Investment highlights
For the first time, it covered Meihua Biology (600873) to outperform the industry. The target price was 13.70 yuan. Based on the relative valuation method, corresponding to a price-earnings ratio of 12 times in 2024, the company is deeply involved in the “amino acid+” strategy and is a full-chain synthetic biology company specializing in amino acid products. The reasons are as follows:
The company is a leader in the amino acid industry, and the supply and demand pattern is expected to improve. The demand side benefited from the reduction and substitution of soybean meal. According to Boya Hexun, domestic amino acid production was about 4.3 million tons in 2023, and the CAGR has maintained rapid growth of 11.7% in the past five years. On the supply side, we believe that the peak period of industry capacity expansion has passed, there will be no new production capacity for threonine in 2024-25, and the lysine pattern is also expected to concentrate on leading companies.
Meihua Biotech has the highest production capacity of 550,000 tons of threonine and 1 million tons of lysine in the industry. As supply expansion slows and demand picks up, we believe it is expected to drive the company's profits to continue to improve.
Continue to carry out cash dividends and repurchase cancellations to increase shareholder returns. Since 2018, the company has accumulated cash dividends of 6.337 billion yuan, with an average dividend rate of 48.9% and an average dividend rate of 5.6%. Meanwhile, since 2021, the company has repurchased and cancelled a total of 216 million shares, with a total amount of 2.06 billion yuan, continuing to increase earnings per share. The company plans to pay 1.2 billion yuan in cash dividends for 2023 and has completed repurchases and cancellation of 860 million yuan. The combined calculation corresponds to the current stock price dividend rate of about 7.2%.
Continue to build a synthetic biology platform company. The company's current large-scale biological manufacturing capabilities are essential for synthetic biology application development and product implementation. The company continues to deeply cultivate synthetic biology and biological fermentation technology, further advance the “amino acid +” strategy, focus on sorting out technology and product opportunities in basic biological technology, precision fermentation, and non-food fermentation, and continue to promote advanced production and development technology and the layout of new products, and is expected to build a synthetic biology platform company.
What is our biggest difference from the market? The market is worried that the new production capacity of monosodium glutamate will be put into operation, and the decline in the xanthan gum boom will affect the company's profits, which in turn will affect dividends or repurchases. We believe that it is unlikely that MSG will experience another price war when CR3 in the industry exceeds 90%, and that although the price of xanthan gum has declined, profit margins are expected to remain at a reasonable level. Furthermore, we expect the company's capital expenditure to remain stable in 2024-25, and the cash flow will cover its capital expenditure and dividend repurchases.
Potential catalysts: Increased pig prices have brought demand for amino acids exceeding expectations, synthetic biology research and development progress exceeding expectations, and dividends and repurchase ratios continue to rise.
Profit forecasting and valuation
We expect the company's 2024/25 EPS to be 1.14 yuan/1.27 yuan, respectively, and a CAGR of 6.5%. The current stock price corresponds to the 2024/25 price-earnings ratio of 8.9/8.1x. Considering the high concentration of the monosodium glutamate industry, the good supply pattern of threonine, and the company still has a lot of room for growth in the field of synthetic biology, the first coverage was given a “outperforming industry” rating. Using a relative valuation method, the target price was given at 13.7 yuan/share, corresponding to 12 times the price-earnings ratio in 2024, with 34% upward space.
risks
Increased production capacity has intensified competition in the industry, anti-dumping duties have been levied overseas, and the return on new construction projects falls short of expectations.