Event: On October 31, 2023, Kaisai Biotech released its 2023 three-quarter report. The company's operating income for the first three quarters of 2023 was 1,565 billion yuan, down 14.81% year on year; net profit was 314 million yuan, down 35.44% year on year; net profit after deducting non-net profit was 256 million yuan, down 45.99% year on year. The corresponding company's 3Q23 operating income was 535 million yuan, up 1.92% from the previous month; net profit was 72 million yuan, down 60.94% from the previous month.

The company's performance was under pressure in the short term, and 3Q23 profit declined month-on-month. The company's overall gross sales margin for the first three quarters was 28.48%, down 6.94 pcts from the same period last year. The company's financial expenses for the first three quarters rose 28.82% year on year; sales expenses fell 17.68% year on year; management expenses increased 8.74%; and R&D expenses fell 6.19% year on year. The company's net profit declined in the first three quarters. The net profit margin was 22.57%, a decrease of 6.31 pcts compared to the same period last year. It is mainly related to factors such as the company's long-chain binary acid series gross profit falling compared to the same period due to the impact of the international market. The company's net profit fell month-on-month in 3Q23, mainly due to higher exchange earnings in 2Q23.

The company's cash flow situation is good. The net cash flow from the company's operating activities in the first three quarters was 530 million yuan, a year-on-year decrease of 18.32%. Net cash flow from investing activities was -1,313 billion yuan, up 60.69% year on year. Net cash flow from fund-raising activities was $80 million, a year-on-year decrease of 71.37%. The balance of cash and cash equivalents at the end of the period was $5,575 million, down 18.75% year on year. Accounts receivable fell 15.60% year over year, and the turnover ratio of accounts receivable fell, from 5.89 in the same period in 2022 to 4.48 times.

Inventories fell 3.23% year on year, and inventory turnover declined, from 0.86 times in the same period in 2022 to 0.73 times.

Synthetic biology is a subversion and transformation of traditional production methods. Synthetic biology technology uses biological methods for large-scale material processing and transformation through the design, construction, and testing of biological systems. Synthetic biology technology has the characteristics of efficiency, cleanliness, and renewable production in the production process. It can gradually fully empower traditional industries, supplement, and even disrupt traditional production methods. As an effective way to solve the excessive dependence of humans on traditional petrochemicals and chemical products, as well as to solve the problems of carbon reduction and carbon neutrality, there is very broad scope for future development. In the context of the “double carbon” goal and green economy transformation in recent years, many traditional industries with high energy consumption and high pollution are in urgent need of transformation and upgrading. China's “14th Five-Year Plan” and various industrial policies have also proposed further development in the field of synthetic biology and biomanufactured materials. This has given synthetic biology a good opportunity for development. According to the company's 2023 semi-annual report, McKinsey included synthetic biology in the “next generation genomics,” which is one of the twelve most disruptive technologies in the future. It is estimated that by 2025, the economic impact of synthetic biology and biological manufacturing will reach 100 billion US dollars.

One of the world's leading synthetic biology companies, deeply involved in products in the entire polyamide industry chain. The company uses biomanufactured technology to develop, produce and sell novel bio-based materials, and is one of the world's leading enterprises in large-scale production of new materials using biomanufactures. The company's products mainly focus on the polyamide industry chain, including a series of biofurated long-chain binary acids (DC10-DC18), bio-based glutenediamines, and a series of bio-based polyamides (Tyrene, E-2260, E-1273, E-3300, E-6300, etc.). Diamine and binary acids can be polymerized to form polyamides. The company is the first in the world to industrialize the production of bioprocessed long-chain binary acids, bio-based pentylenediamines and bio-based polyamides, and has developed a series of bio-based polyamide continuous fiber-reinforced composites, which have obvious advantages in the entire polyamide industry chain.

A leading global supplier of biochemically processed long-chain dibasic acids, sebacic acid provides increased performance. The company has an annual production capacity of 115,000 tons of biochemical long-chain dibasic acids. Production lines are located in Kaisai Jinxiang, Wusu Technology, and Kaisai Taiyuan. In competition with traditional chemical methods in recent years, biochemical long-chain binary acids have gradually dominated the market due to their outstanding advantages in economy and green and low carbon. Currently, the company's series of biochemical long-chain dibasic acid products occupy a dominant position in the global market, and the company has established good cooperative relationships with many high-quality customers such as DuPont, Evonik, Emmans, and Novo Nordisk. With the gradual promotion of downstream bio-based long-chain nylon and other products, the market size of long-chain dibasic acids is expected to expand further. The company's biochemical sebacic acid (DC10) construction project with an annual output of 40,000 tons/year was completed and trial production began at the Kaisai Taiyuan production base. It can be used as a monomer raw material for the production of products such as long-chain nylon and sebacic acid esters. According to the company's 2023 semi-annual report, the global scale of sebacic acid is about 110,000 tons. According to consulting firm GMI, the compound annual growth rate of sebacic acid demand until 2025 is about 5.5%. Its downstream applications include various fields such as textiles, lubricants, plasticizers, and chemical intermediates. The company's main sebacic acid customers partially overlap with long-chain binary acid (DC11-DC18) customers, making it easy to achieve sales promotion. We believe that as the company's sebacic acid production capacity gradually rises, it is expected to contribute to new performance increases.

