Pharmaceutical and veterinary drug provider committed to full-chain expansion. Guobang Pharmaceutical's main business is divided into two major segments: pharmaceuticals and animal insurance. Both segments have now covered the entire chain of business from upstream intermediates to midstream APIs to downstream formulations. The company's current revenue is mainly concentrated on upstream intermediates and APIs, and relies on a solid technical foundation and channel network to establish a leading position in some segments. Currently, it is one of the enterprises with the largest production capacity for intermediates such as sodium borohydride, potassium borohydride, and cipropanamine in China. It is one of the world's largest suppliers of macrolides and quinolones. It is one of the most comprehensive and extensive enterprises in the domestic animal insurance API field. In the future, it will rely on expanded production and development to achieve expansion into the downstream formulation field.

The improvement in pig prices boosts demand for veterinary drugs, and the policy pushes the transformation and upgrading of the industry to accelerate. Regarding the cycle, the recent rise in pig prices reached more than 25 yuan/kg, showing a steady trend in the off-season during the National Day. We continue to be optimistic about the upward trend in the industry, and the operation of the animal insurance industry is expected to improve marginally, driven by pig prices. As for the industry itself, in the short to medium term, the final deadline for the new version of GMP has arrived, and the backward production capacity of veterinary drugs has been clearly cleared in the short term. Combined with the feed side ban, leading veterinary drug companies with clear R&D and product advantages are expected to fully benefit and seize more share. In the long term, the large-scale process of the aquaculture industry is accelerating, and leading veterinary drug companies are expected to rely on their advantages in R&D, products and channels to better meet the needs of large-scale breeding enterprises, and market share is expected to be further concentrated on the head.

The expansion of production is compounded by the rise in pig prices, and I am optimistic about the release of animal insurance performance. In terms of growth, the company is currently working to promote the operation of the entire core single product chain. The veterinary drug raw materials side plans a long-term production capacity of nearly 4,000 tons/year for fluorfenicol APIs and an annual production capacity of nearly 2,500 tons/year for doxycycline APIs. As API and formulation projects are put into production one after another, the effects of scale expansion and cost optimization are expected to be realized steadily, and the company's mobile insurance sector may achieve high-quality expansion in this cycle. On the cyclical side, boosted by rising pig prices, prices of major veterinary raw materials for pigs, such as fluorphenicol and doxycycline, followed suit after the National Day. The company's animal insurance sector is expected to follow pig prices and maintain a high boom in the future. Based on the above analysis, we are optimistic about the company's quantitative profit growth in this cycle.

Profit forecast and valuation: As an important domestic veterinary drug provider, the company is working to promote the operation of the entire core product chain. With the production capacity of upstream raw materials and downstream formulations being implemented one after another, scale expansion and cost optimization are expected to be implemented steadily. Combined with the positive expectations of dynamic insurance demand brought about by the boom in downstream aquaculture, we are optimistic about the future quantitative performance of the company's mobile insurance sector. It is estimated that the company's net profit for 2022-2024 will be 995/12.01.53 billion yuan (+34.4%/26.6%/26.9%), respectively, EPS/ 2.15/2.73 yuan. Through multi-faceted valuation, it is estimated that the company's reasonable valuation is 40.4-43.5 yuan. Compared with the current stock price premium margin of 30%-35%, it was covered for the first time and given a purchase rating.

Risk warning: Risk of another sharp rise in raw material and energy prices; risk of a sharp decline in sales of veterinary drug products for pigs due to African swine fever; risk that the large-scale downstream farming process falls short of expectations.