Incident: Huaheng Biotech released its 2024 three-quarter report, achieving revenue of 1.539 billion yuan, up 12.82% year on year; net profit attributable to shareholders of listed companies was 0.17 billion yuan, down 46.90% year on year. Based on the total share capital of 0.25 billion shares, earnings per share were 0.74 yuan, and operating cash flow per share was 0.46 yuan.

Among them, the third quarter achieved operating income of 0.523 billion yuan, an increase of 1.66% year on year; net profit attributable to shareholders of listed companies was 0.02 billion yuan, a year-on-year decrease of 84.32%.

The decline in valine prices dragged down performance, and the sales scale continued to grow well. The company maintained a slight increase in revenue in the third quarter, but gross margin for the single quarter fell 19 percentage points year on year, down 8.3 percentage points from month to month to 21.4%; at the same time, the four expenses only increased slightly from month to month, increasing by about 0.03 billion yuan year on year (mainly due to an increase in management expenses and financial expenses).

We speculate that the main reason for the decline in prices of the company's products such as valine and inositol is the main reason for the decline in profit levels. According to Wind data, the average price of valine in the third quarter was 0.0137 million/ton, down 34% year on year, down about 8% month on month; in the third quarter, the price of inositol was 0.0469 million yuan/ton, down 67.2% year on year and 21% month on month.

In addition, with product prices falling significantly, the company's revenue continues to grow. We speculate that the sales scale of amino acid series products is still increasing. At the same time, the company's new products such as 1,3-propanediol, succinic acid, malic acid, tryptophan, and arginine are entering the market as planned, and the scale of operation has further expanded.

Projects under construction continue to advance, and it is expected that the commissioning of new projects will contribute more. In the first half of 2024, the company's project with an annual output of 0.05 million tons of bio-based succinic acid and biobased product raw materials, the project with an annual output of 0.05 million tons of bio-based propanediol, and an annual output of 0.05 million tons of bio-based malic acid project were 90%, 75%, and 80%, respectively; in March '24, the project progress of the “alternating 0.06 million tons of three-chain amino acids, tryptophan and 10,000 tons of refined amino acids” project announced by the company was 5%.

Following the signing of the “Technology License Agreement” with Hangzhou Ouhe Biotechnology Co., Ltd. for biologic arginine technology in March '24, the company announced on August 27 that it intends to sign a “Technology License Agreement” with EurocoBio. EurocoBio authorized the company to use its biotechnology for tryptophan production, further enriching the company's product structure and enhancing its position in the industry.

Profit forecast and valuation: Taking into account changes in the company's product prices and project progress, the company's net profit from 2024 to 2026 is estimated to be 0.24, 0.48, and 0.55 billion yuan (previous values were 0.66, 0.84, and 1.03 billion yuan), respectively, maintaining a “buy” investment rating.

Risk warning: Increased competition causes product prices to fall, raw material prices fluctuate greatly, the progress and profit of new projects fall short of expectations, and risk of exchange rate fluctuations.