1H24 results are in line with market expectations

The company announced 1H24 results, achieving revenue of 3.33 billion yuan, or -25.5% year on year; net profit to mother of 0.093 billion yuan, -80.6% year over year, corresponding to profit of 0.116 yuan per share, within the previous performance forecast range, in line with market expectations. Of these, 2Q24 achieved revenue of 1.939 billion yuan and net profit of 0.045 billion yuan to mother. The sharp decline in the company's profit was mainly due to a sharp drop in the price of glyphosate products.

Due to falling prices of ammonium glyphosate and chloropyridine pesticides, 1H24's revenue declined; gross margin fell 9.48ppt to 17.10% year-on-year. The gross margin of the original drug and formulation was similar, and the gross margin of overseas sales was higher than the domestic 2.69ppt. In terms of period expenses, sales and management expenses remained stable, and R&D expenses were reduced by nearly 50 million yuan. 1H24's balance ratio increased by 3.24ppt to 40.17%.

Development trends

The bottom of pesticide prices has arrived, but it may take a long time to bottom up. As of August 25, the Zhongnong Lihua Original Drug Price Index reported 74.85 points, down 18.8% from last year and 1.09% from the previous month. Among the hundreds of products tracked, 71% of products fell compared to last year; 74% of products remained flat compared to the previous month, and 8% of products rose. Looking at it from the top down, the price of the original drug has been falling for more than two and a half years after reaching a peak of nearly ten years at the end of 2021, and the current price of the original drug is at its lowest level on record (since 2014). We believe that it will be difficult for the industry to have an overall market in 2023-24, when supply continues to be realized, but long-term losses in the industry are unsustainable. There is a possibility that some products will recover after experiencing losses, and the industry is expected to return to break-even or a new state of marginal profit.

The price of glyphosate continues to reach new lows, and the industry may face losses. This year, the average price of glyphosate in 1Q/2Q/3Q (until August 31) was 0.061/0.055/0.053 million/ton, respectively, and prices continued to reach new lows. On the other hand, the price of glyphosate continued to decline. By the end of August, the price was 0.083 million yuan/ton, down 25% from the previous year. At current prices, we think glyphosate may face losses across the industry, and that glyphosate may be profitable (outsourced). We believe that the main reason the boom in the glyphosate industry is due to the large release of supply-side production capacity. According to Baichuan News, by the end of 2023, China's glyphosate production capacity had reached 0.113 million tons/year, an increase of 0.031 million tons/year over the end of 2022. Looking ahead, although glyphosate may have lost money throughout the industry at current prices, the gradual increase in production capacity may continue to suppress the prosperity of the glyphosate industry. We believe that it may still be difficult for the price of glyphosate to improve in the short term.

Profit forecasting and valuation

Due to increased competition in the glyphosate industry and difficulties in recovering in the short term, we lowered our 2024/25 net profit by 67.6%/15.4% to 0.24/0.646 billion yuan. The current stock price corresponds to 2024/2025 24x/9xp/E. Maintaining an outperforming industry rating, taking into account the lower profit forecast and the company's current valuation bottom (2024 P/B ~0.7x), we lowered our target price by 25% to $9.00, corresponding to 2024/2025 30x/11x P/E, with 26% upside compared to the current stock price.

risks

Due to production safety risks, the price of glyphosate continues to decline.