Description of the event

The company announced results for the first three quarters of 2024. The first three quarters achieved revenue of 1.539 billion yuan, a year-on-year increase of 12.82%, and realized net profit to mother of 0.17 billion yuan, a year-on-year decrease of 46.9%. In the third quarter, the company achieved revenue of 0.523 billion yuan, up 1.66% year on year and 1.43% month on month. Net profit attributable to mother was 0.02 billion yuan, down 84.32% year on year and 68.03% month on month. Gross margin was 21.4%, down 18.95 pcts year on year, down 8.27 pcts month on month; net margin was 3.83 pct, down 21.11 pct year on year, down 8.22 pct month on month.

Incident reviews

The decline in prices of products such as valine and inositol affected performance. According to Wind and Boya Hexun data, in the third quarter of 2024, the average prices of valine and inositol were 13.66 yuan/kg and 46.86 yuan/kg respectively, down 8.25% and 20.83% from the second quarter of 2024, down 34.07% and 67.24% year on year.

We believe that the current price of valine is expected to stabilize, and there is limited room for further decline in the future.

On the demand side, demand for valine is still growing strongly. According to Morbao.com's forecast, the annual production of valine in 2024 will be about 0.18-0.19 million tons. According to the company's prospectus data, global demand for valine is expected to be 0.0768 million tons in 2023, with a compound growth rate of 24% from 2020 to 2023. Thanks to reduced soybean meal and the cost reduction effects of advances in synthetic biotechnology, the actual demand for valine is still growing strongly, significantly higher than previously forecast.

On the supply side, some enterprises have switched to production and cut production, and the pressure on oversupply has eased somewhat. Due to downward pressure on soybean meal and corn prices, valine prices have continued to be under pressure since 2024. Some companies that previously started valine production chose to switch or cut production. For example, Seagate reduced valine production and converted to flexible production lines. Furthermore, due to the strong prices of varieties such as threonine, some manufacturers are profitably motivated to convert valine to threonine.

The company actively promotes the industrialization of new products. On September 6, the company established a bio-based polyester textile industry alliance, which is expected to effectively open up upstream and downstream collaboration between PDO slicing, spinning, dyeing and finishing, and terminals to promote 1,3-PDO sales. In October, the company 1,3-PDO won the INDP International Innovative Ingredients Award, which can be used as a cosmetic ingredient.

Investment advice

Due to the principle of prudence, we adjust the company's performance forecast based on the market conditions of the company's main products and potential future depreciation, but we do not rule out the possibility that subsequent releases of new products will exceed expectations. We predict that from 2024 to 2026, the company will achieve revenue of 2.281/3.393/4.684 billion yuan, an increase of 17.7%/48.7%/38.0% year on year; net profit to mother of 0.234/0.31/0.41 billion yuan, up -48.0%/32.7%/32.3% year on year, corresponding EPS of 0.94/1.24/1.64 yuan and PE of 37.1/27.9/21.1 times, maintaining a “buy-B” rating.

Risk warning

Risk of fluctuations in raw material prices; risk of overcapacity in the industry; risk of new product technology implementation falling short of expectations; risk of downstream demand growth falling short of expectations.