COFCO Sugar Holdings Co., Ltd. is a domestic A-share listed company controlled by COFCO Group Co., Ltd. The company has two major industries, sugar and tomato processing. It is the largest sugar producer and trading enterprise and a leading tomato product manufacturer in China. Trading sugar, homegrown sugar, processed sugar, and tomato production and processing are the four major businesses of COFCO Sugar.

According to the 2022 annual report, the company's sugar trade business was the core revenue source, accounting for 65.71%. The revenue from self-produced sugar, processed sugar and tomatoes accounted for 15.94%, 10.52%, and 7.08% of total revenue respectively. Among them, tomato products had the highest gross margin.

The company's sugar business has an annual operating volume of about 4.65 million tons, accounting for more than 30% of the country's total consumption, and its share of the terminal market continues to increase. The company continues to strengthen its ability to control sugar sources and is at the forefront of the industry. The company is the main channel for domestic sugar imports, controls over 2 million tons of warehousing and logistics outlets, and has established a logistics service system covering major branch nodes across the country.

Considering the sugar price cycle and the timing of the transfer of the company's non-sugar business, we observed the fluctuation range PE (15-70) of the company's valuation in the past six sugar production and sales years. Compared to the average cyclical agricultural company, the company's valuation range shows a certain premium. We believe that “adding new and optimized assets, import position in line with industry trends, significant self-production, cost advantage of imported sugar, and continuous expansion of consumer goods” are the core advantages of getting a valuation premium, and these advantages are still being upgraded.

Furthermore, in the foreseeable 3-5 years, the company's competitive advantage will steadily increase, and the market share is expected to increase further. There is room for further increase in the valuation range. Currently, the company's valuation is at a low level of nearly 6 years. The bottoming up of sugar prices provides positive help to performance, and the simultaneous rise in performance and valuation has ushered in a double blow from Davis.

Profit forecasts, valuations and investment ratings: Internal and external price spreads are gradually returning to normal levels, and an increase in the share of imports will help the company trade increase the amount of sugar and processed sugar it sells. Domestic and foreign sugar prices ended at the beginning of 2023 from a low level of nearly six years and began a bull market, and the gross margin of domestic and foreign self-produced sugar increased year by year. The company's tomato products business will further expand overseas markets, and its brand power will increase significantly. We expect the company's revenue for 2023-2025 to be 31.806 billion yuan, 33,456 billion yuan and 36.141 billion yuan respectively, up 20.30%, 5.19% and 8.02% year-on-year; net profit attributable to the parent company was 1,525 billion yuan, 1,777 million yuan and 2,220 billion yuan respectively, up 105.11%, 16.51% and 24.90% year-on-year. The company obtained a valuation premium through “the optimization of new assets, the import position in line with industry trends, significant cost advantages, and consumer goods expansion”, and there is room for further increase in the valuation range. First coverage, giving a “buy” rating.

Risk warning: Falling sugar prices at home and abroad limit the release of profits from self-produced sugar, the government restricted the total amount of additional imported sugar distributed, the company received fewer batches, and the expansion of the tomato market was bottlenecked. There is a risk that the public information used in the research report is lagging behind or not being updated in a timely manner.