Event: The company publishes its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 2.978 billion yuan, a year-on-year decrease of 18.8%; realized net profit of 14.16 million yuan, a year-on-year decrease of 42.4%; and realized net profit of 12.74 million yuan after deduction, a year-on-year decrease of 90.2%. With 2024Q2, the company achieved revenue of 1.512 billion yuan in a single quarter, a year-on-year decrease of 11.5% and a month-on-month increase of 3.2%; realized net profit to mother of 11.46 million yuan, turning a loss into a profit over the previous year, with a year-on-year increase of 326%.

Comment:

The challenge of “removing inventory” in the field of plant protection continues, and gross margins of pharmaceuticals and functional chemicals are picking up. In the first half of 2024, the plant protection industry is still facing “inventory removal” adjustments, and downstream customers are still implementing conservative inventory control measures. In 24H1, the company's plant protection business achieved revenue of 1.873 billion yuan, a year-on-year decrease of 24.4%, corresponding to a year-on-year decline of 1.4 pct to 15.5% in gross margin. It is worth noting that with the improvement of the company's own core capabilities and the smooth expansion of downstream clients, the company's pharmaceutical business and functional chemicals business have achieved a recovery in gross margin. In 24H1, the company's pharmaceutical business achieved revenue of 0.713 billion yuan, a year-on-year decrease of 12.2%, and corresponding gross margin increased 6.5 pct to 42.8% year over year; the functional chemicals business achieved revenue of 0.127 billion yuan, an increase of 47.7% year on year, and corresponding gross margin increased by 8.6 pct to 26.0% year on year. In terms of cost ratios, 24H1's sales, management, R&D, and financial expenses rates were 0.45%, 11.18%, 4.68%, and 1.85%, respectively, with year-on-year changes of +0.01pct, +1.52pct, -1.37pct, and +3.19pct, respectively.

CDMO's business customer development and development are smooth, and customer verification of functional chemicals is promoted. In the first half of 2024, the company's CDMO business pipeline continued to advance, and several verification projects were completed, laying the foundation for subsequent business expansion.

Meanwhile, the company deepened R&D cooperation with two foreign pharmaceutical giants in the first half of '24. Furthermore, in terms of technology, 24H1 has achieved certain breakthroughs in the design of continuous reactions, enzymatic catalysis technology, peptide synthesis technology, and oligonucleotide synthesis and delivery technology. In the functional chemicals business segment, there are 4 new energy products to be commercialized in the company's pipeline, and product verification has been completed for downstream customers. In addition, there are 2 products in the pilot phase and 15 products in the small test phase.

Profit forecasting, valuation and ratings: As the industry in which the company's plant protection business accounts for the largest share of revenue is still facing “pressure to remove inventory,” 2024H1's profitability is still under pressure. Considering that there has been no significant improvement in the plant protection business, we lowered the company's profit forecast for 2024-2025 and added a profit forecast for 2026. The company's net profit to mother is expected to be 0.73 (89% reduction), 1.11 (86% reduction), and 0.183 billion yuan in 2024-2026, respectively.

During the industry downturn, the company still maintained good relationships with downstream core customers. At the same time, the profitability of the company's pharmaceutical and functional chemicals business gradually improved, which will bring new impetus to the company's performance recovery, and we maintain the company's “buy” rating.

Risk warning: Product and raw material prices fluctuate, downstream demand falls short of expectations, product development risks, and customer development progress falls short of expectations.