1H24's performance was in line with our expectations. 2Q24's net profit significantly fixed the company's operating income of 2.978 billion yuan (YoY -18.8%) in the first half of 2024, and net profit attributable to shareholders of listed companies was 14.1559 million yuan (YoY -42.4%), after deducting non-net profit of 12.7412 million yuan (YoY -90.2%). Among them, 2Q24 achieved operating income of 1.512 billion yuan (QoQ +3.2%), and net profit attributable to shareholders of listed companies was 11.4642 million yuan (QoQ +325.9%).

By business, 1H24's pharmaceutical/plant protection/functional chemicals/other industrial products revenue was 7.13/1.873/0.127/0.251 billion yuan, YoY -12.17%/-24.36%/+47.67%/-11.54%, gross margin was 42.83%/15.51%/26.02%/25.79%, YoY+6.45/-1.41/+8.62/-0.07pcts, respectively. 1H24's performance is in line with our expectations. 1H24 raised a total of 20.0144 million yuan in asset impairment losses and 13.5514 million yuan in credit impairment losses. We believe that as demand for plant protection products picks up and losses at the UK base gradually decreases, the company is expected to reverse the difficult situation.

Development trends

The UK and Jiangsu bases reduced their losses year on year. Looking at the subsidiary situation, the company's British subsidiary LianheTechHoldCo Limited 1H24 achieved operating income of 0.494 billion yuan (YoY +29.8%) and net profit loss of 0.106 billion yuan (loss of 0.165 billion yuan in the same period last year). The subsidiary Jiangsu Lianhua 1H24 achieved operating income of 0.487 billion yuan (YoY -30.5%) and a net profit loss of 10.667 million yuan (loss of 51.156 million yuan in the same period last year). In response to the downward agrochemical cycle, the company further optimized cost control measures, and 1H24 base losses in Jiangsu and the UK narrowed year-on-year. At the same time, the plant protection CDMO industry where the company is located has a high threshold and a good competitive pattern. At the same time, the company has a world-leading one-stop solution, is highly recognized by overseas customers, and the plant protection business is improving for a long time.

The pharmaceutical business progressed steadily, and the revenue and profit of the functional chemicals business increased. In the pharmaceutical business, in the first half of the year, the company achieved certain breakthroughs in areas involving continuous reaction, enzyme catalysis technology, peptide synthesis technology, oligonucleotide synthesis and delivery technology, polysaccharide synthesis technology, and PEG series compound process development, and completed the implementation of a number of new projects involving related technologies. In terms of functional chemicals, 1H24's functional chemicals business revenue and gross margin both increased significantly year-on-year. The company currently has 4 new energy products to be commercialized in the pipeline, and has completed product verification for downstream customers. There are 2 in the pilot phase and 15 in the small trial phase. We believe that with the development of CDMO's business and the introduction and mass production of lithium salt products, the company's future growth can be expected.

Profit forecasting and valuation

Considering the long downturn cycle of the plant protection industry, we lowered our 2024/2025 net profit 46%/9% to 0.109/0.308 billion yuan. The current stock price corresponds to 38.5/13.7x P/E 2024/2025. Taking into account the adjustment of profit forecasts and the long-term growth of the company's business, we lowered our target price by 30% to 5.36 yuan to correspond to 2024/2025 45.2/16.0x P/E. The company's UK and Jiangsu bases reduced losses, and functional chemicals were gradually released. We maintained our outperforming industry rating, with 17.4% upward space compared to the current stock price.

risks

The development of pharmaceutical intermediates fell short of expectations, and the price of pesticide intermediates dropped sharply.