The first half of 2019 results are in line with our expectations.
The company announced its results for the first half of 2019: revenue of 7.7 billion yuan, 16.5% of the same period last year; net profit of 613 million yuan, corresponding to earnings per share of 0.24 yuan, an increase of 94.5% over the same period last year, in line with expectations. Benefiting from the increase in the price of monosodium glutamate and the increase in sales of starch sweeteners, the company's gross profit margin increased significantly during the performance period, with a comprehensive gross profit margin of 21.7%, an increase of 4.8ppt and a net profit rate of 8% and a year-on-year increase of 3.2ppt. The company announced an interim dividend of HK9.3 cents, with a dividend rate of 34%.
Trend of development
Industry inventory increases, affected by the off-season monosodium glutamate prices under short-term pressure, the peak season is expected to pick up. At present, the average price of monosodium glutamate in the market is 8100 yuan / ton, down 6% from the previous high, but it is still at an all-time high, up 11% from last year's average price of 7275 yuan / ton, and the high-end quotation remains at 8800 yuan / ton. Affected by the off-season, industry inventory increased to 35-45 days, short-term price pressure, peak season prices are expected to pick up. The oligopoly structure of the industry is stable, CR3 is over 80%, the company's MSG production capacity is 1.3 million tons, and the industry expansion tends to be rational. Except for Liaocheng Xijie lysine production capacity to switch to monosodium glutamate production, there is no new production capacity for the time being, and monosodium glutamate prices are expected to remain high.
The price of raw material corn rose slightly, and the company's capacity layout brought a relative cost advantage. At present, the average price of corn in the national corn market is 1978 yuan / ton, and the price of corn in Heilongjiang is 1820 yuan / ton, an increase of 11% over the same period last year, which is lower than the average price of 158yuan / ton. the company has a superior geographical location and brings relatively low raw material costs. According to the CICC Agricultural Group, the price of corn, the main raw material, will rise steadily in the second half of the year, and it is recommended to pay attention to the rotation of state storage, the harm of Spodoptera litura and the progress of new corn on the market.
Threonine, lysine product prices hit bottom, with backward small and medium-sized production capacity quietly waiting for the industry inflection point to come. Stimulated by the corn subsidy policy in 2017, Northeast China and other places increased more amino acid production capacity. In 2018, lysine production capacity increased by 1 million tons, threonine increased by 300000 tons, supply-side pressure increased, competition pattern dispersed, and there was a lack of real leading enterprises. At present, the average market price of lysine and threonine is 6700 yuan / ton, down 43% and 30% from the beginning of 2018. The start of the industry is relatively low, and the reshuffle is imminent. The company's Su and Lai products suffer profits, waiting for the industry inflection point to come.
Profit forecast and valuation
Due to the short-term pressure on the price of monosodium glutamate, we cut the 2020 net profit of 2019% by 13% to 1.117 billion yuan / 1.273 billion yuan. The current share price corresponds to a price-to-earnings ratio of 7.7 times / 6.8 times earnings in 2019 / 2020. Maintain a neutral rating, lowering the target price by 16.7 per cent to HK $4.50 corresponding to 9.2 times 2019 and 8.0 times 2020 earnings, with 18.4 per cent upside from the current share price.
Risk
Monosodium glutamate prices decline, downstream demand is depressed, corn prices rose sharply, the valuation center fell.