HEILONGJIANG AGRICULTURE(600598)：LAND CONTRACTING BUSINESS SOLID;INDUSTRIAL TRADE AND REAL ESTATE DRAG 2021 RESULTS

　　2021 attributable net profit down 13.4% YoY, in line with expectations
　　Heilongjiang Agriculture announced its 2021 results: Revenue rose 12.0% YoY to Rmb3.63bn, net profit attributable to shareholders declined 13.4% YoY to Rmb857mn, and recurring attributable net profit fell 4.7% YoY to Rmb1.00bn. In 4Q21, revenue rose 5.3% YoY to Rmb758mn, attributable net profit increased 113.6% YoY to Rmb6.51mn, and recurring attributable net profit slumped 546.2% YoY to -Rmb25mn. The results are largely in line with our forecast.
　　The firm's land contracting business remained solid in 2021, with revenue rising 4.0% YoY, mainly thanks to higher land contracting fees supported by rising grain prices.
　　However, losses from its industrial, trade, and real estate businesses expanded. In 3Q21, the firm recognized a penalty for breach of contract by its subsidiary, resulting in non-operating expenses of Rmb300mn. The penalty reduced the firm's earnings by around Rmb180mn. In addition, the company made Rmb182mn in provisioning for asset impairment relating to property paid as a means of debt repayment and its trade and malt subsidiaries (such a move eroded its earnings by around Rmb166mn). As a result, its results were under pressure in 2021.
　　Trends to watch
Land contracting business flourishes against the background of food security issues and the Russia-Ukraine conflict. On the one hand, the　central government pays high attention to food security and has introduced related policies. In 2022, the central government emphasized in the annual report the subsidies for grain farmers and raised the minimum purchasing prices of rice and wheat. Recently, the National Development and Reform Commission (NDRC) revised the minimum purchasing prices of wheat and mid-and late-indica rice up Rmb40/t and Rmb20/t. We expect the spot price of grains to increase steadily in 2022. On the other hand, as the situation between Russia and Ukraine is unclear, we think that the planting costs may rise along with oil prices. This, combined with soaring risk aversion, may push up prices of agricultural products and even of grains in the domestic market, in our view. Overall, we think higher grain prices will boost planting income, thereby driving up land rents. We think the firm's land contracting business will achieve solid development in　the future.
　　Focusing on the land contracting business; new strategy to bolster　long-term growth. As Heilongjiang Agriculture has suspended the operation of its industrial and trade businesses, it is focusing on divestiture and asset liquidation of these businesses. Looking ahead, we believe the firm will focus on its land contracting business, thereby improving profitability. The company is expanding its presence in the farming industry by developing its main business and seeking opportunities for M&A, by leveraging its over 10mn mu (1mu = 0.067 hectare) of high-quality agricultural land resources. Heilongjiang Agriculture also launched a new development strategy. It plans to build an exclusive food material base for high-end brands, promote centralized procurement and marketing of agricultural products, and establish a repository for agricultural products in Heilongjiang. Over the long term, we think its efforts in the divestiture of subsidiary businesses, allocating resources to the main business, and seeking M&A opportunities will create new earnings drivers for its land contracting business.
　　Financials and valuation
　　The stock is trading at 27x 2022e and 25x 2023e P/E. We maintain our　2022 attributable net profit forecast of Rmb1.05bn and introduce a 2023 attributable net profit forecast of Rmb1.13bn. As the investment　sentiment in the farming sector improves amid concern over food safety　issues, we raise our target price 11% to Rmb18.2. Our TP implies 31x　2022e and 29x 2023e P/E, offering 16% upside. Maintain　OUTPERFORM.
　　Risks
　　Asset impairment; breach of contract by subsidiary; natural disasters; disappointing reform progress.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。