Key points of investment

2024Q2 achieved revenue of 0.724 billion yuan, up 1% year over year

1) Looking at 24H1, the company achieved revenue of 1.359 billion yuan, a year-on-year decrease of 1%, and realized net profit to mother of 0.138 billion yuan, a year-on-year decrease of 25%. 2) Looking at 24Q2 alone, the company achieved revenue of 0.724 billion yuan, a year-on-year increase of 1%, and realized a net profit of 0.058 billion yuan to mother, a sharp decline over the previous year. We expect that the slowdown in revenue growth is mainly due to raw material cost optimization driving product sales prices under slight year-on-year pressure; the decline in profit is mainly due to sharp fluctuations in gross margins due to phased changes in the shipping structure, and the cost ratio rising ahead of schedule due to expenses such as recruitment of new factory managers.

Gross margin fluctuates greatly, and various cost changes are still expected. In terms of gross margin, 2024Q2 achieved a gross profit margin of 19.6%, a sharp decrease of 4.5 pcts year over year. We expect gross margin to fluctuate greatly due to changes in the phased shipping structure. Among them, the share of revenue from liquid products with lower gross margins in a single quarter in 2024Q2 increased from 20% to 28% in 24Q1. Looking within crystal products, we expect fewer phased shipments such as crystal xylitol varieties with relatively high gross margins; this is partly due to losses experienced by the consolidated reporting subsidiary Jiaozuo Kang Kang approx. 1.76 million yuan. The profit for the same period last year was about 20 million yuan. We expect this loss to be mainly driven by operating costs. In terms of cost ratios, looking at 2024Q2, there was little year-on-year change in sales/R&D expense ratio, etc., and only the year-on-year increase in management expenses was significant, about 2.5 pcts. We expect that this is mainly due to prepayment of expenses such as recruitment of new plant managers in Zhoushan and the calculation of equity incentives.

Convertible bonds have been successfully implemented, and new production capacity in Zhoushan is about to be released

Preliminary preparations are adequate, and the new production capacity can be rapidly digested. 2024H1 has further added 18/11 domestic/overseas traders. The rapid increase in new customers means that the company is actively making sufficient reserves for the digestion of production capacity in Zhoushan. Along with the company's ability to expand customers, we are optimistic that production capacity will be rapidly digested and performance will be released quickly after the new plant is launched. The new plant in Zhoushan is expected to be gradually implemented in 2024Q3, and smooth progress is expected to increase performance during the year. The new plant is expected to increase production capacity by about 1 million tons, covering high-margin products such as sorbitol and allodonose. Production capacity is a major bottleneck in the company's development at this stage. In 2022, the company's crystal sugar alcohol production capacity utilization rate has exceeded 95%, close to saturation, and it is urgent to build new production capacity. We expect the production capacity of the new plant to be gradually implemented in 2024Q3.

Profit forecasting and valuation

The company's main business is sugar substitute manufacturing. We expect the company to achieve revenue of 3.085/3.783/4.968 billion yuan in 2024-2026, an increase of 11%/23%/31% year on year, and is expected to achieve net profit of 0.372/0.465/0.561 billion yuan. The year-on-year growth rate from 2025 to 2026 is 25%/21%, corresponding to PE 10/8/7 times. Considering that the sugar-free era has just arrived in China, demand for sugar substitutes is on the rise. Combined with the company's broad prospects and certain competitiveness, it maintains a “buy” rating.

Risk warning: Product price fluctuations, exchange rate fluctuations, shipping cost fluctuations, increased market competition, etc.