1-3Q24 net profit to mother -14.0% YoY, in line with our expectations

The company announced 1-3Q24 results: 1-3Q24 revenue -13.6% YoY to 7.45 billion yuan, net profit to mother -14.0% YoY to 0.46 billion yuan; of these, 3Q24 revenue was -28.1% YoY to 2.4 billion yuan, and net profit to mother was -35.3% YoY to 0.16 billion yuan. The performance is in line with our expectations. We believe that the decline in performance is mainly due to falling prices of wheat and other grains this year, and the company's profit margin has narrowed as a result.

Development trends

The increase in wheat volume and price reduction, and the margin for gross profit narrowed, hampering the performance of the main planting industry in 3Q24. 1) Planting industry: The company mainly sold wheat in the third quarter of the calendar year. The total export sales volume of 3Q24's self-produced and externally harvested wheat was +3.2% to 0.22 million tons. However, according to Huiyi.com, the average price of domestic wheat in 3Q24 was -14.4% to 2,486 yuan/ton. We believe that the overall gross profit space for wheat has narrowed as a result, dragging down the performance of the main growing industry. 2) Seed industry: In 3Q24, wheat sales volume was -45% to 0.07 million tons. On the one hand, it was a high sales base last year, and on the other hand, it was also dragged down by falling wheat prices; on the other hand, rice sales were smaller in the off-season. 3) Processing industry: In 3Q24, export sales of rice, cooking oil, and malt were -4.6%, -60%, and -1.6%, respectively, to 0.08, 0.05, and 0.05 million tons, respectively. We think it may be mainly affected by the slow recovery in downstream consumption.

Overall profitability declined slightly due to falling food prices. 1) Gross profit margin: The 3Q24 company's gross margin was +1.7ppt to 15.3% year-on-year. We think the main reason is that food prices and planting costs have declined this year, reducing gross profit space while slightly increasing gross profit margin. 2) Expense ratio: The 3Q24 sales/management (including R&D) /finance expenses ratio was +0.4/+1.2/+0.5ppt to 1.9%/6.1%/2.2%, respectively. We believe this is mainly due to the decline in revenue scale. 3) Other income: Other income in 3Q24 was -27.5% to 0.04 billion yuan. We believe that some related government subsidies may have been reduced due to the decline in agricultural prices this year. 4) Under the combined influence, profitability declined slightly, and the 3Q24 net profit margin was -0.7ppt to 6.7% year on year.

The main planting industry is still under pressure in the short term, and integrated expansion explores medium- to long-term incremental space. 1) In the short term, according to Huiyi.com, the spot price of wheat/japonica rice in October was -19.2%/-1.4%, respectively, to 2,458/3,010 yuan/ton, and the price of japonica rice recently hit a low of 2,872 yuan/ton due to the centralized marketing of new grains. Taking into account the fall in pesticide and fertilizer prices this year and the company's internal cost reduction and efficiency, we judge that the company's main planting business may still be under pressure for a short time against the backdrop of low food prices. 2) In the medium to long term, on the one hand, the company initiated integrated volume expansion work to provide “seeds, agricultural supply+technical service+product recycling” closed-loop service to large growers. 1H24 covers an area of more than 0.8 million acres, which we believe is expected to drive sales of seeds, agricultural materials, etc.; on the other hand, various industrial chain subsidiaries actively promote capacity expansion and resource integration to promote endogenous and epitaxial development.

Profit forecasting and valuation

The current stock price corresponds to 24/25 16/15 times P/E. We kept our net profit forecast of 0.89/0.97 billion yuan unchanged for 24/25; based on changes in market risk appetite, we raised the target price by 9% to 12 yuan, corresponding to 19/17 times P/E in 24/25, with room for 14% increase, and maintain the outperforming industry rating.

risks

Natural disasters; food price fluctuations; product quality risks; changes in land circulation and government subsidy policies.