1H24 results fall short of our expectations

The company announced 1H24 results: achieved revenue of 1.016 billion yuan, +20% YoY, -7% month-on-month; net profit to mother 0.15 billion yuan, -22% YoY and -42% month-on-month. Among them, 2Q24 achieved revenue of 0.515 billion yuan, +15% YoY and +3% month-on-month; realized net profit of 0.063 billion yuan, or -43% YoY and -27%.

The performance fell short of our expectations, mainly due to the sharp drop in the company's product prices in the first half of the year.

The company vigorously expanded overseas business. 1H24's domestic and foreign revenue was 0.351/0.508 billion yuan respectively, accounting for 34.5%/50.0% respectively. The foreign revenue ratio increased by 10ppt compared to 2023. The company's three wholly-owned subsidiaries, Qinhuangdao Huaheng, Bayannur Huaheng, and Chifeng Huaheng each achieved revenue of 0.406/0.392/0.251 billion yuan and net profit of 89.29/61.79/-1.5 million yuan, respectively. The main products of Qinhuangdao Huaheng and Bayannur Huaheng in the first half of the year were alanine and valine, respectively.

Development trends

Optimistic about the application prospects of biologic PDO, capital expenditure guarantees supply. In the first half of this year, the company's bio-based 1,3-propanediol (PDO) products were introduced to the market one after another. As a natural raw material for personal care products, it quickly gained a place in the cosmetic ingredients market. As a basic raw material for synthesizing PTT, PDO has more market space. The company is optimistic about the application of PDO in the chemical field. In addition to the company's shareholding subsidiary Chifeng Zhihe's construction project with an annual output of 0.05 million tons of biobased 1,3-propanediol, the company plans to invest another 0.856 billion yuan to build a 0.05 million ton bio-based 1,3-propylene glycol demonstration project in Hefei. According to EIA, the project is expected to be put into operation in June 2025. We believe that PDO, as an iconic product of the company pioneering the bio-method production of chemical intermediates, has contributed greatly to the company's medium- to long-term growth.

Methionine was successfully amplified in pilot trials, contributing to long-term growth. In July 2024, Hengyu Biotech, a joint venture subsidiary of Huaheng Biotech, built the first domestic production line for the production of L-methionine by biological method. The pilot amplification, industrialization and industrial application development of biological L-methionine has successfully passed the scientific and technological achievements assessment organized by the China Light Industry Federation. According to our statistics, the global methionine production capacity in 2023 is close to 2.6 million tons/year. Compared with the company's previous amino acid products, the market space is wider. Currently, domestic methionine is mainly produced by chemical methods, and technical barriers to biological production are high. We believe that Huaheng Biotech's technological breakthrough in biological methionine may break the current methionine oligopoly situation and become an important support for the company's long-term growth.

Profit forecasting and valuation

Due to falling prices of the company's main products, we lowered our 2024/25 net profit by 23.8%/25.2% to 0.459/0.583 billion yuan. The current stock price corresponds to 16/13 times the 2024/25 PE valuation. Due to the company's clear medium- to long-term growth, it maintained an industry rating, but due to the company's share capital transfer and declining industry valuation, we lowered our target price by 65% to 43.56 yuan (excluding the actual reduction of 50% after the share capital transfer), corresponding to the 22/17 times price-earnings ratio in 2024/25, with 36% upward space compared to the current stock price.

risks

Product prices have fallen, new product releases have fallen short of expectations, and production capacity has fallen short of expectations.