Incident: Huakang Co., Ltd. released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 2.78 billion yuan, +26.5% year over year; net profit to mother was 370 million yuan, +16.3% year over year. In the 2024Q1 single quarter, the company achieved revenue of 640 million yuan, -2.4% year on year; net profit to mother was 80 million yuan, -11.2% year over year. First-quarter results fell short of market expectations, and net revenue and profit were under pressure in the short term.
Sugar alcohol sales are growing steadily, and profitability continues to improve. By product, crystal sugar alcohol achieved revenue of 1.91 billion yuan in 2023, +14.7% year over year; annual sales volume of 149,000 tons, +27.9% year over year; gross profit margin of 28.9%, up 2.2 pp year on year. The revenue growth rate was lower than the sales growth rate mainly due to product restructuring, and sales of xylitol remained stable. Sales of sorbitol and maltitol increased significantly. In particular, sales of sorbitol at lower prices increased by up to 60%. Liquid sugar alcohol and others achieved revenue of 680 million yuan in 2023, +33.0% year over year; annual sales volume of 210 million tons, +33.9% year over year; gross profit margin of 8.8%, up 1.1 pp year on year.
Gross margin has been rising steadily, and the level of fee control continues to be steady. In 2024, gross margin was 23.7%, up 1.4pp year on year; net profit margin was 13.4%, down 1.1 pp year over year. The increase in gross margin in 2023 is mainly due to the optimization of raw material costs and product restructuring brought about by an increase in the share of crystalline sugar alcohol with a higher gross margin and a decrease in the share of liquid sugar alcohol. There was a year-on-year decline in net interest rates, mainly due to preemptive sales expenses and administrative expenses. Sales/management/R&D expenses in 2023 were 1.6%/3.0%/4.5%, respectively, +0/-0.2/+0pp compared to the same period. The company's sales and R&D expenses have remained stable, and management expenses have been optimized as efficiency increases.
The xylose project strengthens its raw material advantages, and the Zhoushan project opens up room for future growth. Construction of the “Green Intelligent Upgrading and Transformation Project with an annual output of 30,000 tons of D-xylose” began in May 2022 and has now entered the trial production stage. The project will greatly enhance the degree of automation and intelligence in Jiaozuo Huakang production, and help reduce overall energy consumption and production costs. At the Zhoushan base, the first phase of the 1 million ton corn deep-processing health food ingredients project is expected to complete the first phase of construction, mainly liquid syrup and some crystalline sugar alcohol products, in August of this year. The second phase of construction will take 3 years, and new product lines such as dietary fiber and modified starch will be put into construction one after another.
In order to meet the digestion of Zhoushan's new production capacity in the future, the company has begun to prepare for pre-sales work, expand the sales radius based on Zhoushan's geographical advantages, and develop potential target markets around existing customer channels. The company is vigorously expanding domestic customers, compounding the long-term trend of export substitution of overseas products, and is optimistic that production capacity will be rapidly digested after the new plant is launched, and performance will be released rapidly.
Profit forecasting and investment advice. As a leading international functional sugar alcohol company, Huakang Co., Ltd. continues to improve the layout of the entire industry chain, enrich and optimize the product structure, and expand the new track. As high-margin single product production capacity continues to be implemented, it has excellent growth. Despite being affected by short-term cyclical fluctuations, the return on the medium- to long-term company's crystalline sugar alcohol business is still impressive. Combined with the rapid release of production capacity implementation results in the first phase of the Zhoushan project, I am optimistic that subsequent companies' sugar alcohol business will continue to develop. Net profit due to mother in 2024-2026 is expected to be 380 million yuan, 450 million yuan, and 550 million yuan, respectively, and EPS is 1.61 yuan, 1.97 yuan, and 2.32 yuan respectively. Therefore, 16 times PE will be given in 2024, corresponding to a target price of 25.76 yuan, maintaining a “buy” rating.
Risk warning: risk of low market demand; risk of raw material supply and price fluctuations; risk of exchange rate fluctuations; risk of production capacity falling short of expectations.