Incident: The company announced that in 2023, H1's revenue was 1,425 million yuan, YOY +6.14%, and YOY -3.94%; in 2023, Q2's revenue was 683 million yuan, QOQ -8.04%, net profit of 79 million yuan, QOQ -14.3%, net profit of 109 million yuan, net profit of 109 million yuan, net profit of 109 million yuan, excluding non-net profit of 109 million yuan, up 26.74% from the previous year. The Q2 gross profit margin of 24.06% increased by 3.59 pcts year on year and decreased by 2.81 pcts month on month.

Comment:

1. New production capacity is put into production and sales volume is increased. The pesticide industry was generally in a downward boom cycle in the second quarter, and the company's profit bucked the trend and increased year-on-year in the second quarter. Q2 Net profit increased year-on-year, mainly due to increased profits due to the release of new production capacity from a sales volume perspective, such as the launch of a new propyne fluoroxalamide product at the Huai'an base and the expansion of production of an old product of 3,000 tons/year of dicofuron, which increased the company's product sales volume. Q2 gross margin increased year-on-year, mainly because (1) the company continued to increase export long order sales with higher gross margin, from 72.73% of last year's Q2 to 78.41% of this year's Q2; (2) restrictions on shipping during the same period last year affected product exports, and the gross margin base was lower than this year; (3) although product prices declined in the second quarter, raw material prices also declined; (4) the gross margin of newly produced products such as propargyl fluoroxamine was relatively high, raising the overall gross margin level.

2. The company is the leader in the pesticide segment. Overall product gross margin is relatively stable, and there is strong certainty that the performance will grow as it continues to invest in new production capacity. In terms of gross margin, the market share of the company's core products is high, and downstream is bound to multinational companies such as Cordiva, Bayer, Syngenta, and BASF Agrochemical. Overall, product gross margin is relatively stable, and cycle fluctuations are relatively not obvious. From a quantitative perspective, the planned production capacity of pentafluorosulfonoxamide at the Nanjing base; bifluorosulfamide, oxazoloxamide, and chlorobenzamide at the Huai'an base; the planned production capacity of the project ranges from 500-1500 tons/year to continue to drive the company's performance growth after the launch of future production capacity.

3. Relying on R&D capabilities, we will continue to find new products in the future to create long-term growth. R&D innovation is one of the company's core competencies. R&D expenses in the first half of 2023 were 38.31 million yuan, an increase of 25% over the previous year, exceeding the growth rate of revenue. The company attaches importance to the introduction of high-end R&D and innovative talents and strengthens cooperation with world-renowned universities and research institutes. It has obtained 76 authorized invention patents and 51 utility model patents. We are optimistic about the company's ability to continue to find new products in the future and has long-term growth potential.

Investment suggestions: We are optimistic that the company will stabilize its leading position in the pesticide segment, and rely on R&D capabilities to continue to put in production of new products to bring growth. The company's net profit for 2023-2025 is expected to be 361/4.13/526 million yuan. The corresponding PE is 13.61/11.89/9.33, respectively, maintaining the “highly recommended” rating.

Risk warning: New production capacity investment falls short of expectations, downstream demand falls short of expectations, raw material prices have risen sharply, product prices have dropped sharply, etc.