A leading biopesticide company, expanding comprehensive environmental protection management across fields. The company, formerly known as Zhejiang Haining Pesticide Factory, was founded in 1970 and listed on the Shanghai Stock Exchange in April 1997. In 2004, the company built the Qianjiang Biochemical Industrial Park in the Haining Economic Development Zone, expanding its fermentation production capacity to 4,600 cubic meters, making it one of the largest biopesticide manufacturers in China. In 2018, it was upgraded to an enterprise directly under Haining City. In 2021, the company and Haining Water Group successfully implemented major asset mergers and acquisitions, purchasing 100% of Haiyun Environmental Protection's shares, 40% shares of Pioneer Water, 40% of Shikang Water's shares, and 40% of Lvdong Haiyun's shares. The business expanded to environmental protection engineering, solid waste disposal, sewage treatment and tap water production. Currently, the company uses the three major sectors of “biological pesticides+ecological environment+water operation” to achieve a new pattern of integrated development.

Asset restructuring enhances the company's performance, and good cash flow guarantees the company's development. Revenue achieved in 2021 (asset restructuring completed) /2022 was 20.31/2.09 billion yuan, +8/ -1% year on year (both the growth rates here and below have been adjusted to the year-on-year growth rate after performance tracking); net profit to mother was 148/206 million yuan, +54/ 39% year over year. In terms of cash flow, net operating cash flows in 2021/2022 were 369/402 million yuan, respectively, +14/ 9% year-on-year. Looking at dividends, for the first time in 2021 since 18 years, the company has had high dividends for two consecutive years. The total cash dividends in 2021/2022 were 0.88/088 million yuan, and the dividend ratio was 41/57%, respectively.

Downstream demand for pesticides is resilient, and the global market for plant growth regulators exceeded 30 billion yuan in '28. According to data from the United Nations Population Division and the Food and Agriculture Organization of the United Nations, at the end of 2021, China's per capita cultivated land area was 0.09 hectares, far lower than the global average of 0.20 hectares per capita in 2021. We believe that our country has a small amount of cultivated land per capita, pesticides guarantee food security, and are resilient in demand. In terms of market size, according to the Markets and Markets report data, the global plant growth regulator market is expected to reach 4.5 billion US dollars in 2028 (about 32.4 billion yuan based on the February 19 exchange rate). According to estimates from Guoguang Co., Ltd.'s 2023 semi-annual report and investor exchange platform data, China's plant growth regulator market was about 6.3 billion yuan in '22.

Expand the product matrix internally and horizontally, and expand overseas markets. The company has original drug preparation and a complete industrial chain. It is one of the few domestic enterprises that can simultaneously engage in R&D, production and sales of plant growth regulator raw materials and formulations, and has a complete plant growth regulator industry chain. Combine industry, education and research to expand the product matrix.

Conduct industry-university-research cooperation with university research teams to develop new products with high added value, and continuously optimize fermentation and extraction processes to reduce production costs. As of 23H1, the company has more than 50 original drugs and new formulation products, and the promotion field is expanding year by year. Actively expand the international market and increase foreign trade sales by more than 30%. As of 23H1, sales have spread across more than 60 overseas markets, covering the US, the UK, South America, India, Vietnam and the Middle East.

The water treatment capacity is complete, and the “park pretreatment+advanced treatment” model opens up a new situation. At present, the development of China's water industry has entered a relatively mature stage, and the total amount of water used in the water market is basically showing a steady decline.

We believe that improving quality and efficiency, reducing leakage rates, breaking through seawater desalination technology, etc., and future water price adjustments are expected to inject new vitality into the industry. As of the third quarter of 2023, the company had a sewage treatment capacity of 876,000 tons/day and a water supply capacity of 560,000 tons/day. The industrial park pretreatment model is expected to form a core competitiveness. Currently, the company is actively promoting the construction of the Hanghai New Area Sewage Treatment Plant and the construction of the Hanghai New Area Industrial Sewage Pretreatment Plant. We believe that the future implementation of the water price adjustment+industrial park model is expected to increase revenue in the corporate sector.

Profit forecast and valuation: We expect the company's net profit to be 2.09/234/275 million yuan in 2023-2025, respectively, and the corresponding EPS of 0.24/0.27/0.32 yuan. Based on the average valuation of comparable companies, and considering the company's leading position in the domestic biopesticide industry and the continuous provision of stable cash flow in the water sector, we gave the company 16-17 times PE in 2024, corresponding to a reasonable value range. Overall, we gave the company a reasonable value range of 4.32-4.59 yuan. For the first time, coverage was given, and “superior to the market” rating.

Risk warning: Industry risk and competition increase risk, project investment and construction risk, subsidiary accounts receivable repayment and cash flow turnover risk, and risk of serious inversion of the coal heat linkage mechanism.