The company is mainly engaged in R&D, production and sales of food and feed additives. The products mainly include vitamin products such as biotin and folic acid, and biological preservatives such as streptococcin lactate, natamycin, and epsilon-polylysine. The company is one of the earliest enterprises engaged in the production of biotin and biopreservatives in China. Through years of business accumulation and continuous technological innovation, process optimization and application development, the company has developed into a leading enterprise in the product segment market, and is in a leading position in the world in terms of large-scale production capacity, technical process level, product market share, and brand awareness. By acquiring Tongliao Shengda and holding 75% of its shares in Q4 in 2018, Q4 will add new production capacity for vitamin B2, xanthan gum and biological preservative products.
The company has a leading position in the vitamin and biological preservative industry. After years of market refinement and competitive challenges, the company has taken an important position in domestic and global product segments. In the biotin field, Shengda Biotech is the world's largest supplier, with production, sales and export volume ranking first for many years, with a global market share of about 30%; in the field of folic acid, the company's market share in 2018 was close to 18%; in the field of bio-preservatives, the subsidiary Xinyinxiang is the main supplier of streptococcus lactate and natamycin in the world. It is also one of the few domestic enterprises that can also industrialize the production capacity of streptococcus lactate, natamycin, and epsilon-polylysine hydrochloride series products. As a standard for streptococcus lactate, natamycin, and epsilylysine hydrochloride, the industry standard for streptococcus lactic acid The main drafting unit for basic national standards The company has a leading market position and strong market influence in industry segments.
Prices of biotin and folic acid are expected to rise at the bottom. Price fluctuations of biotin and folic acid are mainly affected by changes in supply-side patterns. The current safety incident in Jiangsu will affect the supply of biotin and folic acid by about 20% and 50% respectively, which will have a significant impact. Referring to the historical driving forces of biotin and folic acid price increases, it is reasonable to expect that biotin and folic acid will experience a bottom-line rise in prices.
Folic acid differs from the market's view: the folate production pattern has been scattered in the past 3 years, with new entrants and small factories opening and stopping, causing the price of folic acid to remain at the bottom in recent years. Expected supply-side changes in folic acid this time, and there is a view in the market that new additional supply from small manufacturers has been added, breaking the logic that prices are rising due to lack of supply. We think the expected value of this rise in folic acid prices is high: (1) What is affected this time is not only the lack of production capacity on the supply side of folic acid, but the raw material side of folic acid is also affected by environmental inspections. Leading producers, represented by Shengda Biotech, have mature relationships with raw material suppliers for many years. Under tight supply conditions, they have a raw material channel advantage over small factories that open and stop; (2) Folic acid production is a highly polluting industry. Affected by this nationwide production safety inspection, small factories also need to increase their environmental protection investment, which will inevitably increase their production costs or affect their commencement of construction, and reduce the profit expectations of small factories; (3) the current shortage of production capacity on the supply side is close to 50%. Relying on the entry of scattered factories will not be able to make up for this part of the supply gap in a short period of time.
The acquisition of Tongliao Shengda merged to integrate business resources and create synergies.
(1) Xanthan gum, the main product of Tongliao Shengda, and Vitamin B2, and Shengda's products have a certain degree of intersection in terms of sales markets and target customer groups. After the acquisition is completed, Shengda Biotech's rich industry experience, management capabilities and high-quality customer resources will help expand sales channels for Tongliao Huanghelong products.
(2) The company's current production capacity for streptococcal lactate has seriously limited the expansion of the scale and market share of this product. In addition to the project with an annual output of 1,000 tons of streptococcal lactate and a project with an annual output of 2,000 tons of sucrose ferment, the company is also planning projects such as vitamin B12, polylysine, and beta-thymidine in Tongliao Shengda to enrich the variety of products and increase profit contribution points.
(3) It is conducive to reducing production costs and improving the company's profitability. Tongliao Shengda is located in the western part of the Northeast Golden Corn Belt. It is rich in raw materials, close to neighboring roads and highways, convenient transportation, and rich local coal resources. It has a clear cost advantage over Tiantai County in Zhejiang Province in terms of raw materials and energy procurement.
Profit forecast: We expect the company to achieve operating income in 2019-2021, respectively:
660.50/748.87/860.60 million yuan, the corresponding net profit attributable to the parent was 115.66/117.78/140.99 million yuan respectively, and the corresponding PE was 25.16/24.70/20.64 times respectively, giving a “buy” rating.
Risk warning: The price increase in the vitamin category fell short of expectations; vitamin sales shrank due to price increases; Tongliao Shengda products could not be put into production as scheduled.