Report guide

We believe that after the transition period of industrial chain integration from 2019 to 2021, the share of pharmaceutical income and net profit margin are expected to continue to improve, and the dye business is expected to gradually hit bottom and pick up, leading to the improvement of the operational efficiency of comprehensive assets and entering a new growth cycle.

Main points of investment

Haixiang Pharmaceutical Industry: the pharmaceutical sector has stepped into a new growth cycle.

Haixiang Pharmaceutical Co., Ltd. was founded in 1966, covering the whole industry chain of medicine and dyestuff. We believe that, compared with other characteristic API companies, Haixiang Pharmaceutical is characterized by: large tonnage varieties + characteristic varieties. The market share is relatively high (according to the company's annual report 22021, such as Penan series, clindamycin series, florfenicol, voglibose, amoprofen hydrochloride, repaglinide and other characteristic APIs and core intermediates in the global market. " According to the Health Network, the company's exports of clindamycin hydrochloride accounted for about 40% from January to April 2022). Looking ahead to 2022-2024, we believe that the marginal change in corporate growth is: 1. With the change of business structure, the contribution of pharmaceutical business is increasing rapidly (2022Q1 pharmaceutical business accounts for nearly 70% of revenue), the volume and price of Peinan's leading products are rising, and the market competitiveness is steadily improving. CMO/CDMO projects and customer pool continue to expand. two。

New production capacity (investment in fixed assets increased by 32.6% in 2021 compared with the same period last year). 3. Profitability has further improved, as reflected in the increased utilization of new production capacity of ① in 2021 and lower amortization expenses for ② employee stock ownership plans (according to the draft employee stock ownership plan for 2020, amortization expenses fell 73 per cent year-on-year in 2022). To sum up, we expect that the profit end of the company is expected to achieve rapid growth in 2022 under the background of the reduction of the drag margin of dye business and the scale advantage of API business, and the revenue is expected to maintain steady growth from 2022 to 2024.

Pharmaceutical sector: industrial chain integration, C (D) MO structure improvement 1. The volume and price of leading products are rising, and the quantity and efficiency of characteristic products are increased.

The echelon of intermediate and API varieties is gradually internationalized and diversified, laying the foundation for medium-and short-term growth.

The company's products focus on anti-infective, hypoglycemic, cardiovascular, digestive tract, mental nerve and other six major treatment areas.

We believe that the company's API has many years of accumulation and advantages in the regulatory market. Looking forward to the growth of the company's pharmaceutical business in 2022-2024, the company's pharmaceutical business growth comes from the prominent scale advantage of the industrial chain of leading products such as ① Penan and clindamycin; the reserve of ② new project is sufficient, and the animal protection series, cardiovascular products, hypoglycemic products and other products are expected to gradually increase the volume and increase efficiency under the capacity release and process improvement. The release of ③ antiviral capacity will usher in new market opportunities (the new production capacity of Yichang Haixiang is expected to be put into production in 2023); the production volume of preparation products under development will be approved.

2. C (D) MO: carry out multi-faceted strategic cooperation and expand the project and customer pool.

C (D) MO has sufficient production capacity, and Becton Dickinson & Co's business development has achieved initial results. In 2021, the company hired Dr. Chen Fener, academician of the Chinese Academy of Engineering, as chief scientist to carry out forward-looking technical research and exploration, reserve international cutting-edge technology and consolidate its technological superiority position; and reached comprehensive strategic cooperation with Huayi Taikang and Xin Kaiyuan to build an international CDMO service platform and enrich the echelon of CDMO project. According to the company's 2021 annual report, "two new cooperation projects for characteristic raw materials and one core intermediate project with the international original research pharmaceutical company have entered the stage of commercial cooperation, with tonnage orders signed, and the subsequent volume will continue to increase. In addition, there are more than 10 potential cooperation projects under negotiation." superimposed Shanghai enzyme Bioengineering Laboratory and South Sichuan Multi-functional pilot Plant have been put into use. We expect that the comprehensive strength of the company in C (D) MO capacity scale and service capacity will continue to improve, and the potential projects and customer pool will continue to expand, bringing potential growth for the company.

3. The utilization rate of production capacity has increased, and the turnover rate of fixed assets has been improved.

From the point of view of projects under construction and fixed assets, we believe that the year 2022-2024 is the improvement period for the capacity utilization of the company's core products: by combing the company's EIA report, it can be found that the company continues to do front-end intermediates and back-end raw material drugs and preparations around the core products. We believe that the product market and competition pattern of newly released capacity from 2022 to 2024 are relatively good (Penan series, Dabiga ester, florfenicol, etc.), and we are optimistic about the improvement of fixed asset turnover under the improvement of capacity utilization.

Dye plate: short-term pressure, waiting for flowers to bloom

The integrated industrial chain of dye intermediate raw materials is expected to partially resist the impact of the industry downturn. The development cycle of the dyestuff industry is closely related to the development cycle of the downstream textile printing and dyeing industry. affected by the epidemic in 2020, China's dye output and sales amount have declined; with the stricter domestic safety and environmental protection situation, the fluctuation of raw material supply in the upstream of the dye industry, the upgrading of dye production equipment and the increase of investment in environmental protection technology, the supply of many small dye manufacturers has gradually shrunk. We expect that with the gradual control of the impact of the epidemic, the adjustment of the industrial structure of the dye industry and the clearing of production capacity, the problems existing at both ends of supply and demand are expected to be gradually alleviated.

Taizhou Qianjin, a subsidiary, has the production and supply capacity of a complete industrial chain from the initial basic chemical raw materials to the final product KN-R. According to the 2022 half-year performance forecast, "Dye business is affected by the industry downturn and profitability is lower than the average in previous years", we believe that the company's key intermediates can partially hedge against the adverse effects of upstream raw material price and supply instability, and the company may have a strong advantage in cost control (relatively high gross profit margin) and quality stability compared with other competitors in the industry.

Profit forecast and investment suggestion

We expect the company to achieve operating income of 2.86 billion yuan, 3.31 billion yuan and 4 billion yuan from 2022 to 2024, an increase of 15.0%, 15.7% and 21.0% over the same period last year, and a net profit of 330 million yuan, 440 million yuan and 570 million yuan, up 242.0%, 35.3% and 28.4% over the same period last year. We believe that 2022-2024, the company's pharmaceutical sector self-developed products and C (D) MO business at the same time, in the case of lower marginal drag on the dye business, profitability is expected to gradually recover and improve, enter a new growth cycle, cover for the first time, and give "overweight" rating.

Risk hint

Product under development is less than expected risk; downstream demand fluctuation risk; raw material price fluctuation risk; exchange rate fluctuation risk, etc.