Description of the event

On August 28, 2024, Huaheng Biotech released its 2024 semi-annual report. In 2024H1, the company achieved revenue of 1.016 billion yuan, a year-on-year increase of 19.57%; realized net profit of 0.15 billion yuan, a year-on-year decrease of 21.72%; and realized net profit deducted from non-mother of 0.148 billion yuan, a year-on-year decrease of 22.14%.

24Q2 achieved revenue of 0.515 billion yuan in a single quarter, up 14.64% year on year and up 2.93% month on month; realized net profit to mother of 0.063 billion yuan, down 42.63% year on year and down 27.08% month on month; realized net profit deducted from mother 0.062 billion yuan, down 44.58% year on year and 28.31% month on month.

24Q2 performance is under pressure, valine production and sales increase, and prices are low

The company's 24Q2 performance declined, and the profit side was under pressure. The main reason was that production and sales of valine products increased rapidly and prices were low. At the same time, many of the company's projects were in the early stages of production, and related expenses increased. The company's 24H1 revenue increased 19.57% year on year, operating costs increased 40.69% year on year, and profits were squeezed; sales expenses increased 32.02% year over year. The company attached importance to sales team building to open up market space for new products. According to Baichuan Yingfu and Chemical Book data, the current average monthly prices of valine/tryptophane/arginine/methionine are 13.3/60.0/68.0/21.02 yuan/kg, respectively, -29%/-11%/+0%/+20%, month-on-month ratio, +0%/-2%. The company's main product, valine, is currently at a low level, but in the long run, the company still has the cost advantage of the biological preparation process, and the gradual increase in production and sales of existing amino acid products and new products such as tryptophan, arginine, methionine, etc. The trend of production volume, The company's performance is expected to be supported and gradually improved.

Methionine achieved technological breakthroughs, and new amino acids were gradually released

The company's new products, 1,3-propanediol, succinic acid, malic acid, tryptophan, and arginine, have been put into production as planned, and the company's product matrix continues to be rich. 24H1 continues to promote the construction of a biologic method project with an alternating annual output of 0.025 million tons of valine, arginine, and 1,000 tons of inositol at the Chifeng base, and a project with an alternating annual output of 0.06 million tons of three-chain amino acids, tryptophan, and refined amino acids with an annual output of 0.01 million tons in Bayannaoer to expand performance growth points. In addition, the company's 24H1 R&D expenses increased 16.56% year on year, focusing on R&D innovation. Following the signing of an arginine technology license contract with O&B Biotech in March '24, the company signed a tryptophan technology license contract again in August to provide synthetic biology technical support for the industrial production of arginine and tryptophan. On July 28, '24, the biological L-methionine project of Huaheng Biotech's joint venture subsidiary Hengyu Biotech passed scientific findings. The method achieved efficient synthesis of L-methionine precursors. Among them, the production and sugar conversion rate of O-succinyl L-hyperserine reached the highest level at home and abroad, and the overall technical level was internationally leading. Yearly output The 3,000-ton production line turns technical advantages into a driving force for performance.

Investment advice

We expect the company's net profit to be 0.418, 0.629, and 0.969 billion yuan respectively in 2024-2026 (previous values were 0.603, 0.841, 1.129 billion yuan), with year-on-year growth rates of -6.8%, 50.4%, and 54.0%. The corresponding PE is 18, 12, and 8 times, respectively. Maintain a “buy” rating.

Risk warning

(1) Risk of fluctuations in raw material prices;

(2) Projects under construction fall short of anticipated risks;

(3) The international situation and the risk of exchange rate fluctuations;

(4) Industry competition increases risk.