2019 results are in line with our expectations
The company announced 2019 results: revenue of 16.17 billion yuan, +17.5% year on year; Guimu's net profit was 1,137 billion yuan, corresponding to profit of 0.45 yuan per share, -38.4% year on year. After deducting the one-time impact of the sale of Baoji land in 2018, net profit was +53.2% year-on-year, in line with our expectations. During the performance period, the competitive pattern of monosodium glutamate improved, with volume and price rising sharply, unit price +14.1% year on year, sales +3.7% year on year, revenue increased 18.1%, accounting for 48% of total revenue; 200,000 tons/year of lysine was put into operation in Longjiang Phase II, but affected by the swine fever epidemic, threonine and lysine prices declined significantly; the overall gross margin was 20.2%, +1.5ppt year on year.
Development trends
Affected by the overseas epidemic, downstream demand for monosodium glutamate is weak and prices are under pressure in the short term. Since the beginning of the year, domestic and overseas epidemics have spread and fermented one after another. In the downstream demand structure for MSG, 50% comes from food processing and additives, and 30%-40% comes from food and beverage consumption. The epidemic has caused consumers to eat out less. Overall demand has been damaged. The price of MSG has declined in the short term. Currently, the average market price is 6,950 yuan/ton, down 16.5% from the same period last year. The overall supply and demand balance in the industry is balanced. At the end of 2020, the industry will have 250,000 tons of new production capacity. We do not expect any impact on MSG prices this year. We are still concerned about the duration of the epidemic in the short term. We expect a rebound in consumer demand after the epidemic, which will drive product prices upward.
Prices of animal nutritional additives such as threonine and lysine have risen slightly. Affected by the epidemic, some small to medium production capacity has not yet resumed normal construction. Evonik's 100,000 tons/year threonine production capacity stopped due to force majeure, and the supply side shrank slightly. The current average price of threonine is 7,800 yuan/ton, up 17% from the 4Q19 price low (-2.5% from the same period last year). The current average price of lysine is 6,920 yuan/ton, which rebounded 7% from the same period last year (-4.4% compared to the same period last year). Threonine and lysine are used as feed additives, and downstream price elasticity is relatively small. The industry is generally oversupplied and the competitive pattern is scattered. We expect that the reshuffle of the industry is imminent, and the pressure on small and medium-sized enterprises from the pandemic may accelerate this process.
Improve raw material support to reduce costs and increase efficiency from various sources. The company plans to complete ammonia synthesis support this year to increase the degree of integration and reduce raw material procurement costs; two special railway lines have also been put into use, and we expect to further reduce logistics costs and improve production efficiency.
Profit forecasting and valuation
Due to the impact of the epidemic, demand in the downstream catering industry for MSG has weakened, and product prices have declined. We lowered our 2020 net profit forecast by 29% to 907 million yuan, introducing the 2021 net profit forecast of 1,183 million yuan for the first time. The current stock price corresponds to a price-earnings ratio of 6.4 times/4.9 times 2020/2021. We maintain a neutral rating, but due to pressure on short-term product prices, we lowered our target price of 28.9% to HK$3.20, corresponding to 7.7 times the 2020 price-earnings ratio and 5.9 times the 2021 price-earnings ratio. There is room for 19.9% upward from the current stock price.
risks
The duration of the epidemic has exceeded expectations, product prices have declined, and downstream demand has been sluggish.