Core views

Expenses have increased, and profits are under pressure in the short term. The company achieved operating income of 1.72 billion yuan in the first three quarters of 2024, or -10.32% year-on-year, mainly due to the pesticide and fertilizer business restructuring to reduce the operation of low-value-added products; the first three quarters of 2024 achieved net profit of -0.071 billion yuan, or -181.02% year-on-year, mainly due to a decrease in current revenue and a significant increase in R&D and sales expenses. On a quarterly basis, the company achieved operating income of 0.392 billion yuan in 2024Q3, -47.65% month-on-month, and -38.83%; 2024Q3 realized net profit to mother -0.049 billion yuan, -465.70% month-on-month, and -107.51% year-on-year.

Revenue from corn and rice seeds continued to grow, and pre-sale performance in the new season was good. According to the 2023/2024 operating year data, the company's total seed revenue was 0.851 billion yuan, +28.64% year over year, and total sales volume was 66.4793 million kg, +10.31% year over year. By variety, sales revenue of corn seeds was 0.508 billion yuan, +41.56% year over year, accounting for 59.61%; sales volume was 24.3632 million kg, +20.03% year over year; sales revenue of rice seeds was 0.192 billion yuan, +12.21% year over year, accounting for 22.57%, and sales volume was 14.0644 million kg, or -3.12% year over year. The company's contract debt at the end of 2024Q3 was 0.689 billion yuan, +147.35% year-on-year. Pre-sale payments for seeds maintained a relatively rapid growth rate, and sales revenue is expected to continue to grow in the new season.

Sales and R&D expenses have increased significantly, and net interest rates are under pressure. The company's 2024Q1-Q3 sales expenses were 0.102 billion yuan, +19.63% year-on-year, corresponding sales expense ratio 5.96% (year-on-year +1.50pct), mainly due to increased costs such as market maintenance, promotion, and rights protection and counterfeiting, as well as increased labor costs; 2024Q1-Q3 management expenses were 0.091 billion yuan, compared to +4.85% year-on-year, corresponding management expense ratio 5.30% (+0.77pct year over year); 2024Q1-Q3 R&D expenses were 0.07 billion yuan , +36.32% year over year, corresponding R&D cost rate 4.05% (+1.39pct year over year). Affected by the increase in the expense ratio, the company's gross margin was +0.65pct to 10.30% yoy in 2024Q1-Q3, but the net margin was -3.16pct to -4.77% yoy.

Seed inventories increased year over year, and operating cash flow was under pressure in the short term. As of July 31, the book value of the company's corn seed inventory was 0.234 billion yuan, +91.34% year over year, and the book value of rice seed inventory was 0.051 billion yuan, or -23.12% year on year. Affected by this, the company's 2024Q1-Q3 inventory turnover days was +26% year-on-year to 138 days. In terms of cash flow, the company's net operating cash flow in the first three quarters of 2024 was -0.113 billion yuan, -203.97% year-on-year, due to increased prepaid payments and procurement of raw materials for medicinal fertilizer, putting pressure on the short term.

Risk warning: Breeding risks caused by bad weather; implementation of genetically-modified policies falls short of expectations.

Investment advice: The company's corn seed business has maintained rapid development in recent years. In the future, it is expected to rely on new shareholders' resources to further strengthen the main business and fully benefit from the commercialization and promotion of genetically modified corn. We maintain our profit forecast. We expect the net profit attributable to the parent company in 2024-2026 to be 0.059/0.084/0.12 billion yuan, and EPS 0.10/0.14/0.20 yuan respectively, maintaining the “better than the market” rating.