2Q24 results are in line with our expectations

The company's 1H24 revenue was -15.6% to 0.408 billion yuan, and net profit to mother -29.3% year-on-year to 0.053 billion yuan. Among them, 2Q24 revenue was -20.5% to 0.175 billion yuan, and net profit to mother was -24.3% to 0.023 billion yuan, in line with our expectations. The year-on-year pressure on performance was mainly due to falling corn prices.

Development trends

1. The decline in corn prices and oversupply in the industry dragged down seed prices, and revenue was under year-on-year pressure. By product, the company's 1H24 corn/wheat/rice/vegetable seeds achieved revenue of 3.85/0.014/0.061/0.107 billion yuan respectively, -15.4%/-1.7%/+82.6%/-10.6% year-on-year. We believe that, on the one hand, 1H24 corn prices have declined significantly year on year, and farmers' enthusiasm to buy seeds declined. According to iFind, the average domestic corn price was -14%; on the other hand, corn seed production was sufficient in 23 years. According to the Ministry of Agriculture and Rural Affairs, the annual supply/demand for hybrid corn seeds in the 23/24 market is expected to be 2.05/1.22 million tons, with a supply-demand ratio of 168%, and market competition is fierce. Under the combined influence, the company's revenue in the corn sector was under pressure.

2. Production costs are high, and profitability is under year-on-year pressure. We believe that 1) gross profit side: corn production costs remained relatively high, 1H24 corn prices declined year on year, and the company's profitability was under pressure. 1H24's corn seed gross margin reached 25.2%, 3ppt year on year; 2) cost side: as revenue volume declined, the cost rate increased, and the company continued to increase R&D investment. 1H24 sales/management/R&D/finance cost ratios were +0.6/+0.9/+2.8/-0.5ppt to 7.1%/11.4%/9.2%/-3.6% year on year, respectively. Under the combined influence, the company achieved a net profit margin of 12.9% on 1H24, -2.5ppt year over year.

3. It is expected to be the first to benefit from the industrialization of biological breeding, focusing on the speed of industrialization penetration and the pace of profit realization.

We believe that 1) Biological breeding: According to the Ministry of Agriculture and Rural Affairs, 6 varieties, including Denghai 605D, Denghai 533K, and Denghai 685D, under the Denghai Seed Industry, have been approved, ranking second in the country in terms of the number of approved genetically-modified corn varieties, accounting for 9%. Among them, the promotion area corresponding to conventional varieties of Denghai 605D ranked 5th in the country in 2022, reaching 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 rely on first-mover advantages, high-quality varieties, and complete commercial support Increase market share. 2) Long-term space: The CR2 of the overseas mature corn seed market was as high as 60% in '21. As the industrialization of biological breeding accelerates, we estimate that the company has potential room to increase profits in the medium to long term. We recommend continuing to pay attention to the rate of penetration of biological breeding industrialization and the pace of profit realization.

Profit forecasting and valuation

Based on the decline in food prices, the company lowered its 24/25 net profit by 18%/19% to 0.23/0.27 billion yuan. The current stock price corresponds to 31/26 times P/E in 24/25. Maintaining an outperforming industry rating, the target price was lowered by 29% to 10 yuan based on profit forecast adjustments, corresponding to 38/32 times P/E in 24/25, with 24% upward space.

risks

Corn prices have declined, the industrialization process of biological breeding has fallen short of expectations, and market competition is fierce.