Event: The company released its annual report for 2023 and its quarterly report for 2014. In 2023, we achieved revenue of 33.114 billion yuan, +24.53% year on year, net profit to mother of 2,073 billion yuan, +177.04% year on year; of these, Q4 revenue was 9.24 billion yuan, +29.33% year over year, and net profit to mother was 633 million yuan, +5386.33% year over year. 2024Q1 achieved revenue of 7.812 billion yuan, +62.84% year over year, and net profit to mother of 440 million yuan, +60.71% year over year. The results exceeded expectations.

In 2023, the company sold 1.192,900 tons of sugar, with revenue of 30.25 billion yuan; sold 282,300 tons of tomatoes, with revenue of 2.64 billion yuan, all of which reached record highs. EPS, net interest rate, and ROE all hit record highs in the same period of nearly 10 years. The period expense ratio hit a new low in nearly 10 years, and inventory for the first quarter was +6.5% compared to the end of 2023.

According to the “2023 Year-End Profit Distribution Plan Notice”, the company plans to distribute a cash dividend of 1347474,383.64 yuan (tax included) to all shareholders. In addition to the cash dividend of 513323574.72 yuan already paid in mid-2023, the company plans to distribute a cash dividend of approximately RMB 18607958.36 in 2023, accounting for about 89.75% of the net profit attributable to common shareholders of listed companies in the company's 2023 consolidated statements.

The company launched the new C-end product “Tunhe” Ding Ding Li Fresh Season Tomato Diced and “Medium Sugar” Cat Brown Sugar Chocolate. The new packaging design is close to the aesthetics of young people. Among them, Cat Wu perfectly combines traditional Chinese brown sugar with the trendy flavors of chocolate, and has become a celebrity souvenir for the 2024 CCTV Dragon Year Spring Festival Gala.

The rise in sugar and tomato prices in 2023 brought about a significant increase in performance, dispelling investors' concerns that hedging would limit performance flexibility; the total net profit of imported processing capacity Tangshan Sugar Industry+Liaoning Sugar Industry in 2023 was 184 million, the second-highest since 2016. This was achieved in the context of continued losses with additional imports; 2024Q1 performance increased significantly over the same period last year, or to some extent related to the use of high-price hedging and forward pre-sales of derivatives at the end of 2023; the above fully demonstrates the company's excellent ability to evaluate business conditions and manage risks in derivatives.

Disorderly imports of non-standard sugar sources are the core cause of loss of import profits in the past two years. On April 18, the General Administration of Customs, together with the National Development and Reform Commission, the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, the Ministry of Commerce and the State Administration of Taxation, jointly issued the “Notice on Adjusting Special Customs Supervision Areas and Sugar Management Measures for Processed Trade Outside the Region”. Starting July 1, 2024, the management measures for sugar processed in special customs supervision areas and processed sugar outside the region will be adjusted. In the 22/23 season, 1,585,900 tons of non-standard sugar sources (syrup, ready mix) were imported, far higher than the previous 1.126,700 tons and 808,400 tons. The 22/23 pressing season imported 3.89 million tons of sugar, far lower than the previous 5.34 million tons and 6.33 million tons.

It is expected that more supporting measures will be introduced. Standardized management of non-standard sugar sources will help restore import profits. According to the annual report, COFCO's 350,000 ton raw sugar processing project in Zhangzhou has been basically completed. It is expected to be put into trial operation in the second quarter of 2024. The company's total refined sugar production capacity will increase to about 2.35 million tons, benefiting from the gradual recovery of import profits.

Sugar prices at home and abroad have been adjusted in the past six months. This is related to the increase in supply brought about by phased high prices, but the adjusted low price (19 cents/pound; Chinese forward futures contracts below 6,000 yuan/ton) will once again curb the increase in global production capacity and the release of supply by exporting countries, especially against the backdrop of successive increases in the purchase price of sugar cane in major Asian countries. Domestic futures prices have mostly reflected bear market expectations. We expect domestic spot sugar prices to remain fluctuating between 6,000 and 7,000 yuan/ton until mid-2025.

Investment advice: International sugar prices are in a new cycle of bull market. Historical experience estimates that the bull market will end in 2027-2028, and the domestic 10,000 yuan sugar price view remains unchanged. Along with the rise in external dependence, China's sugar prices will be more closely linked to the international market. Increased industry volatility will test the overall quality of domestic sugar enterprises, and the valuations of enterprises with diverse business models, excellent risk management capabilities, and room for growth will be raised. Due to insufficient demand in the consumer market and a downward shift in the focus on agricultural products, domestic sugar prices have now entered a recuperation period, and the tomato business will enter a phased easing situation. We have adjusted our profit forecast. We expect revenue for 2024-2026 to be $334.2/360.3/39.91 billion yuan, respectively (previous 24-25 years were 334.56/36,141 billion yuan, respectively); net profit to mother was 17.09/23.36/3.466 billion yuan respectively (the previous 24-25 years were $17.77/2.801 billion yuan, respectively). The current stock price corresponds to PE 12.5/9.1/6.1, respectively. Maintain a “buy” rating.

Risk warning: Falling sugar prices at home and abroad limit the release of profits from self-produced sugar, import profits fall short of expectations, bottlenecks in tomato market expansion, historical rules have failed, and public data used in research reports may be delayed or not updated in a timely manner.