Incident: The company issued an announcement regarding the resignation of a non-independent director. Mr. Lin Wei resigned as a director of the third board of directors of the company and a member of the audit committee of the board of directors due to personal reasons. The company will complete the by-election of directors as soon as possible in accordance with relevant laws and regulations and the relevant provisions of the “Articles of Association”, and promptly fulfill the obligation to disclose information.

The edible probiotics business has grown into a core sector and has maintained good growth, and animal and plant microecological preparations continue to gain strength. Since '21, the company's business restructuring has had remarkable results. Downstream demand for compound food additives has declined significantly. The revenue share of the business segment declined significantly, and the share of 24H1 revenue fell to 13.2%, with limited future impact on the company's performance. At the same time, the edible probiotic products business developed rapidly in recent years, with a compound growth rate of 60.3% in 21-23. Under a high base, 24H1 growth decelerated but maintained double-digit growth. The share of revenue increased to 73.8%, which has become the main source of the company's revenue; the animal and plant microformulation business 24H1 revenue increased 86.1% year-on-year Along with The new production base is completed and put into operation, and downstream customer development, such as signing a “Strategic Cooperation Agreement” with Runhe Supply Chain Group Co., Ltd., the business is expected to maintain good growth in the future.

Technology and R&D advantages create competitive barriers, rich strain resource library, and clinical trial accumulation data support.

As a leading enterprise in the domestic probiotic industry, the company has built the largest commercial lactic acid bacteria strain resource bank in Asia, containing more than 40,000 strains of lactic acid bacteria (including probiotics), including more than 120 probiotics that have been industrialized. In addition, the company invested a large amount of research and development funds, and conducted a number of joint clinical trials on the core strain with many of the top three hospitals in China, verifying the probiotic function of the strain and accumulating detailed data support.

Revenue continued to grow in the third quarter, and profits were under slight pressure. We continue to monitor the progress of probiotics business development. 24Q3 achieved revenue of 0.081 billion yuan, +4.7% year over year, and realized net profit of 0.028 billion yuan, or -12.6% year over year; gross profit margin of 52.7%, -5.6 pct year on year; sales expenses ratio, management expense ratio, and R&D expense ratio changed by +2.4 pct, 5.8 pct, and -2.5 pct year on year, respectively, with a net interest rate of 34.3% and -6.8 pct year on year.

The resignation of non-independent director Lin Wei did not affect the standardized operation of the company's board of directors. The executive team remained stable, and it is recommended that the company continue to monitor the progress of the company's probiotics business development.

Investment advice: The company has the core technical advantages of probiotics, and has accumulated a number of high-quality and stable B-side customers to form a good demonstration effect. The C-side active multi-channel layout is expected to contribute more in the future, and at the same time implement equity incentives and cohesion, which is conducive to promoting the company's high-quality development. The company's revenue for 2024-2026 is expected to be 0.34, 0.4, and 0.47 billion yuan, respectively, and EPS is 0.39, 0.48, and 0.56 yuan, respectively. The corresponding valuation of the current stock price is 41, 34, and 29 times, respectively, maintaining a “buy” rating.

Risk warning: Increased industry competition, risk of stock price fluctuations in the secondary market, development of B-side probiotic customers falling short of expectations, compound food business falling short of expectations, food safety risks.