Attributable net profit up 21.08% YoY in 1H22, in line with our expectations

Heilongjiang Agriculture announced its 1H22 results: Revenue grew 27.90% YoY in 1H22 to Rmb2.52bn and 35.05% YoY in 2Q22 to Rmb1.8bn, and attributable net profit rose 21.08% YoY in 1H22 to Rmb931mn and 24.55% YoY in 2Q22 to Rmb490mn, in line with our expectations. We attribute the firm’s revenue and earnings growth to rising land contracting fees, increase in agricultural material sales, and declining losses from the industrial and trade businesses.

Revenue from the land contracting business grew 11.93% YoY to Rmb1.56bn in 1H22, which we attribute to the firm’s rising land contracting fees. We estimate that the combined revenue of agricultural materials and services grew over 50% in 1H22, mainly thanks to the firm’s efforts to promote centralized procurement and supply of agricultural products. Losses from its industrial, trade, and real estate businesses shrank in 1H22, with net profits growing by Rmb19.36mn, Rmb6.61mn, and Rmb1.61mn thanks to the firm’s enhanced internal management and accelerated write-offs of accounts payable. The firm’s blended gross margin and net margin fell 5ppt and 2.1ppt YoY to 41.0% and 37.0% in 1H22, which we attribute to the rising sales contribution from the low-GM agricultural material business.

Trends to watch

Improving services to support steady growth of land contracting business. Heilongjiang Agriculture has primarily focused on the land contracting business, and land rent is the core source of profit. The firm has continued to raise land contracting fees in recent years, which we attribute to the following two factors: 1) Amid the impact of food security issues and the Russia-Ukraine conflict, China’s grain prices have grown steadily, and farmers’ business operations have continued to improve. 2) The firm has promoted centralized procurement and marketing of agricultural products, and improved services to enhance customer stickiness. Looking ahead, we think domestic grain prices will likely stabilize, and that the firm’s land contracting business will grow steadily thanks to its efforts to improve customer services and raise land contracting fees.

Divestiture of industrial and trade businesses helps reduce losses; external expansion unleashes growth potential. The firm’s efforts to divest its industrial and trade businesses in recent years have paid off, and related losses have been gradually reduced. We believe this will ease pressure on earnings growth and help the firm focus on its main business. By leveraging its over 10mn mu (1mu = 0.067 hectare) of high-quality agricultural land resources, the firm is expanding its presence in the farming industry and seeking opportunities for M&A. Meanwhile, it plans to build an exclusive food material base for high-end brands, and establish a repository for agricultural products in Heilongjiang. While attaching greater importance to the main business, the firm will likely leverage its high-quality land resources to expand its presence in the farming industry and enjoy long-term growth, in our view.

Financials and valuation

The stock is trading at 25x 2022e and 23x 2023e P/E. We leave our 2022 and 2023 attributable net profit forecasts unchanged at Rmb1.05bn and Rmb1.13bn. We maintain OUTPERFORM and our TP of Rmb18.2 (31x 2022e and 29x 2023e P/E), offering 22% upside.

Risks

Asset impairment; natural disasters; disappointing progress in reform.