2021 results in line with our forecasts; 1Q22 results slightly miss

Sanyuan Biotechnology (Sanyuan) announced its 2021 results: Revenue rose 113.9% YoY to Rmb1.68bn; net profit attributable to shareholders rose 130.2% YoY to Rmb535mn (Rmb3.97/sh), in line with our forecasts. The rapid earnings growth in 2021 was mainly attributable to rising sales volume and ASP of erythritol products. In 2021, recurring net profit attributable to shareholders grew 127.1% YoY to Rmb528mn. Net operating cash flow grew 195.4% YoY to Rmb642mn.

In 2021, revenue from erythritol products increased 153.9% YoY to Rmb1.57bn; compound sugar fell 52.3% YoY to Rmb74mn. Total erythritol and compound sugar sales volume reached 81,100t in 2021, up 69.81% YoY. Given rising raw material prices, gross margin of erythritol products slid 0.59ppt to 41.56%, and that of compound sugar fell 1.31ppt to 41.24%.

In 1Q22, revenue increased 3.45% YoY to Rmb273mn; net profit attributable to shareholders fell 9.64% YoY to Rmb63mn, slightly missing our forecast, mainly because falling erythritol price and rising raw material cost led to weaker-than-expected gross margin. In 1Q22, gross margin fell 11.6ppt YoY to 24.3%.

Trends to watch

Continued expansion of erythritol production capacity to support future growth; erythritol price could come under pressure. Demand for erythritol continues to grow rapidly thanks to consumer preference for healthier sugar alternatives, beverage companies expanding to the sugar-free beverages market, and rising use of erythritol in compound sugar. We project that the firm’s 50,000t erythritol production project will commence operation this year, boding well for its growth prospects. However, the strong demand for erythritol has attracted a large number of new market entrants. According to Baiinfo, the price of erythritol (in the Shandong market) is Rmb13,500/t so far. With gradual commencement of new production facilities, we believe erythritol price could come under pressure to a certain extent.

Plans to invest Rmb200mn in a 20,000t allulose project to broaden the range of its product categories. As a new-generation sugar, allulose has been widely used in overseas markets. In order to expand the scope of its business and diversify its product categories, Sanyuan plans to construct an allulose production project with annual capacity of 20,000t and . The company expects that the construction period will last for 15 months, and the project has been selected as a key project in Shandong for 2022 this January. In our view, leveraging Sanyuan’s competitive advantages in production technologies and extensive experience, the project could further enhance the firm’s competitive strength and profitability, creating a new source of profit growth.

Financials and valuation

Considering the decline in erythritol price and elevated prices of raw materials such as glucose, we cut our 2022 and 2023 earnings forecasts 20.1% and 19.8% to Rmb559mn and Rmb665mn. The stock is trading at 17.1x 2022e and 14.4x 2023e P/E. Considering decline in average valuation of the sector and downward revisions to earnings forecasts, we cut our TP 25% to Rmb90, corresponding to 21.7x 2022e and 18.3x 2023e P/E and implying 27% upside. Maintain OUTPERFORM.

Risks

Continuous decline in erythritol price and rise in raw material prices; low level of product diversification.