1H24 performance was in line with market expectations, and 2Q24 profit side recovered

The company achieved operating income of 1.942 billion yuan in the first half of 2024, a year-on-year decrease of 3.1%. Net profit attributable to shareholders of listed companies was 19.4155 million yuan, a year-on-year decrease of 88.75%, and realized deduction of 20.7913 million yuan in non-net profit, a year-on-year decrease of 88.20%. Among them, 2Q24's quarterly revenue was 1.082 billion yuan (QoQ +25.8%, YoY +10.2%), and net profit to mother was 11.5119 million yuan (QoQ +45.7%, YoY -86%). The 2Q24 performance was restored month-on-month, and the performance was in line with our expectations.

By product, 1H24's herbicides/insecticides/microbicides revenue was 0.923/0.782/0.18 billion yuan, YoY -1.76%/-3.92%/-9.33%, respectively; gross margins were 15.16%/7.09%/13.99%, respectively, and -10.95/-9.62/-7.39pct, respectively.

Development trends

Pesticide prices continue to bottom out. The company's 1H24 domestic revenue was 1.036 billion yuan, down 3.09% year on year, and direct export revenue was 0.583 billion yuan, down 20.19% year on year. Market demand in the pesticide industry was still sluggish in the first half of 2024, product prices continued to decline. At the same time, industry competition intensified and environmental pressure increased, and the domestic pesticide industry is entering a new round of integration. According to Zhongnong Lihua Pharmaceutical data, as of August 18, the company's main herbicide, fluorosulfonamol, was reported at 0.108 million/ton (down 20% since the beginning of the year), imidacloprid, reported 0.072 million yuan/ton (down 20% since the beginning of the year), and tricyclazole, the main biocide variety, reported 0.059 million/ton (down 1.7% since the beginning of the year). The company's products cover the three major series of herbicides, insecticides and biocides, with a total of more than 30 kinds of raw drugs and more than 140 kinds of preparations. The main products are all high-efficiency, low-toxic, and low-residue pesticide products, and the price fluctuation is slowing down compared to the overall pesticide raw drug market.

Continued cost reduction strengthens competitiveness. Facing increasingly fierce market competition, the company focuses on measures to reduce raw material costs, reduce production costs, and optimize production processes to continuously promote energy saving and consumption reduction efforts, and continuously enhance the company's market competitiveness. During the year, the company plans to accelerate the convertible bond raising project and the company's riverside factory vacancy, relocation and renovation project. The 1H24 riverside plant evacuation and relocation project is in the equipment installation stage, and the company expects trial production to be put into trial production in 4Q24. We believe that 2H24's seasonal impact may disrupt product demand, but the company's continued cost reduction measures are beginning to bear fruit, and we are optimistic that the company's profits will continue to recover.

Profit forecasting and valuation

2024 is or a more competitive year for the pesticide industry. The gross margin of the company's main products declined. We cut 2024/2025 net profit by 57%/27% to 0.052/0.131 billion yuan. Currently, the company's stock price corresponds to 53.9/21.4 times the price-earnings ratio in 2024/25. Taking into account the adjustment of profit forecasts and the release of the company's new production capacity, the product segmentation pattern is relatively good. We have maintained an outperforming industry rating and lowered the target price by 14.3% to 5.4 yuan, corresponding to a price-earnings ratio of 26.7 times in 2025. There is 25.0% upward space compared to the current stock price.

risks

The inventory removal cycle exceeded expectations, and the progress of the new project fell short of expectations.