1Q24 results are in line with our expectations

Xinhecheng announced 1Q24 results: revenue of 4.499 billion yuan, up 24.54% year on year, up 9.6% month on month; net profit to mother of 870 million yuan, corresponding to profit of 0.28 yuan per share, up 35.21% year on year and 44.2% month on month, in line with our and market expectations. 1Q24 deducted non-net profit of 857 million yuan, a year-on-year increase of 46.22%.

The year-on-year increase in 1Q24's profit was mainly due to the increase in methionine sales and prices. The average price of methionine in the 1Q24 methionine market rose 22% year on year, while the introduction of the company's 150,000 tons/year methionine production capacity led to a year-on-year increase in sales. 1Q24's main business profit increased by 419 million yuan year on year (up 37.7% year on year), and gross margin increased 3.2ppt to 34.1% year over year. Expenses increased 9% year over year to 427 million yuan during the 1Q24 period, and the cost ratio for the period decreased by 1.4ppt to 9.5% year over year.

The month-on-month increase in 1Q24's profit was mainly due to rising prices of vitamin A, vitamin E, vitamin C and methionine, a month-on-month increase in methionine sales, and a month-on-month decline in expenses during the period. The average prices of vitamin A, vitamin E, vitamin C and methionine in the 1Q24 market rose 10.8%/4.3%/30.8%/3.9%, respectively. At the same time, the release of 150,000 tons/year of new methionine production capacity also led to a month-on-month increase in methionine sales. 1Q24's main business profit increased by 305 million yuan month-on-month (up 24.8% month-on-month), and gross margin increased 4.2ppt month-on-month. Expenses fell 9.5% month-on-month to 427 million yuan during the 1Q24 period, and the cost ratio for the period decreased 2.0ppt month-on-month.

Development trends

New methionine production capacity has been released, and profits are still at a good level. Affected by the discontinuation and production cuts of methionine devices at home and abroad, the methionine market price has continued to rise since 3Q23. Currently, the market price of methionine is 21,800 yuan/ton, and the price and profit are at a relatively good level. At the same time, the company's 150,000 tons/year production capacity of new methionine devices is gradually being released. We expect that the increase in methionine sales and prices will drive 2Q24 profits to continue to achieve good growth.

The construction of new projects drives profit growth. The 180,000 tons/year liquid methionine project built by the company and Zhenhai Refining Co., Ltd. was put into construction, and construction of 4,000 tons/year of cystine began; the pilot trial of the adiponitrile project went smoothly, and project approval progressed in an orderly manner; and the company's HA project was commissioned and tested, and the project progressed smoothly (60% of the project progress by the end of 2023). We expect the new construction project to become a new profit growth point for the company.

Profit forecasting and valuation

We keep our profit forecast for 2024/25 unchanged. Currently, the company's stock price corresponds to a price-earnings ratio of 14.4/12.1x 2024/25. We maintain our target price of 23 yuan, corresponding to a 22% increase and a price-earnings ratio of 17.5/14.5x in 2024/25, and maintain our rating of outperforming the industry.

risks

Prices of methionine and vitamins have dropped sharply, and new projects are progressing less than expected.