Main opinion: Featured antimicrobial API manufacturers, with rapid performance growth. The company's main business is R&D, production and sales of specialty antimicrobial APIs and intermediates. Currently, it has five production bases in Liaoning, Shandong, Jiangxi, etc., two R&D institutions and an import and export company in Zhejiang, for a total of five wholly-owned subsidiaries and two holding subsidiaries. The company's main products include three series of products, including sulbactam series, tazobactam series beta-lactamase inhibitor APIs and intermediates, carbapenems antimicrobial APIs and intermediates, and lovirus-like antiviral drug intermediates. The company's performance has maintained rapid growth in recent years. In terms of revenue, the 2016-2019 CAGR was 21.03%; in terms of net profit, the growth rate has continued to rise since 2017, with a CAGR of 20.70% in 2016-2019. In the first half of 2020, the company achieved operating income of 816 million yuan, an increase of 37.82% over the previous year, and realized net profit attributable to shareholders of listed companies of 219 million yuan, an increase of 92% over the previous year. The antimicrobial market — opportunities and risks coexist. Affected by antimicrobial restrictions, the growth rate of China's antimicrobial market began to decline since 2012, but China still has the largest market for antibiotics used in human treatment in the world. According to Frost & Sullivan data, the market size of antibiotic drugs used in human treatment in China increased from US$21.5 billion in 2013 to US$23.3 billion in 2017, and is expected to reach US$30.6 billion in 2023. The US also has one of the largest antibiotic markets in the world. Its antibiotic market reached $7.5 billion in 2017 and is expected to reach $8.8 billion in 2023. According to data from the Huajing Industrial Research Institute, sales of cephalosporins, penicillins, macrolides, and carbocyanasene are currently in the top four in the Chinese antibiotic drug market, with a total market share of 85%. In terms of production, up to 2018, the production of major antibiotic APIs in China was 196,000 tons, a slight increase of 10,000 tons over 2017. Sulbactam is the absolute leader in the industry. He thwarted that new Batam projects can be expected in the future. The global market demand for sulbactam is about 800 tons/year. The company currently has a production capacity of 500 tons and a newly planned production capacity of 200 tons [can be switched from the newly expanded DP3 (penicillane diphenyl sulfoxide) to sulbactam], with a high market share. The company's sulbactam products have passed the US FDA certification on-site inspection with the conclusion of “zero defects”. It is currently the only manufacturer in the domestic market with standardized supply standards. As domestic environmental protection policies become stricter and backward production capacity is cleared, the company will continue to benefit from the increasing concentration of the API industry and become the absolute leader in the sulbactam segment. Global demand for batan series products was reduced by about 250 tons, maintaining a steady increase of 5% to 10%. Major global suppliers include Qilutian, Huishi Pharmaceutical, and Fuxiang Pharmaceutical (current production capacity is 100 tons, with plans to increase production capacity by 200 tons). The company's Tabatan series products have been registered in many countries, including China, the United States, Japan, and South Korea, and can be sold globally. In 2019, the company publicly issued convertible corporate bonds, and 350 million yuan of capital raised was used for the piperacillin sodium/tazobactam sodium (8:1) sterile powder project in the “Novel Enzyme Inhibitor Production Expansion and Industry Chain Extension Project”. The project reached a production capacity of 450 tons of piperacillin sodium/tazobactam sodium (8:1) per year after delivery. The project is expected to enter the production and trial production stage in the second half of this year. Its smooth implementation will not only meet the growing market demand for antimicrobial compound products, help the company enhance its international competitiveness, and guarantee market share at home and abroad, but will also further enhance the company's performance. AAI101, an innovative enzyme inhibitor under development, is exclusively supplied by the company's APIs. As a new global drug under development, AAI101 is another novel beta-lactamase inhibitor further synthesized using tazobactam, the company's current main product, as a raw material. The company provided CDMO services to its original research company for the customer's phase III clinical trial. The company is the exclusive API supplier for the clinical stage of this product. If the later project progresses smoothly, in the future, with the launch of related pharmaceutical products, the company's tazobactam API products will be further expanded. Producer of carbapene-like phenem series products with a full industry chain layout. The company is one of the few domestic manufacturers of carbapene-like phenem series products with a full industry chain layout from initial raw materials to downstream APIs. The main products are crude products, parent cores, side chains, and 4-AA, the core starting material of the penemide type, etc., which are necessary for the preparation of peinam-based APIs. The global demand for 4-AA is about 700 tons/year. The company's 4-AA current production capacity is 200 tons. The main domestic 4-AA manufacturers are Haixiang Pharmaceutical, Fuxiang Pharmaceutical, Jiuzhou Pharmaceutical, and Lepu Pharmaceutical. In June 2020, the market price of 4-AA was 1,700 yuan/kg. Due to the impact of the epidemic and demand for downstream formulations, we believe that its price is expected to remain at the current level. As the “last line of