1-3Q24 net profit to mother +4.1% YoY, in line with our expectations

The company announced 1-3Q24 results: 1-3Q24's revenue was +9.5% YoY to 4.36 billion yuan, net profit to mother +4.1% YoY to 1.35 billion yuan; of these, 3Q24 revenue was +20.2% YoY to 1.26 billion yuan, and net profit to mother was +9.1% YoY to 0.36 billion yuan. The performance is in line with our expectations. We believe that steady growth has benefited from the reform of the management mechanism and the implementation of the bidding and contracting mechanism this year, and the revenue of the main land contracting business increased year-on-year.

Development trends

Advance payment carry-over is progressing smoothly, and the main arable land contract business is growing steadily. 1) Main land contract business: The rent for the company's main land contract business is pre-collected in advance and carried over quarterly. 3Q24 contract debt (mainly pre-sale land rent) decreased by 1.22 billion yuan month-on-month, and the decrease amount was +3.9% year-on-year. We believe that on the one hand, the company's land contract rent increased year-on-year. On the other hand, it reflects the smooth carry-over of the company's 3Q24 pre-collected land rent. It is expected that the main business revenue will continue to grow throughout the year. 2) Sales of agricultural materials: The company's agricultural business is centralized procurement and unified supply. 3Q24 inventory (mainly agricultural materials) fell 0.99 billion yuan from the 1Q24 high, and the decrease was -13.9% year-on-year. We believe that on the one hand, agricultural prices in the industry have declined, and on the other hand, it reflects a decline in the scale of the company's agricultural sales. However, considering that the company's agricultural sales are mainly used to benefit contracted farmers and have a cost bonus, we judge that the decline in agricultural sales will not change the company's overall steady expectations.

The share of low-margin businesses increased, compounded by a decrease in interest income, but profitability remained high. 1) Gross profit margin:

1-3Q24 gross margin was -1.2ppt to 38.0% year over year. We think it may be affected by the increase in the share of low-profit businesses such as agricultural products. 2) Expense ratio: The 1-3Q24 sales/management (including R&D) /finance expense ratio was +0.2/-0.7/+1.4ppt to 0.8%/-2.4%, respectively. We believe that the increase in sales expenses ratio may be due to the expansion of agricultural product business scale, and the increase in financial expense ratio is due to the decline in interest rates for deposit products this year. 3) Under the combined influence, the company's 1-3Q24 net interest rate was -1.6ppt to 30.9% year-on-year, and profitability remained high.

The main land contracting business has been developing steadily over a long period of time, and the value of continuing high dividends is expected to be highlighted. 1) In the short term, the price of japonica rice has recently declined along with the centralized listing of new rice. The average spot price of japonica rice nationwide on October 28 was -4.5% to 2,872 yuan/ton; however, due to extreme weather and the like this year, production of Japonica rice in Heilongjiang is expected to decrease slightly. We expect the price of japonica rice in Heilongjiang to be relatively good in '25, and the prices of agricultural materials such as pesticides and fertilizers are still low, all of which will help the company continue to grow steadily in 25 years. 2) In the long run, the company relies on more than 10 million acres of high-quality arable land resources, focusing on developing various business models such as sales and ordering, collection and storage to improve the quality of agricultural operations, and is optimistic about the company's expansion opportunities from traditional farmland operators to modern agricultural service platforms. 3) Furthermore, over the years, the company has continued to give back to shareholders with high dividends leading in the agricultural industry. The dividend rate and stability rank high in the agricultural sector, and the high dividend value is expected to be prominent.

Profit forecasting and valuation

The current stock price corresponds to 24/25 23/22 times P/E. We kept our net profit forecast of 1.14/1.22 billion yuan unchanged for 24/25. Based on changes in market risk appetite, we raised our target price by 16% to 18.0 yuan, corresponding to 28/26 times P/E in 24/25, with 20% upward space, and maintaining the outperforming industry rating.

risks

Asset impairment; natural disasters; pending litigation (arbitration) cases; progress of reforms falling short of expectations.