Since 2019, when the company began to clear channel inventory and stabilize the pricing system, Dong'e Ejiao's (000423.SZ) current main product channel inventory has been maintained in a healthy state, with the pricing system continuously standardized and an emphasis on increasing terminal sales efforts to control shipments. These measures are conducive to the stable growth of long-term performance.

On October 9th, Dong'e Ejiao released a performance forecast for the first three quarters of 2024. During the reporting period, the company is expected to achieve a net profit of 1.1 billion to 1.175 billion yuan, a year-on-year increase of 40% to 50%, and an adjusted net profit of 1.015 billion to 1.09 billion yuan, a year-on-year increase of 45% to 56%.

Looking at the single quarter, Dong'e Ejiao is expected to achieve a net profit of 362 million to 437 million yuan in the third quarter, a year-on-year increase of 43% to 73%, and an adjusted net profit of 315 million to 390 million yuan, a year-on-year increase of 50% to 85%. Despite the third quarter being a traditionally slow season, Dong'e Ejiao's performance has seen rapid growth, and in terms of amount, the third quarter has also returned to the best level in history: 360 million yuan, 400 million yuan, 350 million yuan, and 360 million yuan for the third quarter of 2015-2018, respectively. The company's performance has exceeded expectations.

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Since 2019, when the company began to clear channel inventory and stabilize the pricing system, the current main product channel inventory has been maintained in a healthy state, with the pricing system continuously standardized and an emphasis on increasing terminal sales efforts to control shipments, which is beneficial for the stable growth of long-term performance.

High performance growth

Due to the emergence of the inventory backlog issue of Ejiao blocks in 2019, Dong'e Ejiao's physical pharmacy terminal sales for the year were 3.93 billion yuan, a year-on-year decrease of 7.09%; in 2020, terminal sales further decreased to 2.223 billion yuan, a year-on-year decline of 43.44%. In 2019, Dong'e Ejiao's operating income decreased by 59.68% year-on-year, and net profit turned from a profit of 2.444 billion yuan in the previous year to a loss of 505 million yuan, a significant year-on-year decrease of 120.67%.

With the gradual recovery of sales and the clearance of channel inventory, the company's performance began to gradually rebound. From 2020 to 2023, Dong'e Ejiao's operating income was 3.409 billion yuan, 3.849 billion yuan, 4.042 billion yuan, and 4.715 billion yuan, respectively, with year-on-year growth of 15.24%, 12.89%, 5.01%, and 16.66%, respectively. Net profit was 43.29 million yuan, 440 million yuan, 780 million yuan, and 1.151 billion yuan, respectively, with year-on-year growth of 109.75%, 917.43%, 77.1%, and 47.55%, respectively. In the first half of 2024, Dong'e Ejiao achieved an operating income of 2.748 billion yuan, a year-on-year increase of 26.8%, and a net profit of 738 million yuan, a year-on-year increase of 39.03%.

At present, the trend of continuous growth in Dong'e Ejiao's performance is continuing. Whether it can continue in the future depends on the company's channel inventory and product pricing situation. Looking back, Dong'e Ejiao's performance growth is more dependent on the continuous and rapid increase in product prices, which leads to the backlog of channel inventory.

Donkey skin is the main raw material for producing Ejiao, but there is a shortage of donkey skin resources in China, with supply not meeting demand. In 2018, the Shandong Ejiao Industry Association estimated that the annual production of Ejiao was at least 50,000 tons based on the annual production reports of more than 100 Ejiao production enterprises. According to this estimate, about 4 million donkey skins are needed, while the domestic supply is less than 1.8 million. The number of donkeys in China has been declining, from 9.44 million heads in 1996 to 1.97 million heads in 2021, and securities firms predict that it will continue to decline in the future. There is a significant gap in the domestic supply of donkeys, mostly relying on imports, and the supply and demand relationship is relatively tense.

Affected by the supply and demand relationship, the price of domestic donkey skin has been rising continuously, from 20 yuan/kg to a peak of 150 yuan/kg in 2017. Under the rise of raw material prices, Dong'e Ejiao has comprehensively increased the prices of Ejiao products since 2006; from 2013 to 2017, enterprises in the Ejiao industry were actively purchasing donkey skin in the market, which led to a significant increase in the price of donkey skin during this period, further driving up product costs and pushing prices to continue to rise. According to statistics, to date, the company has adjusted prices 17 times, with the last price increase in December 2018, from 196 yuan/kg in May 2006 to the current出厂价 of about 3,273 yuan/kg, an increase of more than 20 times, making Dong'e Ejiao the highest-priced Ejiao product in the market.On January 2, 2024, Dong'e Ejiao announced an equity incentive plan, proposing to grant no more than 1.51 million restricted shares to the incentive targets at a price of 24.98 yuan per share, accounting for 0.23% of the company's total share capital. The incentive targets include the company's directors, senior executives, middle-level managers, and core backbone personnel. The company has established strict performance assessment conditions: the return on equity for 2024-2026 should not be lower than 10.00%, 10.50%, and 11.00%, respectively, and should not be lower than the industry average or the 75th percentile level of benchmark companies; based on 2022 as the benchmark, the compound annual growth rate of net profit attributable to the parent company's shareholders for 2024-2026 should not be lower than 20%, and should not be lower than the industry average or the 75th percentile level of benchmark companies; the operating profit margin for 2024-2026 should not be lower than 23.00%, 23.50%, and 24.00%, respectively. From the above assessment conditions, it can be seen that Dong'e Ejiao has a certain confidence in its future growth.