Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, we achieved revenue of 12.168 billion yuan, -4.39% year on year, net profit of 816 million yuan, -1.2% year on year, EPS of 0.59 yuan, -1.7% year on year. The second half of the year's performance was superior to the first half of the year; of these, Q4 revenue was 3,548 million yuan, -4.58% year over year, and net profit to mother of 286 million yuan, +28.41% year over year. 2024Q1 achieved revenue of 2,336 million yuan, -4.77% YoY, and net profit to mother of 129 million yuan, +8.55% YoY.

According to the announcement, the year-on-year decline in profit in 2023 was mainly due to the decline in the edible oil market, the decline in sales prices of the company's main oil products, and the narrowing of profit margins. In terms of gross profit composition, edible oil gross profit was -66.8%, and gross margin fell 3.42pct year over year, which was the core of the drag down performance; the seed industry performed impressive, achieving a gross profit growth rate of +30.17%, with a gross profit margin of 13.72%, all of which hit new highs since listing; the planting industry and agricultural materials maintained steady growth, with gross profit growth rates of +13.95% and +13.18%. 2024Q1's gross profit margin was 13.93%, +1.16pct year over year, and inventory -4.7% compared to the end of 2023.

In June 2023, Suken Grain and Oil, a wholly-owned subsidiary, won the bankruptcy and liquidation assets of Jingjiang Longwei Grain and Oil Industry Co., Ltd. with 182 million yuan. The projects under construction at the end of 2023 were +395.77% compared to the end of the previous year, mainly due to the assets awaiting transformation.

In February 2024, the shareholders' meeting reviewed and passed the “Proposal on the Company's 2024 Investment Plan”. Dahua Seed Industry plans to invest 50 million yuan to lay out mergers and acquisitions of high-quality seed industries in the direction of hybrid rice and wheat varieties. It plans to invest 50 million yuan to lay out mergers and acquisitions of high-quality seed industries in the direction of hybrid corn.

The board of directors of the company reviewed and passed the “Proposal on Profit Distribution for 2023” and agreed to distribute a cash dividend of 3 yuan (tax included) to all shareholders for every 10 shares based on the total share capital at the end of 2023, for a total cash dividend of 413,400,000 yuan (tax included), accounting for 50.65% of the distributable profit (consolidated caliber) for the year. The dividend payment rate reached the highest level since listing.

As of the fall broadcast of 2023, the company's self-managed arable land area is about 1.295 million mu, of which the land circulation (including land trusteeship and cooperative planting) area is about 337,800 mu. The company's operating land area has been growing steadily in the past three years. Grain production reached a new high, with a total annual output of 2,737 billion kg of grain and oil crops. The annual yield of rice and wheat in the headquarters is 2,481 kg, and the annual yield of the expanded base is 2,159 kg. Total grain production and annual mu yield are at the highest level in history. The planting industry has achieved both scale and efficiency improvements.

According to the company's main product production and sales data, self-produced wheat production in 2023 was +12.54% year over year, but sales volume was -6.19%, while sales volume of harvested wheat was -19.8%; self-produced rice production was +4.64% year over year, but sales volume was -34.68% year over year; edible oil sales were -1.37% year over year, which was a sharp decline compared to the first half of the year. Although sales of all varieties recorded negative growth throughout the year, the second half of the year was significantly better than the first half. We have determined that there are two reasons for the narrowing of the decline. First, the domestic consumption environment gradually recovered from the slump in the first half of the year in the second half of the year; second, demand increased after falling product prices in the first half of the year stimulated an increase in demand. The recovery in sales in the second half of the year made up for the profit impact of falling prices to a certain extent. In 2024Q1, the company's rice yield was +10.68%; sales volume +36.34%; edible oil sales were +22.48%. Sales in the seed industry remained strong while sales of edible oil improved significantly.

In 2023, China imported 12.1 million tons of wheat, a record high; in January-January 2024, it imported 4.29 million tons, which is basically the same as the same period last year. Taking the Jiangsu region as an example, wheat prices fluctuated and declined in 2023, with a cumulative decline of 8.28%; wheat prices continued to be sluggish from the beginning of the year to date, and prices at the end of April were -10% compared to the end of 2023. The International Grain Council (IGC) expects global wheat production to reach 798 million tons in 24/25, up from 789 million tons the previous year. If achieved, it will be the second highest on record, after 803 million tons in 2022/23; global end-of-period inventories are 259 million tons, down from 264 million tons the previous year. The Ministry of Agriculture and Rural Affairs said at the press conference of the State Information Office in mid-April that the area of winter wheat and winter rapeseed has been increasing steadily, and the growth of seedlings is better than last year.

China imported 2.63 million tons of rice and rice in 2023, down 57.5% from the historical peak of 6.19 million tons in 2022, and imported 310,000 tons in January-January 2024, a 69% year-on-year decline. Compared with the frequency of overseas rice prices reaching new highs, domestic rice and rice prices have been stable. Taking the Jiangsu region as an example, the price of japonica rice fluctuated strongly in 2023, with a cumulative increase of 4.3%; from the beginning to date, rice prices fluctuated narrowly, and the price at the end of April was -0.69% compared to the end of 2023. IGC expects global rice production to resume the upward trend in 24/25, reaching a record 520 million tons, an increase of 2% over the previous year; China's rice production is expected to be 145 million tons, +0.3% year over year; and global rice stocks at the end of the period are expected to be 169.7 million tons, an increase of 1.3% over the previous year.

Investment advice: Affected by the expected increase in production, sluggish demand for feed, and the expected increase in import volumes brought about by the 100 billion production capacity increase plan, the grain market is in a downward boom cycle, and the domestic wheat and rice markets have or are about to ease. The company's advantages throughout the industry chain help all sectors develop collaboratively and weaken cyclical influence. In particular, the rapid growth of the seed industry sector enhances performance resilience. After two years of adjustments, the company's valuation has already fulfilled the forecast of a decline in prosperity ahead of schedule, and the long-term layout should be actively carried out in the low historical valuation range. The company's increase in the dividend ratio to give back to investors not only values shareholder returns, but also reflects management's confidence in the steady growth of long-term profits. We adjusted our profit forecast. We expect the company's revenue for 2024-2026 to be 122.2/130.2/14.03 billion yuan respectively (the previous value was 120.6/12.92 billion yuan for 24-25); net profit attributable to the parent company was $8.65/9.66 billion ($799/932 million yuan for 24-25, respectively). The current stock price corresponds to PE 16.8/15.1/13.6, respectively. Maintain a “buy” rating.

Risk warning: Risk of fluctuations in raw material prices, risk of natural disasters, risk of changes in industrial policies and government subsidy policies. There may be a risk that the information used in the research report may be delayed or not updated in a timely manner.