Key points of investment

Introduction: Q3 performance was under pressure in the short term, the fixed increase project was successfully implemented, and the arginine project was successfully put into operation

Event: On October 28, 2024, the company released its report for the third quarter of 2024. Net profit to mother was 0.17 billion yuan in the first three quarters of 24, down 46.90% year on year; net profit to mother was 0.02 billion yuan in 24Q3, down 84.32% year on year and 68.03% month on month.

The fall in the prices of raw materials and substitutes led to a drop in the prices of major products, and the release of new products fell short of expectations, affecting Q3 results. Prices of raw materials and substitutes declined. The average price of corn and soybean meal in 24Q3 was 2401/3098 yuan/ton, down 1.3%/9.6% from month to month. The prices of 24Q3's main products valine/inositol/calcium pantothenate/tryptophane/arginine were 1.37/4.69/0.0551/0.0599/0.0328 million yuan/ton, respectively, down 8.2%/20.8%/3.4%/8.0%/12.6% month-on-month.

Overcapacity combined with falling product prices is expected. The company's sales volume of new products fell short of expectations. 24Q3's revenue was 0.523 billion yuan, up 1.43% month-on-month, gross margin was 21.40%, down 8.27pcts month-on-month, and inventory was 0.354 billion yuan, up 34.37% month-on-month. This year, due to the expansion of production in the industry, the decline in downstream demand, and the fall in the prices of raw materials and substitutes, the prices of the company's main products have declined by varying degrees. In the future, as demand for fresh pig feed increases, I am optimistic that the prices of the company's products will increase steadily in production and sales.

The fixed increase project was successfully implemented to help the product project develop. The company announced the fixed increase stock report on October 23. The total capital raised was 0.7 billion yuan (net 0.684 billion yuan), and the final fixed increase issue price was 33.14 yuan/share, slightly lower than the closing price of 36.75 yuan/share on the 23rd. The dilution of existing shares is expected to be limited. The subscription amount for this issuance reached 4.4 billion yuan, and the overfunding ratio reached 6 times. It was finally determined that there were 9 issuers, mainly local state-owned assets and private equity funds. The fixed increase capital will supplement the company's working capital in the short term and reduce the balance ratio. The optimization of the financial structure will help the company to scale up and put into operation new projects.

The arginine project was successfully put into operation, and I am optimistic that the release of new products will drive performance growth. The 0.025 million ton arginine project at the company's Chifeng base was fully put into operation in July, with an output value of 0.8 billion. The project uses biological alternation to produce 0.025 million tons of valine and arginine per year. The domestic production capacity of arginine has reached 0.081 million tons/year, and Korea's Seagate production capacity has reached 0.055 million tons/year. The industry pattern mainly shows the characteristics of Korea's Seagate family. The domestic production capacity is small and large. I am optimistic that the company will use cost advantages to increase its market share and become an industry Leading the way, the company plans to build a “project with an alternating annual output of 0.06 million tons of three-chain amino acids, tryptophan, and 0.01 million tons of refined amino acids per year”. Trial production is expected to begin in 2025. We believe that the company's core competitiveness stems from low-cost deployment. The release and commissioning of new products is the core growth logic of this year and next, and product commissioning will drive performance growth.

Investment suggestions and conclusions: The company is building a synthetic biology industrialization platform. The application of new technology brings significant cost advantages, and product volume drives the company's profit growth. The company is expected to achieve net profit of 0.411/0.618/0.949 billion in 2024-2026, a year-on-year change of -8.54%/+50.51%/+53.56%. The current market value corresponds to PE of 20.15/13.39/8.72 times, maintaining a “buy” rating.

Risk warning: raw material price risk, risk of new products falling short of expectations when put into production and sales, core competitiveness risk.