Matters:
Xinhecheng released its report for the first quarter of 2024, achieving revenue of 4.499 billion yuan, +24.54%/+9.61%, achieving net profit of 870 million yuan, +35.21%/+44.21% YoY, and net profit without return to mother of 857 million yuan, +46.22%/+29.21% YoY.
Commentary:
The quantity and price of methionine rose sharply, and Q1 profits achieved a high increase. In 24Q1, the company achieved a high year-on-month increase in revenue and profit. We believe that the main reason for this is the sharp rise in the volume and price of the methionine business: in terms of volume, the 150,000-ton installation process route was opened at one time in the company's methionine phase II project in 2023, and 24Q1 contributed a significant increase; in terms of price, the average price of methionine Q1 was 21.79 yuan/kg, +22.55% year-on-month, and +2.75% month-on-month. With the price recovery of products such as vitamins and methionine, the company's profit also broke out of the trough of recent years. 24Q1 achieved a gross profit margin of 35.04%, +3.35 PCT year on month, and +3.60 PCT month on month, achieving a net profit margin of 19.40%, +1.49PCT year on year, and +4.63PCT month on month.
Vitamin prices have reached an inflection point and are expected to gradually recover. Since 2022, the vitamin price index has experienced 7 quarters of decline and bottomed out in 23Q4. The 24Q1 vitamin price index was 82.64, +4.15% over the previous month. Judging from the company's main products VA and VE, as of April 29, their prices were 85 and 70 yuan/kg respectively, up 18.88% and 22.81% respectively from the low prices in 2023. Looking ahead to 2024, the company's vitamin sector has entered the recovery range: on the demand side, the business situation in the downstream aquaculture industry is gradually improving, and acceptance of vitamin prices is constantly increasing; on the supply side, during the low period of the cycle, some production capacity has already begun to be withdrawn, and maintenance is becoming more frequent. Coupled with recent frequent device accidents, supply-side uncertainty is constantly increasing. Therefore, looking at the whole year, vitamin prices are expected to gradually recover with the support of both supply and demand, helping the company improve its performance.
Project reserves are abundant, and new products inject new impetus into development. On the traditional racetrack, construction of Xinhecheng's 4,000 tons/year cystine has begun. The pilot test of the adiponitrile project is progressing smoothly, project approval is progressing in an orderly manner, the HA project is being put into testing. The project is progressing smoothly, and the product range is constantly being enriched. On the new track, in 2023, Xinhecheng announced a project with an annual output of 60,000 tons of phosphorus-containing amino acids. It plans to invest 3 billion yuan to build a 60,000 ton glyphosate project. The first phase of the 27,000 tons of original medicine and 15,000 tons of 20% solubilizer project is expected to be put into operation in December 2024. It lays out a pesticide project for the first time to expand the company's boundaries. Abundant project reserves will inject new impetus into the company's development.
Investment advice: Xinhecheng is one of the top four vitamin companies in the world. The vitamin sector is at a low level, and profits are expected to recover as demand recovers. In the long run, the company has four major track layouts, abundant reserve projects, and long-term growth is guaranteed. We expect the company to achieve net profit of 39.08/ 47.62/5.189 billion yuan in 2024-2026, +44.5%/+21.8%/+9.0%; corresponding PE is 15/12/11 times. Referring to historical valuation levels and gradually improving fundamentals, the 2024 PE was given 18 times, and the corresponding target price was 22.68 yuan, maintaining the “strong promotion” rating.
Risk warning: Product prices fall short of expectations; projects under construction fall short of expectations; raw material prices fluctuate greatly.