan, which is relatively high in history. Against the backdrop of oversupply in the corn seed industry as a whole, the company will continue to reduce the production area and actively absorb the inventory in '24.

The company's 6 genetically-modified corn varieties have been approved, and it is expected that priority will benefit from the commercialization of genetically modified genes. In October 2023, the Ministry of Agriculture and Rural Affairs announced the approval list for the first batch of genetically modified corn and soybean varieties (the second batch announced in March 2024), and issued the first batch of genetically modified production and operation licenses in the country in December, marking the official entry of genetically modified corn into the sales process. At present, the company has 6 genetically modified varieties, including Denghai 605D and Denghai 533D, which have been approved, ranking second in the country, accounting for 9%. Some varieties have already been sold during the 23/24 sales season. The company is expected to seize initial market share with a first-mover advantage, and at the same time further increase the market share of corn seeds with strong high-quality varieties and continuous investment in R&D.

I am optimistic that the company will benefit from the commercialization and promotion of genetically-modified genes, and its market share is rising steadily, and maintaining a “gain” rating. There was an oversupply of corn seeds in '23, competition in the industry was fierce, and the price of corn dropped significantly in '23 and 24Q1. Therefore, we expect the company's average sales price of corn seeds to drop in '24. At the same time, the promotion area of genetically-modified corn during the 23/24 sales season was lower than expected, so we lowered the penetration rate of genetically modified corn in 24-25. Based on this, we lowered the company's 24-25 profit forecast and added a 26-year profit forecast. It is estimated that in 2023-2025, the company will achieve operating income of 16.7/18.9/2.11 billion yuan, and net profit of 2.9/3.6/40 billion yuan (the original 24-25 profit forecast was 35.440 million yuan), +15%/+23%/+11% year-on-year. The PE valuation corresponding to the current stock price is 30X/24X/21X, maintaining the “increase in holdings” rating.

Risk warning: Extreme weather effects; poor market performance for large varieties; promotion of genetically modified corn falls short of expectations.