1H22 results beat our forecast
　　Fufeng announced its 1H22 results: Revenue rose 35.3% YoY to Rmb12.93bn, and net profit surged 242.8% YoY to Rmb2.03bn (Rmb0.8 a share), much higher than we had expected. We attribute the strong earnings growth to: 1) rising sales volume and prices of monosodium glutamate (MSG), threonine and lysine; 2) rising price of xanthan gum thanks to robust demand amid the elevated oil price; 3) a decline in corn price. In 1H22, ASP of corn fell 6.3% YoY to Rmb2,262/t; and 4) Fufeng registered earnings of almost Rmb210mn in 1H22 from renminbi depreciation against the US dollar.
　　In 1H22, revenue of food additives, animal nutrition, high-end amino acids, and colloid reached Rmb6.06bn, Rmb4.75bn, Rmb535mn, and Rmb940mn, accounting for 46.9%, 36.8%, 4.1%, and 7.3%. Their respective gross margins were 20.9% (up 7.5ppt YoY), 29.4% (up 11.7ppt), 39.9% (down 4.9ppt), and 50.6% (up 12.5ppt).
　　Trends to watch
　　MSG to maintain high profitability in the traditional peak season of 4Q thanks to the falling prices of raw materials such as corn. According to chem99.com, the CR3 of the MSG industry is about 80% in terms of production capacity in 2021. As the COVID-19 conditions ease, we expect demand for MSG to increase in the 4Q peak season. The market price of MSG rose 13.2% YoY to Rmb9,625/t. The price spread MSG and corn stands at Rmb3,557/t, representing a MoM increase of 2.2%. We expect MSG profitability to remain stable in 4Q22 thanks to the robust consumption momentum.
　　Internationalization is accelerating; business integration enhances competitiveness. Qingdao R&D center started operations in May; the B2C model provides product solutions; and Fufeng acquired land in North Dakota, and the firm plans to build a new facility for animal-nutrition products. Fufeng completed the acquisition of 300,000t of synthetic ammonia production capacity. We believe that the business integration will increase earnings, and that the construction of overseas facilities will further increase its global market share.
　　Profitability of xanthan gum rising; amino acid market landscape improving. We expect earnings of the xanthan gum business to continue to grow thanks to robust demand amid the elevated crude oil prices. We believe that demand for amino acids will increase substantially, thanks to the high number of hogs. We also believe that capacity expansion is limited, as AMD’s solid lysine production capacity stopped production in 2021. Meihua’s 300,000t of lysine production capacity was put into production. We believe gross profit of amino acid products will remain high along with the improving competitive landscape.
　　Financials and valuation
　　To reflect improvement industry momentum and renminbi depreciation, we raise our 2022 and 2023 earnings forecasts 166.2% and 132.7% to Rmb3.52bn and Rmb3.41bn. The stock is trading at 2.8x 2022e and 2.9x 2023e P/E. We maintain OUTPERFORM. Given the combined effect of substantial upward revisions to earnings forecasts and lower valuation for corn processing business, we raise our TP 61.1% to HK$5.80 (3.6x 2022e and 3.7x 2023e P/E), offering 29.2% upside.
　　Risks
　　Sharp rise in raw-material prices such as corn and coal; deteriorating competitive landscape