The first-half results were lower than expected.
Fufeng Group announced its results for the first half of 2018: operating income rose 6.4% year-on-year to 6.6 billion yuan, while net profit attributed to the parent company fell 51% to 315 million yuan, corresponding to 0.12 yuan per share. The first-half results were lower than we expected, and gross profit margin fell by 5.6 percentage points, mainly due to: 1) with the significant increase in the cost of major raw materials such as corn kernels and coal, the profitability of monosodium glutamate and starch sweeteners declined; 2) the low demand for threonine downstream led to a significant drop in product prices.
Trend of development
Environmental inspectors have led to a limited supply of monosodium glutamate, which is expected to support monosodium glutamate prices, and monosodium glutamate business profitability is expected to improve in the second half of the year. Due to the low inventory of the industry, and the operating rate of the industry is only about 50%, the price of monosodium glutamate has increased significantly in the off-season. It will take time to increase the operating rate, and we expect monosodium glutamate prices to remain high in the second half of the year, which is expected to significantly improve the company's gross profit.
The demand for xanthan gum is expected to rise in both volume and price. With the recovery of oil prices and the gradual increase in the number of drilling, the demand for xanthan gum is expected to be supported. We think the worst is over and the gross profit margin of the xanthan gum business will continue to improve.
The second phase of Longjiang base project will begin trial production in the fourth quarter of 2018, which is expected to bring incremental contribution in the future. The production capacity of 300000 tons of starch sweetener and 200000 tons of lysine in the second phase will further enrich Fufeng's product portfolio and expand its scale advantage.
Profit forecast
We raised our earnings per share forecast for 2018 by 33% to 0.76 yuan, mainly considering that the profitability of monosodium glutamate business is expected to improve in the second half of 2018. In addition, the company's sale of Baoji land is expected to bring about 1 billion yuan one-time profit. At the same time, we have lowered our 2019 earnings per share forecast by 10% to 0.59 yuan.
Valuation and suggestion
Currently, the company trades at 4.4x and 5.6x 2018-19 p / e. We maintain our neutral rating and target price of HK $5.4, corresponding to 33% upside.
Risk.
The price of raw materials has soared, the price of monosodium glutamate has fallen, and the valuation has dropped.