Key points of investment:

Company announcement: The company released the 2023 annual report and the 2024 quarterly report forecast. 1) In 2023, the company achieved operating income of 15.117 billion yuan (YoY -5.13%), net profit of 2.704 billion yuan (YoY -25.3%), net profit of non-return to mother of 2,614 billion yuan (YoY -27.12%), of which 23Q4 achieved operating income of 4.104 billion yuan (YoY +2%, QoQ +14.19%), net profit attributable to mother of 603 million yuan (YoY -1.02%, QoQ -2.43%), net profit of 664 million yuan (YoY +0.65%) , QoQ +15.48%). In 2023, due to a drop in market prices for vitamin series products, the company estimated an inventory impairment of 230 million yuan, which dragged down the company's performance. 2) In the first quarter of 2024, the company achieved operating income of 4.499 billion yuan (YoY +24.54%, QoQ +9.61%), net profit to mother of 870 million yuan (YoY +35.21%, QoQ +44.21%), and achieved net profit of 857 million yuan (YoY +46.22%, QoQ +29.21%), which is in line with market expectations. The company plans to distribute a cash dividend of 4.5 yuan (tax included) to all shareholders for every 10 shares, 0 bonus shares (tax included), and no capital increase from the capital reserve fund, for a total of 1,383 billion yuan in cash.

The nutrition sector hit a “V” bottom throughout the year, but the overall economy was still under pressure year over year. According to Wind statistics, the average market prices of the company's main products in 2023: VA 83.5 yuan/kg (YoY -47.2%), VE 70 yuan/kg (YoY -17.5%), VC 20.9 yuan/kg (YoY -32.6%), biotin 39.8 yuan/kg (YoY -27.9%), solid methionine 18.4 yuan/kg (YoY -9.8%), etc., are under year-on-year pressure.

Nutritional products contributed 9.867 billion yuan (YoY -9.9%) in the reporting period, with a gross profit margin of 29.91%, a year-on-year decrease of 6.68 pcts. The company's fragrance and fragrance business continued to grow steadily. During the reporting period, it achieved revenue of 3.274 billion yuan (YoY +10.35%) and a gross profit margin of 50.51%, an increase of 1.54 pct over the previous year. In terms of the new materials business, the 7,000-ton PPS phase III project was produced normally, the adiponitrile project went smoothly, the HA project was put into trial operation, and revenue of 1.02 billion yuan (YoY +3.1%) was achieved during the reporting period. The main subsidiary Shandong Xinhecheng Vitamins achieved net profit of 817 million yuan (YoY -6.7%), Shandong Xinhecheng Pharmaceutical achieved net profit of 1,164 million yuan (YoY +6.5%), and Shandong Xinhecheng Amino Acid achieved net profit of 1,055 billion yuan (YoY -11.12%). The company's annual average sales margin was 32.98%, down 3.96 pcts year on year, average net sales margin was 18.03%, down 4.8 pct year on year. In 2023, the industry is still in the process of gradually releasing new construction and expanded production capacity, but as some less competitive devices continue to be cleared, the nutrition sector gradually bottomed out at the end of 23, showing a “V” rebound throughout the year.

The 24Q1 vitamin rebound trend was obvious. Methionine fluctuated at a high level, and flavors and fragrances expanded steadily. 24Q1 With the maintenance of some equipment and the removal of backward production capacity, supply-side pressure eased to a certain extent, and the company's business profitability picked up at the bottom. In terms of vitamins, according to Wind statistics, the average market prices of the company's main vitamin products VA, VE, and VC in the first quarter were 81.38, 65.04, and 24.61 yuan/kg, up 11.55%, 6.32%, and 24.74%, respectively. The boom gradually bottomed out and picked up from month to month. At the bottom of the vitamin cycle, the company maintained a capital expenditure rhythm. The 30,000 tons/year taurine project and the 2,500 tons/year VB5 project were operating normally; in terms of methionine, overseas Evonik and Seagate all reduced production in the second half of '23. Ningxia Ziguang and Andisu all had equipment maintenance plans in the first quarter, and the supply side was more willing to raise prices, supporting the continuous increase in the average price of solid methionine by 2.76% to 21.79 yuan/kg over the 24Q1 period. In terms of project progress, according to the company's announcement, construction of 4,000 tons/year of cystine began, and the 150,000 ton methionine plant process was completed once. At the same time, the company plans to establish a joint venture with Sinopec for 2,595 billion yuan to build a 180,000 tons/year liquid methionine (pure) project to ensure the advantages of integrated raw materials while helping the company enter the first tier of methionine in the world. In the fragrance and fragrance sector, the company's business scale continues to expand. The 5,000 ton menthol project produces and sells normally, contributing to business growth.

The new material planning project progressed smoothly, fine chemicals entered the pesticide market, and continued to build “chemical+” and “bio+” platforms. According to the company's announcement, in the field of new materials, the company plans to lay out 100,000 tons of adiponitrile, 100,000 tons of hexanediamine, and 200,000 tons of nylon 66 projects in Shandong for 4.203 billion yuan, and also plans to invest 4.48 billion yuan to build 103,000 tons of HDI and 21,000 tons/year IPDI projects to build the next industrial chain platform. In the field of fine chemicals, based on the layout of ACA products in the methionine industry chain, the company plans to invest 3 billion dollars to build a 60,000 ton glyphosate project, opening up the pesticide market and strengthening the synergy between different businesses. With multiple projects progressing in an orderly manner, the company's “chemical+” and “bio+” platforms continue to be enriched, and continued growth can be expected.

Investment rating and valuation: Maintaining the company's profit forecast for 2024-2025, the company is expected to achieve net profit of 41.57 billion yuan and 5,045 billion yuan, while adding the company's profit forecast for 2026. The company is expected to achieve net profit of 6.041 billion yuan. The corresponding PE valuations are 15X, 12X, and 10X, respectively, maintaining the “increase” rating.

Risk warning: 1) The commissioning of new projects falls short of expectations; 2) downstream demand falls short of expectations.