2023 and 1Q24 results are in line with our expectations
The company announced its results for the year 23 and 1Q24, achieving revenue of 15.5/230 million yuan, +17%/-12%, and net profit to mother of 26/0.3 billion yuan, +1%/-33% year-on-year, in line with our expectations. The pressure on 1Q24 results was mainly due to a marked year-on-year decline in corn food prices, and farmers' enthusiasm or pressure to buy seeds.
On a quarterly basis, Q1/Q2/Q3/Q4 companies' net profit for Q1/Q3/Q4 was 0.5/0.2/160 million yuan, respectively, and 4Q23 and 1Q24 net profit to mother was +2.7% year-on-year.
Development trends
Corn seeds grew steadily in 1 and 23, and the fall in corn food prices in 1Q24 was dragged down. By product, the company achieved revenue of 13.5/1.1/0.5 billion yuan for corn/wheat/rice seeds in '23, respectively, +15.3%/+25.2%/+69.1% year-on-year. We believe that relatively high corn prices in '23 supported seed sales and prices, while 1Q24 corn prices declined markedly year over year, and farmers' enthusiasm to buy seeds early declined or marginally. According to iFind, the average domestic corn price was -0.7%/-15% year-on-year in 2013/1Q24. Under the combined impact, the company's total revenue for 4Q23 and 1Q24 increased 10% to 1.13 billion yuan.
2. Production costs have risen marginally, and profitability is under pressure. We believe that 1) the gross profit side: the cost of corn production rose marginally in 23, corn prices fluctuated and declined, and the company's profitability was under pressure. In 2023/1Q24, the company's gross margin was -3.2/-6.5ppt to 28.3%/25.4%, respectively; 2) the cost side: the company continued to reduce costs and control fees, maintain high R&D investment, and the 23-year sales/management/finance/R&D expense ratio was -0.06/-0.37/+0.55/+0.01ppt to 4.6%/7%/4.3%/-2.1%, respectively. Under the combined influence, the company achieved a net profit margin of 16.5%/13% in 2023/1Q24, -2.6/-4.1ppt.
3. It is expected to be the first to benefit from the industrialization of biological breeding, and the traditional hybrid corn seed trend is steady and far-reaching. We believe that 1) Biological breeding: Six varieties, including Denghai 605D, Denghai 533D, Denghai 533K, and Liangyu 99D, under Denghai Seed Industry, have been approved as genetically modified varieties. The number of approved genetically-modified corn varieties ranked second in the country, accounting for 9%. Among them, Denghai 605D's corresponding conventional varieties ranked 5th in the country in 2022 in terms of promotion area of 12.19 million mu, and was selected as “Looking for high-yield varieties of corn in 2023”. We expect that the company will continue to increase its market share with first-mover advantages, high-quality varieties, and complete commercial support. 2) Spatial calculation: The CR2 of the overseas mature corn seed market is as high as 60%, and the company's potential profit flexibility is high. It is recommended to continue to pay attention to the rate of penetration of biological breeding industrialization and the pace of profit realization.
Profit forecasting and valuation
We keep our profit forecast unchanged. The current stock price corresponds to 30/26 times P/E for 24/25, respectively. Keep the outperforming industry rating and target price of 14 yuan unchanged, corresponding to 44/37 times P/E in 24/25, respectively, with 43% upside compared to the current stock price.
risks
Corn prices are falling, the industrialization process of biological breeding falls short of expectations, and extreme weather risks.