Report summary
Revenue is growing rapidly, and the seed market affects profits
In 2023, the company achieved operating income of 15.52 yuan, up 17.06% year on year; net profit to mother was 256 million yuan, up 1.01% year on year, after deducting non-net profit of 177 million yuan, up 9.35% year on year. The company is mainly engaged in the seed industry, and corn seeds are the main category. In '23, the company sold 1,354 billion yuan of corn seeds, accounting for 87.23% of revenue. In terms of quantity, demand for corn cultivation is good, and the company's main varieties are highly competitive, driving the company's annual sales volume to increase 22.29% year-on-year in '23. In terms of price, homogenized competition in the industry is fierce, affecting the company's overall seed sales price and gross profit margin. According to the Agricultural Technology Promotion Center, the price of corn seeds grown in 23 years (Denghai 605) was 30.80 yuan/kg, down 4.7% from the previous year; the gross profit margin of the company's main corn seed business was 29.17%, down 4.07pcts from the previous year, and the seed cycle is expected to improve. Commercialization of biological breeding is expected to open up the spatial seed industry without change. Cyclic interpretation and technological changes will drive the reshaping of the industry. 1) The current supply of corn seeds exceeds demand, and the cycle is expected to improve. According to the National Agricultural Technology Center, 1.75 billion kilograms of new seeds are expected to be produced in 24, plus 290 million kilograms of effective stocks last quarter, and a total supply of 2.04 billion kilograms. The total demand is estimated to be 1.22 billion kilograms, or 167.20% of the supply-demand ratio. Major companies are expected to adjust their production plans in '24, and some weak production capacity will be cleared, and the overall supply and demand pattern for corn seeds is expected to improve in the future. 2) Commercialization of biological breeding starts, leading breeding companies benefit. In December '23, the Ministry of Agriculture and Rural Affairs announced the issuance of licenses for the production and operation of genetically modified corn and soybean seeds to 26 enterprises, including Denghai Seed Industry. This also means that related genetically modified varieties can be produced and operated on a market-based basis, and commercialization of biological breeding has officially started. Judging from the first batch of approved genetically modified varieties and the second batch of announced genetically modified varieties, the Denghai seed industry successfully entered the first tier. In the first batch of genetically modified varieties, the company's Denghai 605D, 533D and other related varieties were approved; in the second batch of genetically modified varieties, the company's Denghai 533K, 685D, 710D, and Liangyu 99D related varieties were included. We believe commercialization of biological breeding will bring about profound changes in the industry. First, biological breeding increases farmers' profits and increases seed sales prices, and the industry is expected to expand significantly. Second, the threshold for early testing, evaluation, and approval of biological breeding is high, which will help leading breeding companies to further consolidate their competitiveness and occupy a higher market share. As a leading corn breeding enterprise, the company has a significant advantage in the sales scale of corn seeds. The biological breeding industry layout has entered the first tier, and it is expected to fully benefit in the future.
Investment advice
The company is a leading enterprise in the corn seed industry. The seed cycle is expected to improve and commercialization of biological breeding is expected to drive the company's performance. We expect the company's net profit to be 285 million yuan, 341 million yuan, and 444 million yuan respectively. EPS will be 0.32 yuan, 0.39 yuan, and 0.50 yuan respectively. Corresponding to 2024-2026 PE will be 30.15, 25.17, and 19.35 times, respectively, and maintain the rating to give a “buy” rating.
Risk warning
Risks such as fluctuations in the seed market and failure to promote genetically-modified genes as expected.