1H24 results are in line with market expectations

Fufeng Group announced 1H24 results: revenue of 13.37 billion yuan, -1.6% year on year; net profit of 1.04 billion yuan to mother, corresponding to profit of 0.41 yuan per share, -32.3% year over year, in line with market expectations and close to the upper limit of the profit forecast range. In terms of dividends, 1H24's interim dividend was HK$0.18 (including an interim dividend of HK$0.16 and a special dividend of HK$0.02), corresponding to a payout ratio of 40%.

By business segment, 1H24's food additives/animal nutrition/premium amino acid/colloid business achieved revenue of 69.2/4.19/1.08/0.9 billion yuan, with revenue changes of +5.5%/+2.5%/+30%/-44.9% year-on-year; gross margins were 11.0%/20.4%/36.8%/39.2%, respectively, with year-on-year changes of -3.8/+5.9/+0.7/-21.9ppt. The decline in gross margin in the food additives and colloid sector was mainly due to lower prices and the return of xanthan gum prices to reasonable levels due to the introduction of new production capacity of monosodium glutamate; the year-on-year increase in the price of suzu and lysine led to an increase in gross margin in the animal nutrition sector; 1H24's gross profit margin was 17.2%, down 4.6ppt year on year.

In terms of raw materials, the prices of 1H24 corn and coal were 2,078 yuan/ton and 389 yuan/ton respectively, a year-on-year decrease of 13.3%/7.6%.

Development trends

The price of monosodium glutamate is under pressure, the price of xanthan gum has now picked up, and amino acids are maintaining their boom. 1) MSG: Downstream demand is relatively stable. The supply-side has added production capacity combined with falling corn prices, leading to a decline in MSG prices. According to Zhuochuang Information, the current market price of MSG is 7,490 yuan/ton, down 1,660 yuan/ton compared to the average price in 2023. 2) Xanthan gum: According to Zhuochuang information, the current price of xanthan gum is 0.0295 million yuan/ton, up 0.0045 million/ton from the low at the beginning of the year. Looking ahead to 2H24, we expect the downstream procurement pace of the industry to return to normal after price stabilization, which is expected to drive the gross margin of xanthan gum to maintain the current reasonable level. 3) Amino Acids: According to Boya Hexun, the current market price for ly/threonine is 10,700/10,900 yuan/ton. We believe that considering that the price of raw materials such as corn has declined, the profit of su/lysine currently remains relatively strong, and the industry boom may continue to rise after demand enters the peak season in September-October.

Profit forecasting and valuation

Due to falling prices of monosodium glutamate and xanthan gum products and a sharp decline in gross profit from by-products such as fertilizer, we lowered our 2024/25 profit forecast by 29%/27% to 2.13/2.27 billion yuan. The current stock price corresponds to the 2024/25 price-earnings ratio of 4.7/4.3x. The profit forecast was lowered, but considering the upward valuation of high dividend stocks, we lowered the target price by 9% to HK$5.3, corresponding to the 2024/25 price-earnings ratio of 5.7/5.2 times and 21% upward space, and maintain the outperforming industry rating.

risks

Competition intensified due to the investment of additional production capacity, and downstream consumer demand fell short of expectations.