Introduction to this report:

24H1's performance forecast profit growth rate has greatly exceeded expectations, benefiting from overseas business expansion exceeding expectations and production capacity switching from major domestic customers, driving revenue growth while improving profitability. A fundamental inflection point has arrived.

Key points of investment:

Investment advice: ARA's overseas expansion brought the company's performance bottomed out and raised the profit forecast. It is expected to be 2024-2026EPS 0.84 (+0.16), 1.01 (+0.17), 1.16 (+0.19) yuan. Referring to comparable company valuations and considering the company's performance growth expectations, the company will be given PE24x in 2024, and the target price will be raised to 20.16 (+0.07) yuan to maintain the “increase in holdings” rating.

Performance exceeded expectations, and overseas expansion contributed to high revenue and profit growth. The company released a semi-annual performance forecast. It is expected that 2024H1 will achieve a year-on-year increase of 20.75%-40.87% in revenue of 0.24-0.28 billion, H1 net profit of 0.061-0.073 billion 75.05%-109.49% year-on-year, and H1 deducts 0.048-0.058 billion of non-net profit +112.36%-154.48% year-on-year. Corresponding to 24Q2 revenue of 0.123-0.163 billion +11%-47%, net profit to mother 0.037-0.049 billion +79%-137% YoY, deducted 0.03-0.039 billion YoY, and +91% -153% YoY after deducting non-net profit of 0.03-0.039 billion, the performance greatly exceeded expectations. We expect the company's profitability to be better than expected due mainly to the increase in overseas business expansion exceeding expectations and the expansion of small and medium-sized customers after the production capacity of major domestic customers was higher than that of large domestic customers, and that the factory capacity utilization rate increased and diluted fixed costs after the production capacity switch increased.

Benefiting from the expiration of new national standards and DSM patents, the company expanded its customers and brought growth. In terms of the international market, DSM's global patents expired one after another in 2023H1. The company followed the trend of expanding international customers. The 2024H1 climbed above expectations and was affected by DSM patents and the 2023H1 base was low; in 2023, overseas demand was affected by the delay in registration of the new national standard for small and medium-sized customers, and 2024H1 demand was compensated. In addition, the company actively expanded distributors to help customers expand. In the domestic market, the company's major customers gradually completed the conversion of powder production capacity, and gross margin improved marginally after capacity utilization increased. At the same time, with the release of production capacity, the company expanded domestic small and medium-sized customers, bringing in simultaneous optimization of revenue and gross margin.

HMO raw materials have been approved domestically, and are expected to contribute new growth points in the future, and various synthetic biological raw materials are expected to open up long-term growth space. HMO ingredients 2'-FL and LnnT have been approved domestically as food nutrition enhancers. The company's 2'-FL products have completed production capacity construction and are actively expanding overseas sales channels. Subsequent overseas expansion and domestic HMO milk powder registration are expected to contribute to growth.

Based on synthetic biology, the company has developed high-value-added strategic products such as hMOs based on synthetic biology platforms, and has successively carried out research and development of new carotenoids (lycopene, astaxanthin, etc.) and functional personal care ingredients (gamma-PGA, α-arbutin, etc.). It is expected that it will continue to provide high-quality nutritional products and innovative solutions for customers in the field of nutrition and health around the world.

Risk warning: New customer volume falls short of expectations, competition intensifies, and new product development falls short of expectations.