Incident: The company released its 2024 semi-annual report. 24H1 achieved revenue of 0.138 billion yuan, -1.3% year over year; realized net profit of 0.044 billion yuan, +7.9% year over year; realized net profit deducted from non-mother 0.038 billion yuan, +17.3% year over year. According to estimates, 24Q2 achieved revenue of 0.079 billion yuan, +16.6% year over year; realized net profit of 0.025 billion yuan, +23.3% year over year; realized net profit of 0.022 billion yuan without return to mother, +56.1% year over year.

The edible probiotics business maintained a relatively rapid growth rate, and animal and plant microecological preparations gradually released new production capacity.

1) 24H1's edible probiotics business achieved revenue of 0.102 billion yuan, +18.2% year-on-year, and achieved sales volume of 190.9 tons, or +37.5% year-on-year. During the reporting period, the company continued to break through innovation and strengthen brand promotion and marketing based on research and development. The edible probiotics business has become the main support and important growth point for the company's revenue.

2) 24H1 animal and plant microecological preparations achieved revenue of 0.015 billion yuan, +86.0% year over year, and achieved sales volume of 745.2 tons, or +98.2% year over year. The rapid year-on-year growth in this business was mainly due to the construction of a microecological formulation production base, and the entire industry chain was extended on the original basis, focusing on agriculture, pets, fishery products, etc. In August 2024, the company signed a “Strategic Cooperation Agreement” with Runhe Supply Chain Group Co., Ltd.

3) 24H1 compound food additives achieved revenue of 0.018 billion yuan, or -56.4% year-on-year, and achieved sales volume of 403.4 tons, or -54.3% year-on-year. The business was affected by consumer demand for downstream products, and the scale declined significantly, but it accounted for less than 14% of revenue, which had limited impact on the company's overall performance.

Product structure optimization increases gross profit margin and enhances overall profitability. 24Q2's gross margin was 55.5%, up 4.2 pct year on year, mainly due to product structure optimization; sales expense ratio, management expense ratio, and R&D expense ratio were 13.2%, 9.0%, and 10.2%, respectively, with year-on-year changes of 0.3 pct, -0.2 pct, and -2.6 pct, period cost ratio optimization; other income decreased by about 3.07 million yuan year on year, and credit impairment losses decreased by about 3.29 million yuan year on year; under comprehensive influence, 24Q2's net interest rate increased by 31.6% year on year 1.7 pct.

The company focuses on the edible probiotic business as a breakthrough in performance growth: focusing on ToB, developing a wide range of customers by directly providing probiotic products to downstream companies or customizing probiotic terminal products for customers, and continuously improving and expanding the number and quality of customers; ToC business channels, the company's three major Chinese bacteria brands, are positioned according to the needs of different groups of people and application scenarios of different probiotic products.

The online business is mainly self-operated and commissioned distribution, and the offline business is mainly about establishing dealer operation systems with different channels. The company will also incubate some promising probiotic brands and marketing teams.

Investment advice: The company has the core technical advantages of probiotics, and has accumulated a number of high-quality and stable B-side customers to form a good demonstration effect. The C-side active multi-channel layout is expected to contribute more in the future, and at the same time implement equity incentives and cohesion, which is conducive to promoting the company's high-quality development. The company's revenue for 2024-2026 is expected to be 0.39, 0.48, and 0.6 billion yuan, respectively, and EPS is 0.46, 0.58, and 0.74 yuan, respectively. The corresponding valuation of the current stock price is 31, 24, and 19 times, respectively, maintaining a “buy” rating.

Risk warning: Increased industry competition, risk of stock price fluctuations in the secondary market, development of B-side probiotic customers falling short of expectations, compound food business falling short of expectations, food safety risks.