Benefiting from the booming production and sales of antibiotic intermediates and the formation of revenue from new synthetic biology products, the company's net profit in the first three quarters of 2023 was + 92.65% compared with the same period last year. The layout of the company in the field of synthetic biology is accelerated, red myrrh alcohol has entered the sales stage, at the same time, there are a number of product lines to be expected in the future, optimistic about the company's long-term growth. With reference to the company's average valuation of 32.7 times PE in 2023, the company was given 27 times PE in 2023, corresponding to the target price of 10.4 yuan, maintaining a "buy" rating.

In the first three quarters of 2023, the company's homing net profit exceeded expectations compared with the same period last year. In the first three quarters of 2023, the company achieved revenue of 3.581 billion yuan, + 21.83% compared with the same period last year; realized return net profit / deducted non-return net profit of 640 million yuan, 72.52% compared with the same period last year. Based on the company's quarterly report data, we calculated that the company's 2023Q3 realized revenue of 1.164 billion yuan, year-on-year + 21.81%, month-on-month + 1.45%; net profit of 249 million yuan, + 162.02%, month-on-month + 15.72%; Q3 performance exceeded expectations, mainly due to the booming production and marketing of antibiotic intermediates and the formation of income from new synthetic biology products. By product, the income of erythromycin thiocyanate / penicillin intermediates / cephalosporin intermediates in the first three quarters of 2023 was 10.9514.58 / 733 million yuan respectively, with a year-on-year growth rate of 7.8%, 44.8% and 12.3%, respectively.

Profitability continued to improve month-on-month, and the expense rate decreased significantly during the period. As the company flattens production fluctuations, improves product yield, capacity utilization is saturated, and new products begin to expand, the company's profitability has improved for three consecutive quarters, with 2023Q3's gross profit margin reaching 33.13%, the highest level in history. In the first three quarters of 2023, the company's gross profit margin was 29.93%, an increase in 1.7pcts compared with the same period last year. In the first three quarters of 2023, the total rate of the company's four fees was 5.72%, which was reduced by 5.3pcts compared with the same period last year, and the sales / management / R & D / financial rates were 0.41%, 2.99%, 1.09% and 1.23%, respectively, of which the management rate was lower than that of the same period last year. The main reason is that due to the change of accounting standards, the repair expenses related to production are included in the cost of products. The lower 1.8pcts in financial rates compared with the same period last year was mainly due to lower interest payments and increased exchange gains.

The boom of the antibiotic intermediate industry is high, and 7-ADCA increases the profits of cephalosporin products. The antibiotic intermediates industry has entered a business cycle since 2020, and the demand remains good this year. According to Wind, the market quotations of erythromycin thiocyanate, 6-APA, 7-ACA and 7-ADCA in September 2023 increased by 7.1%, 2.7%, 2.3% and 8.3% respectively compared with December 2022. The company is the first enterprise in China to produce 7-ADCA products by enzymatic method, and the new process greatly reduces the production cost. With the release of 7-ADCA products, we expect the profitability of cephalosporin products to be significantly improved. 7-ADCA sales increased by 368.0% in the first three quarters of 2023 compared with the same period last year.

New products of synthetic biology begin to contribute profits, and follow-up products are rich in reserves. At present, the company's new synthetic biology product red myrrh alcohol has entered the sales stage, and 5-hydroxytryptophan, ergothione and other products are in the pilot stage, if the first phase of the "Green Recycling Industrial Park project" is completed as scheduled at the end of the year, the new products of synthetic biology are expected to enter larger-scale production next year, and the cost advantage will be more obvious. The self-developed products planned by Shanghai Research Institute to be delivered this year include cosmetic active raw material RCB112, feed additive RCB114, and health product raw material RCB108. The milestone work of strain construction has been completed, the optimization of fermentation process and extraction process is being carried out, and the strain is being continuously modified in order to further improve the fermentation concentration and conversion rate.

Risk factors: industry industrial policy risk; major product market price fluctuation risk; raw material supply and price fluctuation risk; environmental protection risk; overseas business market risk; market competition intensification risk; new product and new technology development risk.

Profit forecast, valuation and rating: in view of the continued boom in the antibiotic intermediates industry and the smooth progress of the company's new synthetic biology products, we have raised the company's 2023-2025 net return forecast to 859pm 936pm 1.071 million (the original forecast was 694pm 819pm), corresponding to the EPS forecast of 0.39pm 0.42pm. With reference to the current comparable companies (Kaisai Biology, Huaheng Biology, Huaxi Biology, Health Yuan), based on the Wind consensus expectation of 32.7 times the average PE in 2023, give the company 27 times PE in 2023, corresponding to the target price of 10.4 yuan, maintaining the "buy" rating.