It is one of the leading domestic fine chemical companies, and its business scope spans various fields such as nutritional products, fragrance, polymer materials, and APIs. Since growing from a school-run enterprise, the company has become a leader in the domestic fine chemical industry. It has four major production bases in Xinchang, Zhejiang, Shangyu, Shandong, and Suihua, Heilongjiang. The company's business scope spans the four major chemical fields of nutrition, fragrance, polymer materials, and APIs. Among them, the nutritional products business is the main support for the company's performance. The company's nutritional products business accounted for more than 60% of revenue in 2018-2023. The revenue and gross profit of the nutritional products business in 2023 were 65.27% and 59.20% respectively. The overall gross margin of the company's nutritional products has remained at a high level of 29%-60% over the years.

Innovation drives growth in new and growing periods. The company adheres to the concept of innovation-driven development. Continuous innovation in technology and continuous expansion and iteration of products are the lifeblood of the company's growth. The company uses the two core technology platforms of “Chemical +” and “Bio+” to continuously develop various functional chemicals. Production methods have expanded from chemical synthesis to biological manufacturing, and products have expanded from small molecule compounds to polymer polymers.

In terms of R&D, the number of R&D personnel in the company has continued to increase for many years, and the company's R&D investment has shown a relatively rapid growth trend. From 2019 to 2023, the company's R&D expenses rose from 0.43 billion yuan to 0.89 billion yuan, an increase of 106.98%; during the same period, the number of the company's R&D personnel increased by 56.33%.

The global demand for methionine is resilient. The demand for methionine addition to feed is rigid, and due to the small addition ratio, downstream is less sensitive to changes in the price of methionine. Due to factors such as population growth, rising economic standards in developing countries, and the continuous development of modern livestock farming, methionine demand in the Asia-Pacific region, including China, is growing rapidly, and global methionine demand is still growing at a moderate rate. The global market demand for methionine has reached more than 1.6 million tons in 2022. Based on past data, normal market growth means there will be an additional demand of about 0.2 million tons every two years in the future. Based on the price of 0.022 million yuan/ton, the global methionine market size is about 35 billion yuan, and the market will increase by about 4.4 billion yuan every two years. We believe that global methionine can still maintain a moderate growth rate, and that future growth will mainly be due to the expansion of the poultry farming industry in developing countries, as well as the expansion of the aquatic products and ruminant markets.

Methionine supply and demand are expected to tighten in the future, and methionine prices may remain strong. Evonik, Xijie, Xinhe, Ziguang, and Andisu have all arranged equipment maintenance in 2024. Sumitomo will withdraw 0.075 million tons of production capacity by 2024, driving up corporate prices. We believe that considering that methionine prices are still at historically low levels, Sumitomo continues to reduce methionine production capacity, and that some old production capacity may continue to be cleared in the future, supply and demand are expected to tighten in the future, and methionine prices may remain strong, which is beneficial to the company's performance.

The company collaborated on multiple advantages, reduced costs and increased efficiency, and entered the first tier of the global methionine industry. The company's competitive advantages in the methionine industry include integrated cost advantages, leading innovative technology, and business synergy: the company built an integrated methionine supporting device to strengthen its cost advantage. The company's methionine production uses integrated devices, and the main starting materials, acrylaldehyde, hydrocyanic acid, and hydrogen sulfide all achieved self-support; the company always insisted on independent R&D and innovation, driving the growth of the methionine business. In 2017, the company successfully achieved large-scale production with 0.05 million tons of methionine per year. This is the first large-scale system in China that actually has completely independent intellectual property rights A green, integrated methionine production device, and a weak alkali potassium salt dual-cycle D, L-methionine production process developed by the company also fundamentally solved problems such as high energy consumption, high equipment safety requirements, and large by-products in the methionine industrialization process; the company can take advantage of the synergy between products in the animal nutrition sector and use vitamin sales channels to shorten the market expansion period and reduce product sales costs.

Looking ahead, the quantity and quality of the company's methionine business is expected to rise sharply. The company's new production capacity for liquid methionine. In the 0.18 million tons/year (100% production capacity) liquid methionine project between the company and Sinopec, the company's equity production capacity is 0.09 million tons/year. As production capacity expands further, the company's scale effect will become more significant, enhancing its market competitiveness. In addition, after the company's production capacity reaches 0.3 million tons/year, according to full production capacity estimates, for every 1,000 yuan/ton increase in methionine price, the company's profit will increase by about 0.372 billion yuan. Furthermore, the current price of methionine is still in the bottom range, which is expected to bring greater performance flexibility to the company. On the other hand, the company's methionine business can create high-value-added methionine specialty products through collaboration with products such as vitamins, to achieve transformation from a primary product supplier to a product+solution, and advance towards a global animal nutrition leader.

Profit forecast and valuation: We expect the company's revenue for 2024-2026 to be 21.856/22.67/24.985 billion yuan, respectively, and net profit to mother of 6.224/6.5/6.714 billion yuan, respectively. The corresponding EPS is 2.01/2.10/2.17 yuan, and the corresponding PE multiples are 10.8X, 10.4X, and 10.1X, respectively. We are optimistic about the price rebound of the company's methionine products and the release of the company's new production capacity, and maintain the “buy” rating.

Risk warning: Risk of product prices falling short of expectations, risk of increased industry supply, increased industry competition, risk of insufficient downstream demand in the aquaculture industry, risk of sharp rise in raw material prices, risk of safe and environmentally friendly production, and risks of projects under construction falling short of expectations.