The company is deeply involved in the fields of pharmaceuticals and animal health products. It is a pharmaceutical manufacturing company that targets the global market, has multiple varieties, and has the ability to produce a variety of key intermediates on its own. Benefiting from the continuous expansion of the pharmaceutical manufacturing industry and animal insurance industry, the company continuously introduces new products to the market through horizontal replication and vertical expansion of the industry, and continues to enrich the product matrix. Considering that the company has the highest market share of many of its products, with the orderly release of fund-raising capacity and the subsequent planned layout of new production capacity, we believe there is strong certainty that the company will maintain rapid growth in the medium to long term.

In summary, we gave the company 18 times the valuation in 2023, corresponding to the target price of 39 yuan, covering the “buy” rating for the first time.

The company is deeply involved in the pharmaceutical and animal insurance industries, and the advantages of a high-end manufacturing platform for a variety of APIs are gradually becoming apparent. The company was founded in 1996 and is mainly engaged in R&D, production and sales of related products in the field of pharmaceuticals and animal health products. Among them, the pharmaceutical sector covers APIs, key pharmaceutical intermediates and formulations, and the animal health products sector covers animal protection APIs, animal health insurance additives and formulations. In the field of pharmaceutical raw materials and formulations, the company is one of the world's major manufacturers of macrolides and quinolones; in the field of pharmaceutical intermediates, the company is one of the largest domestic enterprises with the largest production capacity of intermediates such as sodium borohydride, potassium borohydride, and cyclopropanamine; in the field of animal health products, the company is one of the most comprehensive and extensive enterprises in the domestic animal insurance API field. In recent years, benefiting from the continuous expansion of the pharmaceutical manufacturing industry and animal insurance industry, the company has taken APIs as the core and has continued to expand upstream and downstream of the industry chain, and its performance has achieved rapid growth - the company's revenue for the first three quarters of 2022 was 4.113 billion yuan, up 28.01% year on year. The 2017-2021 CAGR was 11.59%; the company's net profit for the first three quarters of 2022 was 721 million yuan, an increase of 38.38% over the previous year, and the 2017-2021 CAGR was 41.18%.

Innovate/manufacture two-wheel drive, integrated industrial layout to build core competitiveness. In its long-term steady development, the company has formed the comprehensive advantages of “one system and two platforms”, namely an effective management and innovation system, an advanced and complete large-scale manufacturing platform, and a broad and effective global market channel platform. At the same time, the company's fixed asset turnover and profit level are relatively leading among comparable manufacturing companies. The company continues to deepen the industrial layout with pharmaceutical manufacturing as the core, control the supply of key intermediates upward and achieve foreign sales at the same time, and gradually extends the value chain of advantageous API products to the pharmaceutical sector downwards — in 2021, the company raised 2,645 million yuan through an IPO, of which 756 million yuan is planned to be invested in new pharmaceutical industry chain construction and technological upgrading projects, 1,110 million yuan in R&D center projects, and 383 million yuan in supplementary working capital. We believe that after the completion of related projects, the company will give full play to the competitive advantages of the integrated industry, obtain a relatively certain market share in the industrial chain, and is expected to maintain a high level of fixed asset turnover and stable profitability.

