Event

According to the 2018 mid-term report, the company achieved operating income of 444 million yuan during the reporting period, an increase of 59.04% over the same period last year; the net profit attributed to shareholders of listed companies was 16.5558 million yuan, turning losses into profits over the same period last year; and the net profit attributable to non-deductions was 13.3541 million yuan. Basic earnings per share are 0.026.

Brief comment

Take biological fermentation and biochemical industry as the core

The company is mainly engaged in the research and development, production and sales of food additives, feed additives, chemical APIs and pharmaceutical intermediates. The scope of product application covers many fields such as food processing, feed processing, pharmaceutical manufacturing and so on. At present, the company has a production capacity of 7500 tons of nucleotide additives (the third largest in the nucleotide industry) and 4094 tons of biochemical APIs and intermediates.

The supply and demand situation of IPCC has gradually improved, and the price has gone up.

The full name of iatrog is disodium monosodium glutamate, which is prepared by fermentation process and is the freshening agent of monosodium glutamate. During the reporting period, the market price of Iyogg has been rising all the way. In October 2017, the price of domestic flavor nucleotide disodium was still at a low of 55,000 yuan / ton. In June 2018, the price rose to 100,000 yuan / ton, and the price rebounded sharply, up 30% from the beginning of the year. The reason is mainly because part of the domestic production capacity is affected by environmental production restrictions, the industry capacity shrinks; on the other hand, the market demand for composite seasoning is strong, and the downstream recognition of Itung is gradually increasing, and the proportion of adding and using is increasing. At present, the domestic nucleotide manufacturers are only South Korean Xijie, Plum Blossom Biology and Xinghu Science and Technology, and the industry is in the pattern of oligopoly.

The API industry is tight, and prices are rising.

API production is an important source of profit for the company. The company's API series products have passed the official drug policy inspection of many countries, such as China CFDA, American FDA, EU GMP, Australia TGA, EU EDQM COS and so on. In recent years, the chemical API industry has been affected by environmental protection regulation and related policies. The backward production capacity at the production end is obvious, and the prices of some APIs have risen sharply. With the normalization of the national environmental protection supervision system, the continuous tightening of environmental protection policies, the cyclical weakening of the chemical API industry, and the overall rise in industry prices.

The three expenses change greatly, which is mainly affected by the state of operation.

During the reporting period, the company's expenses totaled 75.485 million yuan, of which sales expenses were 16.6854 million yuan, an increase of 92.35% over the same period last year, and the expense rate was 3.76%. The main reason for the sharp increase in sales expenses during the reporting period was the corresponding increase in transportation costs with the increase in product sales. The management expenses were 50.9655 million yuan, down 19.94% from the same period last year, and the expense rate was 11.49%. The reason for the change in management expenses was the higher management expenses in the same period last year, mainly due to the wages of production personnel, depreciation, water and electricity and other expenses included in the management expenses during the maintenance and shutdown period in the same period last year. The financial expenses were 7.8339 million yuan, down 51.65% from the same period last year, and the expense rate was 1.77%. The change in financial expenses was mainly due to the reduction of interest-bearing liabilities due to the maturity and repayment of corporate bonds in July last year, and the reduction of interest expenses due to the repayment of bank loans due during the reporting period.

The continuous progress of the merger and acquisition of Sichuan Jiuling Pharmaceutical will bring new performance increments for the company.

In March 2018, the company issued a restructuring plan to buy a 100% stake in Jiuling Pharmaceutical by issuing shares and paying cash. Jiuling Pharmaceutical, the target company, is a pharmaceutical and chemical enterprise engaged in the research and development, production and sales of pharmaceutical intermediates. In 2016 and 2017, its revenue reached 8462 yuan and 105.25 million yuan respectively, and its net profit reached 2708 yuan and 34.46 million yuan respectively. And according to the "performance compensation Agreement" signed with the company, it is estimated that the net profit of "Jiuling Pharmaceutical" from 2018 to 2020 will not be less than 3200 yuan, 3790 yuan and 43.5 million yuan respectively. After the completion of this transaction, it will bring significant performance increments for the company, which will help to improve the company's sustainable profitability.

Pay attention to the persistence of the price increase of nucleotide products and look forward to the follow-up performance release of the company.

The company is the third largest producer in the domestic nucleotide industry and will benefit significantly from the current round of nucleotide price increases, focusing on the persistence of subsequent price increases for nucleotide products. On the whole, Xijie's 10, 000-ton new production capacity is not expected to be put on the market until the second half of 199. in the context of increasingly stringent environmental protection, we expect nucleotide prices to remain high and look forward to the company's future performance release. Regardless of the performance increment and equity dilution after the completion of the merger and acquisition of Jiuling Pharmaceutical, we expect the company's net profit from 2018 to 2020 to be 88.45 million yuan, 176 million yuan and 180 million yuan respectively, corresponding to 29X, 15x and 14x respectively, with a "overweight" rating.