Investment advice
We downgraded the rating of Qingsong Co., Ltd. to neutral, and lowered the target price by 31% to 4.7 yuan. The reasons are as follows:
Downstream demand was under pressure, and the 2023 results fell short of our expectations. In 2023, the company achieved revenue of 1,969 million yuan, or -32.5%, mainly due to the company's completion of the divestment of the turpentine processing business at the end of 2022 and the listing of Qingsong Chemical; if the impact of the divestment of the turpentine processing business was excluded, the company's cosmetics business revenue was -5.8% year over year; net loss to mother was 68 million yuan, a year-on-year decrease of 674 million yuan. The performance fell short of our expectations, mainly due to pressure on orders for some cosmetics and wipes, and the company's new production capacity was not released as scheduled (in 2023, the capacity utilization rate of the company's mask/wipes/skincare series products was 29%/12%/30%, respectively, at a low level), and personnel costs, depreciation and amortization were relatively rigid, affecting gross margin repair progress lower than expected. At the same time, the cost rate for the 2023 period was +0.9ppt to 14.6%, with sales/management expense ratios +0.9/+1.2ppt to 2.4%/7.9% year over year, respectively; financial expenses ratio -0.6ppt to -0.7% year on year, mainly due to reduced interest expenses; and R&D expenses ratio -0.7ppt to 3.5% year on year, mainly due to Qingsong Chemical. Asset impairment losses of $28 million in 2023 were mainly depreciation of inventory and projects under construction; non-operating expenses of RMB 0.24 million were mainly due to land idle charges for the Northbell 148-acre land project.
The 1Q24 revenue decline was narrower than in 2023, and gross margin improved slightly. 1Q24 achieved revenue of 380 million yuan, -4.3% year over year. The revenue decline was narrower than in 2023, but downstream demand still needed to recover; net loss to mother was 6 million yuan, a year-on-year decrease of 42 million yuan. The gross margin of 1Q24 was 13.8%, +11.3ppt compared to 2023. The main reason was that the company reduced costs and efficiency by streamlining personnel, optimizing production processes, etc., and the price of raw materials decreased slightly. The company continued to promote refined management. The cost ratio was -1.9ppt year-on-year during the 1Q24 period, with sales/management/R&D expense ratios of -0.1/-0.4/-0.9ppt, respectively. The company's operating momentum is improving, but sustainability remains to be seen.
Focus on cost reduction and efficiency, and focus on the recovery in cosmetic order demand and the progress of profit-side restoration. The company focuses on the large-scale consumer business of cosmetics, and gradually forms an industrial matrix for cosmetics manufacturing, cosmetic raw material development, and cosmetic efficacy testing. We believe that the company has accumulated deep product development and supply chain capabilities. As demand for downstream cosmetics continues to pick up and the company continues to explore potential customers, we expect the company's revenue to resume growth; at the same time, the company continues to reform and optimize production and management to reduce costs and increase efficiency. It is recommended to keep an eye on the progress of profit margin repair.
Profit forecasting and valuation
As competition in the industry intensifies and downstream demand has yet to recover, we lowered our 2024 net profit by 39% to $120 million and introduced a net profit forecast of $195 million for 2025. The current stock price corresponds to 17/11 times the 2024/2025 price-earnings ratio. We downgraded the company's rating to neutral, and the target price was lowered by 31% to 4.7 yuan, corresponding to 20/12 times the 2024/2025 price-earnings ratio. There is 16% room for improvement compared to the current stock price.
risks
The risk of raw material price fluctuations, increased industry competition, and loss of core customers.