Pharmaceutical industry: Deeply cultivating high-end manufacturing, horizontal replication and vertical expansion to empower future development. The chemical pharmaceutical industry consists of chemical raw materials and chemical preparations. According to data from the China Chemical and Pharmaceutical Industry Association, the operating income of enterprises that mainly produce APIs in 2020 reached 394.46 billion yuan, an increase of 3.70% over the previous year; the overall revenue of the chemical pharmaceutical industry in 2020 accounted for 44.00% of the total revenue of the pharmaceutical manufacturing industry, which is one of the most important market segments of the pharmaceutical manufacturing industry. With the API business as its core, the company is one of the world's major manufacturers and suppliers of macrolide and quinolone APIs. It has more than 20 mature products with advantages in the fields of antibiotics, cardiovascular system, respiratory system, urinary system, anti-tumor system, etc. - from 2017 to 2019, the company's azithromycin APIs, clarithromycin APIs and ciprofloxacin APIs (hydrochloric acid, lactic acid) ranked first in China. Meanwhile, the company's specialty API production base with an annual output of 50 tons was completed and put into operation in January 2022, and the cephalosporin project with an annual output of 550 tons will be completed and put into operation in December 2022 according to the plan. We believe that as the company relies on the advantages of the market platform, horizontal replication continues to increase the advantageous varieties of APIs; controls the supply of key intermediates upward to meet the three-dimensional needs of customers; based on the extension of advantageous pharmaceutical API products to downstream formulations, the pharmaceutical industry chain is expected to be further improved and market share will gradually expand - the company's pharmaceutical sector achieved sales revenue of 2,959 billion yuan in 2021, an increase of 1.20% over the previous year, with a compound growth rate of 7.91% in 2017-2021

Animal insurance industry: The competitive pattern of veterinary chemicals is improving, and production and sales of the company's main varieties are booming. Veterinary chemicals are an important part of animal insurance, and it is expected that in the future they will continue to benefit from the expansion of industry space driven by a high short-term livestock and poultry boom, increased demand for therapeutic antibiotics after the medium-term anti-drug ban, and an increase in the degree of long-term downstream scaling. The industry pattern is also expected to improve marginal in the next 1-2 years as environmental protection, anti-resistance, and the promotion of new GMP policies is expected to improve marginally in the next 1-2 years. Companies with diverse product capabilities (diversification in terms of product categories, applicable targets, etc., and forward-looking layout of the pet sector) and cost advantages (advantage of scale plus ability to integrate raw materials and formulations) are expected to win. The company started with dongbao and has been deeply involved in the animal insurance industry for 26 years. The main varieties of fluorfenicol and enrofloxacin are all over 100 million in revenue, occupying a leading market position. The company is also the main supplier of special ingredients for animal insurance such as marpofloxacin, salafloxacin, dicerzuli, ciproalaminazine, and gamitamycin. The company relies on platform advantages to expand API production capacity -- the first phase of the Doxycycline API was successfully completed and trial-produced in 2021, starting large-scale marketing and sales, and became another major product for the company; the company expects a new construction project in the animal insurance industry chain to be completed and put into operation in 2023; at the same time, the company expanded to downstream formulations of existing/developing active pharmaceutical ingredients, and achieved rapid growth in the mobile insurance business - the company achieved sales revenue of 1,534 billion yuan in 2021, an increase of 20.31% over the previous year, 2017-2021 The compound annual growth rate was 21.15%.

Risk factors: risk of raw material supply and price fluctuations; risk of increased trade frictions; risk of production and operation restrictions due to the COVID-19 pandemic; risk of fluctuations in foreign exchange rates; risk related to the company's environmental protection; risk of the company's product quality control.

Profit forecasting, valuation and rating: The company is deeply involved in the fields of pharmaceuticals and animal health products. It is a pharmaceutical manufacturing company that targets the global market, has multiple varieties, and has the ability to produce a variety of key intermediates on its own. Benefiting from the continuous expansion of the pharmaceutical manufacturing industry and animal insurance industry, the company continuously introduces new products to the market through horizontal replication and vertical expansion of the industry, and continues to enrich the product matrix. Considering that the company has the highest market share of many of its products, with the orderly release of fund-raising capacity and the subsequent planned layout of new production capacity, we believe there is strong certainty that the company will maintain rapid growth in the medium to long term. In summary, we expect the company's net profit from 2022 to 2024 to 962 million/1,202 million/1,469 million yuan respectively. The corresponding EPS forecast is 1.72/2.15/2.63 yuan respectively. Referring to the average PE valuation of comparable companies in 2023 (Proluo Pharmaceutical, China Animal Husbandry, Xinhecheng; Wind's consistent expectations), we gave the company 18 times the PE valuation in 2023. The corresponding target price was 39 yuan, covering the “buy” rating for the first time.