Results for 2023 and 1Q24 fell short of our expectations

Luther Environmental announced 2023 and 1Q24 results: 2023 revenue of 351 million yuan, +2.6% year over year; net profit to mother of 0.27 million yuan, +4.0% year over year; 1Q24 revenue of 68 million yuan, +21.9% year over year, net profit to mother of 06 million yuan, +54.2% year over year. The performance fell short of our expectations due mainly to downstream demand pressure and new customer expansion. Sands production fell short of expectations.

Liquor lees feed: Prices of corn and soybean meal are declining, demand for lees feed is weakening, and Sands production capacity is slower than we expected; production and sales volume -8ppt to 92% year over year. In 2023, 1Q24, lees feed sales were +27.6% and +66.3% year-on-year. Sales were lower in February 2024 due to holiday logistics and transportation. We estimate that the average sales price ratio was -2.7%, -2.2% to 2,110 yuan/ton and 2,054 yuan/ton. According to the CICC bulk group forecast, the inventory consumption ratio of corn and soybean meal will recover in 2024, and the price center of gravity is likely to decline. Among them: 1) Gu Wei: Sales volume in 2023 was 65,000 tons, production and sales rate of 99.8%, average price 2,128 yuan/ton, gross margin +2.7ppt to 32% year-on-year. 1Q24 sales volume was +4.5% YoY to 15,000 tons. 2) Sands: Sales volume of 28,000 tons in 2023, production and sales rate of 77.8%, average price 2,070 yuan/ton, gross profit margin of 24%. The 1Q24 sales volume was 90,000 tons.

Inorganic solid waste treatment: The share of revenue fell to 16% in 1Q24. 1) River and lake sludge: In 2023, 1Q24 revenue was -9.5%, +17.0% to 90 million yuan and 0.07 billion yuan, gross margin was +19ppt and +19ppt to 42% and 49% year-on-year. 2) Engineering mud: In 2023, 1Q24 revenue was -33.8%, -81.4% to 55 million yuan, and 0.03 billion yuan, gross margin was -19ppt and -86ppt to 43% and -35% year-on-year, mainly due to a decrease in housing construction and infrastructure project starts.

Expense rates increased during the period. In 2023, the 1Q24 sales expense ratio was +1.3ppt, +2.2ppt to 2.7% and 5.0% year-on-year, mainly due to the introduction of new professional marketing personnel and establishment of a marketing system after the release of production capacity; the financial expense ratio was +1.6ppt, +1.5ppt to 1.1% and 2.7% year-on-year, mainly due to interest charges and strengthening of working capital loans to guarantee the supply of raw materials to the factory after production.

Development trends

The transformation to the recycling of sake lees continues. The company expects the Zunyi, Bozhou and Yongle projects to be gradually put into operation in 3Q24, and the alcoholic wine project is being prepared in the early stages. The Lianyungang alkali slag project is in the early stages of construction. A subcontract was signed with CNNC Environmental Protection in May 2023. The service period is 5 years, and the total contract amount is tentatively set at 518 million yuan.

Profit forecasting and valuation

Considering that the new plant's production is being implemented more slowly than expected and the price of corn and soybean meal is in a downward cycle, we lowered our net profit for 2024 by 60% to 50 million yuan, and introduced a profit forecast of 80 million yuan for 2025. The current stock price corresponds to 2024/25 33x/21x P/E. Considering that the company has channel and technical advantages as a leader in the industry, its performance has maintained a relatively rapid growth rate, maintained an industry rating, and lowered its target price by 43% to 17.65 yuan, corresponding to 35x/22x P/E in 2024/25, which has 6% room to rise compared to the current stock price.

risks

Production capacity fell short of expectations, and the expansion of new customers fell short of expectations.