defense for antibiotics,” phenemes continue to maintain a double-digit increase in downstream formulations every year. Taking meropenem, the largest single product, as an example, the sample hospital's sales CAGR from 2012 to 2019 was 12.87%. Acquired Weifang Aotong and successfully entered the field of antiviral drugs. In 2016, the company acquired 70% of the shares of Weifang Aotong Pharmaceutical Co., Ltd. and entered the field of antiviral drugs. Weifang Aotong Pharmaceutical is a professional manufacturer of antiviral drugs. The main products include pyrimidine, guanine, SH acid, etc. After the company acquired Weifang Aotong, it invested a lot in Weifang Aotong in the early stages, which significantly improved the overall production and operation conditions of Weifang Aotong, became one of the world's major suppliers of lovirus-like drug intermediates, and is building production facilities for Navir intermediates. Weifang Aotong achieved a basic profit and loss balance in 2018. In 2019 and the first half of 2020, it achieved net profit of 17.6434 million yuan and 13.8503 million yuan respectively, which has become one of the company's important performance growth points. Extend to the downstream pharmaceutical field to create “pharmaceutical intermediates, APIs, and formulations integration”. In July 2017, the company purchased 70% of the shares of Dalian Fangu Pharmaceutical Co., Ltd. in cash (later renamed “Fuxiang (Dalian) Pharmaceutical Co., Ltd.”) and entered the downstream formulation field. The product currently being produced and sold by Fuxiang (Dalian) is doxycycline. On July 6 this year, the new product Agatroban injection was approved for drug registration. According to data from the Mi Intranet, agacroban has maintained a strong growth trend in recent years. Domestic sales in 2017, 2018, and 2019 were 370 million, 4.6 million, and 540 million respectively, and maintained an annual growth rate of more than 17% in the past three years. As an anticoagulant, agatroban has been included in the 2019 edition of the national health insurance catalogue in China. On the basis of consolidating and upgrading the existing industry chain, the company has further expanded into the downstream pharmaceutical field through the expansion of anticoagulant drugs in the cardiovascular field, realized the development strategy of “intermediates, APIs, and formulations”, and enhanced the company's core competitiveness. Actively expand production capacity to resolve bottlenecks in production development. The company focuses on the main business and continuously improves the layout of the industrial chain. The company currently has a production capacity of 100 tons of tazobactam, 500 tons of sulbactam, 200 tons of DP3 (production lines can be switched to produce sulbactam), and 200 tons of 4-AA. When the production site of the parent company headquarters is limited, the company promotes the extension and optimization of the industrial chain through the integrated production layout of the group, and effectively solves bottlenecks in production development. On August 1 of this year, the company announced that it plans to raise no more than 1,064 million yuan in total capital by issuing shares to specific targets. After deducting issuance fees, it plans to use 950 million yuan for the “Fuxiang Biomedical Project” and 114 million yuan for the “Navir intermediates project with an annual output of 616 tons”. The “Fuxiang Biomedical Project” has a construction period of two years. After completion, it has an annual production capacity of 600 tons of 4-AA and 200 tons of Meropenem. After full production, it is expected to achieve annual sales revenue of 1285 million yuan and annual net profit of 212.1593 million yuan. In the first half of this year, the company signed a strategic cooperation agreement with the Jingdezhen Municipal People's Government to establish a wholly-owned subsidiary, Jingdezhen Fuxiang Life Technology Co., Ltd., to prepare the Fuxiang Biomedical Project and build a production base with an annual output of 2,500 tons of chiral drugs, 1,200 tons of biopharmaceuticals, and 500 million tablets (packs/sticks) of pharmaceutical preparations. The land for the project has been auctioned and is progressing according to plan. The main products of the “Annual Production of 616 tons of Navir Intermediates Project” are navir intermediates, including ketone, chloranol, and 2R-epoxy. The construction period is expected to be 1 year. The estimated sales revenue after delivery will reach 264.3 million yuan, the total annual profit is 48.34 million yuan, and the additional profit after tax is 36.25 million yuan. In the second half of this year, Weifang Aotong's Navirus-based intermediates and other intermediates projects are expected to enter the production and trial production stage. Investment suggestions: We expect the company's net profit in 2020-2022 to be 4.14/5.18/611 million yuan, EPS to be 0.89/1.12/1.32 yuan respectively, and the current stock price corresponding to P/E of 23/18/16 times, respectively. Currently, the median P/E (TTM) of the chemical API industry is 46 times. There is plenty of room for improvement in the company's valuation, and considering that the API industry's bargaining power in the industry chain has increased, the company has Peinan products with a full industry chain layout, and the downstream market is growing rapidly. The sterile powder project will be put into operation in the second half of the year to further enhance the company's performance. Achieving profit in the antiviral business is expected to become a new growth point. For the first time, we have given it a “buy” investment rating. Risk warning: risk of price fluctuations of APIs and intermediates; production capacity release of projects under construction falls short of expectations; environmental policy risk; exchange rate fluctuation risk.