Core views
Since Q3 2023, the company's main business, vitamins and methionine, experienced a downward cycle of two years. As industry maintenance & force majeure events increased, the supply and demand pattern was optimized, and prices bottomed out and rebounded, the company's 24Q1 gross margin recovered 3.6 pct month-on-month. Looking ahead, as supply constraints remain and downstream farming demand is expected to improve, it is expected that varieties such as VA and VE will continue to rise; the 150,000 ton methionine project is about to be released, and the 180,000 ton liquid egg construction is expected to contribute significantly; the new materials business is blossoming, PPS and adiponitrile projects continue to advance, and the company's future growth momentum is strong.
occurrences
The company released its annual report for the year 23 and the quarterly report for '24. The company achieved revenue of 15.117 billion yuan in '23, -5.13% year on year, and net profit to mother of 2.704 billion yuan, or -25.3% year on year. Among them, Q4 revenue in '23 was 4.104 billion yuan, +2.0% year over month, +14.2% month on month; net profit to mother was 603 million yuan, -1.0% year on year and -2.4% month on month. In Q1 '24, we achieved revenue of 4.499 billion yuan, +24.5% YoY, +6.0% month-on-month; realized net profit to mother of 870 million yuan, +35.2% YoY and +44.3% month-on-month.
Brief review
Flavors and fragrances have grown steadily. Since 23Q4, the recovery in main product prices has helped restore gross margin. In 23, the company's fragrance and fragrance business achieved revenue of 3.274 billion yuan, +10.3% year-on-year, and achieved a gross profit margin of 50.5%, or +1.5pct year-on-year. Flavors and fragrances contributed the most profit as the company's second-largest business. As the company continues to expand its fragrance range and explore bio-based products, the business is expected to continue to grow in the future.
The company achieved a gross profit margin of 33.0% in '23, -4.0pct year on year. This is mainly because the average price of the company's main products such as methionine, VA, and VE declined year on year; in Q1, the company achieved a gross profit margin of 35.0%, +3.6 pct month-on-month, and began to rise. This is mainly because prices of main products such as methionine, VA, and VE began to pick up due to easing competition in the industry.
With the optimization of the supply and demand pattern of VA, VE, and methionine, prices are expected to rise steadily. After experiencing a downward cycle since 2021, prices reached a position of several years in Q3 of 2023. Afterwards, various companies at home and abroad began to take turns stopping production and maintenance, and during this period, there were many incidents of force majeure, and industry sentiment began to rise; methionine: Evonik (Singapore) cut production in 2023Q4 in 2023Q1. Seagate will switch 40% of production capacity to others in Q2 2023. Reduced production capacity by 80,000 tons, domestic Xinhe Cheng and Ziguang Chemical will be undergoing maintenance for a period of time in Q1 2024, respectively;
VA and VE: An explosion occurred at a domestic manufacturer in January 2024, then the vitamin device was discontinued (production resumed in April), and a fire broke out in a domestic manufacturer's workshop in April 2024, causing some disturbance to production; Xinhecheng and Zhejiang Pharmaceutical began maintenance in January and February 24, respectively, and Xinhecheng also announced that maintenance will be carried out in July 2024.
Since the second half of last year, there have been many factors limiting the supply of vitamins and methionine. Supply and demand in the industry have improved, and prices have gradually come out of the bottom. Looking ahead, supply-side restrictions still exist. As profits on the downstream farming side gradually recover, VA and VE prices are expected to rise, and methionine prices are expected to stabilize at a high level, contributing a considerable increase to the company.
Many active projects are about to expand production, and the company's growth momentum is strong
The nutrition sector company's additional 150,000 tons of methionine production capacity has been put into operation and is expected to gradually contribute to the increase. In addition, the 180,000 ton liquid methionine project built with Sinopec has been put into construction; the 30,000 ton taurine project was tested in 23 years and is gradually being scaled up; the fragrance and fragrance sector has a high level of profit, and the company continues to expand its categories steadily; in the new materials sector, the 7,000-ton PPS phase III project has begun to scale up, and the pilot trial of the adiponitrile project is progressing smoothly and continues to advance project approval. At present, the company's three major businesses have developed in a trident style. Among them, flavors and fragrances have built a stable basic market. Nutritional products and new materials each contribute significant increases in the short, medium, and long term, and the company's future growth momentum is strong.
Profit forecast and valuation: As vitamin and methionine prices recover, the company's main business continues to recover, and new projects have contributed significantly to the gradual expansion of new projects. The company's net profit for 2024-2026 is estimated to be 39.68, 4.522, and 5.129 billion yuan. The corresponding PE is 15.5X, 13.6X, and 12.0X, respectively, maintaining a “buy” rating.
Risk warning: downstream demand falls short of expectations; project commissioning falls short of expectations; industry competition intensifies.