1H24 net profit to mother - 0.022 billion yuan, which is basically in line with our expectations: 1H24 revenue +30.6% to 1.41 billion yuan, net profit to mother - 0.022 billion yuan (1H23 0.039 billion yuan); 2Q24 revenue +59.5% YoY to 0.74 billion yuan, net profit to mother - 0.04 billion yuan (2Q23 0.008 billion yuan). The performance is basically in line with our expectations. We believe that short-term fluctuations in performance are partly due to 2Q as a traditional low sales season. On the other hand, it was also affected by increased marketing spending in the first half of the year, an increase in the share of low-margin order businesses, and a decline in food prices.

Development trends

The export of ordered grain and rice varieties contributed to an increase in revenue, and the overall progress of advance seed payments was improving. 1) Seeds:

1H24 rice seed revenue +14.1% YoY to 0.38 billion yuan, gross margin -8.8ppt to 31.2% YoY.

We believe that the increase in revenue and the decline in gross margin are mainly due to the year-on-year increase in exports of rice seeds. 1H24 overseas revenue was +147.4% year-on-year to 0.22 billion yuan. 1H24's contract debt ratio was +56.4% to 0.81 billion yuan, reflecting the improvement in seed advance payment progress. 2) Food orders: 1H24 grain order revenue was +112.0% to 0.48 billion yuan, contributing to the company's 1H24 77% revenue increase, and gross margin -3.8% to 1.5% year-on-year.

3) Lint: 1H24's lint revenue was -9.5% to 0.2 billion yuan, and gross margin was +1.4ppt to 7.4% year over year. We believe that the main reason is that lint prices and costs declined year on year.

Structural changes compounded expenses, putting pressure on profitability in the off-season. 1) Gross profit margin: 1H24 company gross margin -7.2ppt to 17.3% year-on-year. We believe that the main reason is that the share of revenue from the grain business has increased significantly due to low gross margin orders, which has lowered the overall level; in addition, due to higher production costs and lower food prices, the gross margin of the seed industry has declined. 2) Expense ratio: In 1H24, the company increased investment in R&D and management expenses, but it was diluted due to the increase in the company's revenue scale, and the cost ratio for the period was -0.5ppt to 19.7% year-on-year. 3) Impairment: 1H24 asset and credit impairment losses of 0.01 billion yuan, mainly due to inventory depreciation losses. 4) Under the combined influence, the company's profitability was under pressure in the short term, and the 1H24 net interest rate was -5.2ppt to -1.6% year-on-year.

Set up a rice, corn and wheat division to focus on corn seeds and the potential of rice to go overseas. The company announced the latest organizational structure adjustments, from the original three levels to a flatter two-tier design. At the same time, it also established new divisions for rice, corn, and wheat, and continued to use settings such as the Overseas Management Department and the Quanyin Academy of Agricultural Sciences. We believe it is expected to further improve operational efficiency and optimize resource allocation. Looking ahead, the company has a dual layout in the traditional seed industry and biological breeding. The rice seed industry has the dual advantages of variety innovation and marketing; the corn seed industry adheres to the “endogenous+extension” drive; the 3 genetically-modified corn varieties participating in the biological breeding application were approved and publicized this year, and actively cooperated with major shareholders in biological breeding research and development. In the long run, it will help achieve the company's goal of entering the top ten global seed industry and the top three national corn seed sales revenue goals in 25 years.

Profit forecasting and valuation

The stock price corresponds to 24/25 18/14 times P/E. Keeping the net profit forecast unchanged, considering the downward shift in the sector's overall valuation center, the target price was lowered by 24% to 8.0 yuan, corresponding to 23/19 times P/E, with 31% upward space. We believe that the company's corn seeds and rice have the potential to outperform the industry.

risks

Competition in the industry; intellectual property disputes; contract farming business risks; overseas project promotion falls short of expectations.