Incident: The company released its 2024 mid-year report. 2024H1 achieved revenue of 7.175 billion yuan, +6.9% year-on-year, net profit of 0.691 billion yuan to mother, 3.4% year-on-year, after deducting non-net profit of 0.596 billion yuan, or -2.5% year-on-year. 2024Q2 achieved revenue of 3.692 billion yuan, +11.3% YoY, net profit to mother 0.372 billion yuan, +17.7% YoY, net profit without deducting 0.301 billion yuan, +7.3% YoY.

Overseas growth has been maintained+growth in leading domestic products has resumed, and Q2 revenue is in line with expectations. The main yeast business in Q2 was +12.2%, and others (including enzyme preparations, food ingredients, etc.) were +46.3% year-on-year, mainly due to rapidly growing overseas emerging regions contributing to the increase. Q2 overseas revenue was +19.0% year-on-year. At the same time, Q2 domestic leading yeast and YE achieved restorative growth. The company adopted a “one factory, one policy” approach to flexibly adjust prices and sales, and improve product quality to promote the second return of orders. In Q2, domestic revenue after excluding sugar production was about +15% compared to the same period last year. In addition, Q2 packaging/sugar production declined by 16.9%/40.0%, respectively, and the sugar business was gradually divested.

Costs declined and the product structure recovered upward, and gross margin improved year-on-year. H1's gross margin was -0.3 pct year over year, and remained stable. Among them, Q2 gross margin was +0.3 pct to 23.9% year on year. On the one hand, due to lower costs of molasses and raw materials, especially overseas molasses prices, on the other hand, product structure improvements, domestic leading yeast achieved restorative growth, and the gradual divestment of the sugar production business, which had dragged down profitable performance, all of which had a driving effect on the increase in gross margin. Q2 Sales/management/R&D/finance expense ratios were +0.6/-0.6/+0.6pct year on year, and net interest rate was +0.6pct to 10.1% year over year. Excluding the impact of government subsidies, after deducting the impact of government subsidies, non-net interest rates were -0.3 pct to 8.2% year on year, and -0.3 pct month-on-month.

Overseas expansion is accelerating, and a return to flexible performance can be expected. Looking ahead to H2, the company's domestic demand for dominant yeast will gradually recover, flexible price adjustment policies will effectively drive sales, and domestic revenue is expected to continue to recover. Yeast is growing well in emerging markets such as the Middle East, Africa, and the Asia-Pacific region, and is expected to reach incentive targets under the resonance of domestic and foreign demand. At the same time, as demand for leading yeasts gradually recovers, it has a significant impact on profit levels. In the medium to long term, after the industry experiences a cycle of low demand and cost pressure for bakery and consumption upgrade products (such as YE, animal nutrition, etc.), concentration is expected to be further skewed towards leading companies with strong business resilience. The company's yeast production capacity is being released in an orderly manner, gradually improving with demand, and a return in flexible performance can be expected.

Profit forecast: We expect the company to achieve revenue of 14.98/16.76/18.71 billion yuan in 2024-2026, +10.3%/+11.9%/+11.6%, and achieve net profit to mother of 1.41/1.57/1.74 billion yuan, +10.8%/+11.4%/+11.0% year-on-year, corresponding PE is 19/17/15X. We will rate PE 23 times PE according to the 2024 results, with a target price of 37.26 yuan for one year.

Risk warning: Food safety risks; increased industry competition; risk of rising raw material costs; overseas factory operations fall short of expectations; domestic demand recovery falls short of expectations.