Glutanediamine is the core raw material for the company's bio-based polyamides. The company's Wusu Materials project produces 50,000 tons of glutarylamine per year. For the first time in the world, large-scale production has been achieved, enriching the product range in the global double nylon market.

The company's bio-based pentanediamine is mainly used as the core raw material for the production of bio-based polyamides. It is polymerized with one or more different binary acids to produce a series of bio-based polyamides. The product categories include PA56, PA510, PA5X, etc. The company's series bio-based polyamide production line with an annual output of 100,000 tons is located in Wusu Materials. Its downstream promotion and application areas include: civil yarn, industrial yarn, non-woven fabrics, engineering plastics, nylon elastomers, etc. For different downstream fields, the company has registered the trademark “Teflon”, which is mainly used in the textile field, and the trademark “ECOPENT”, which is mainly used in the field of engineering materials.

Continue to develop various application materials for bio-based polyamides and actively promote marketing. The company continues to develop products such as bio-based long-chain polyamides, high-temperature polyamides, continuous fiber-reinforced bio-based polyamide composites, polyamide elastomers, and polyamide foam/honeycomb materials to promote downstream applications and enhance the company's overall competitiveness. The company is developing bio-based polyamide thermoplastic composites reinforced with glass fiber and carbon fiber. Due to their lightweight, high strength, and temperature resistance, etc., they can be applied in a wide range of fields such as transportation logistics, new energy equipment, and building decoration. Currently, petroleum-based polyamides are still the main polyamide products, with nylon 6 and nylon 66 accounting for close to 90% in total. After being industrialized in recent years, bio-based polyamides have gradually been accepted and recognized by the market for their product performance and application potential, and have begun to be applied and promoted in the fields of spinning and engineering materials. The application and promotion of bio-based polyamides is conducive to improving the import dependency of key materials in China. The industrialization technology of bio-based pentylenediamine and bio-based polyamide was classified as a key common technology in the industry by the Ministry of Industry and Information Technology in 2015. The company continues to develop product applications and deepen cooperation with downstream industrial customers, actively explore potential downstream applications, and promote the market promotion of bio-based polyamides.

The integrated layout of the entire industry chain creates a complete production platform. At present, the company's products have covered the entire industry chain of bio-based polyamide monomers - bio-based polyamide polyamide polymers - bio-based polyamide composites/modified materials. It has obvious competitive advantages in terms of production cost and product quality, and is building a world-leading full-scale synthetic biological materials industry chain project in Shanxi. The company can produce binary acids with various chain lengths from carbon 10 to carbon 18 through biological methods. It has the ability to develop multiple potential markets. Combined with its own bio-based glutaramide products, it can obtain more high-performance polyamides through different monomer combinations, and has a complete platform to produce a series of bio-based polyamide products.

Bio-based polyamides have outstanding competitive advantages in low cost and low carbon emissions. The company has a complete platform for the production of bio-based polyamides. The main core raw materials are independently controlled by the company, which can effectively reduce production costs.

Furthermore, the company has further strengthened its cost advantage through continuous technology development and upgrading, production process optimization, and introduction of digital and intelligent management methods. The company's biobased products use renewable crops as raw materials and produce biobased products through biotechnology. The manufacturing process conditions are mild, energy saving, and carbon reduction. It is expected to achieve zero carbon or even negative carbon, which has a significant effect on reducing carbon emissions, and has outstanding advantages in the context of the double carbon policy and the transformation of green production methods. According to the company's 2023 semi-annual report, the production of bio-based polyamide 56 reduces carbon emissions by more than half compared to traditional nylon 66 or nylon 6; the production of biosebacic acid reduces carbon emissions by about 20% compared to chemical sebacic acid; in addition, the company's bio-based polyamide products use plastic instead of steel to reduce consumption through weight reduction in terminal products, and plastic instead of thermosetting materials to achieve recycling, all of which have made a beneficial contribution to carbon neutrality.

The signing of a cooperation with the China Merchants Bureau is expected to further open up growth space for bio-based polyamides. The company announced in June 2023 that the company and China Merchants Group Co., Ltd. signed a “Business Cooperation Agreement”. China Merchants Group will make maximum commercial efforts to promote and implement the use of Kaisai bio-based polyamide products to ensure the implementation of the “1-8-20 target” for the first three years (the “1-8-20 target” for the first three years: the amount of bio-based polyamide resin purchased and used by the China Merchants Bureau in 2023, 2024 and 2025 is not less than 10,000 tons, 80,000 tons and 200,000 tons, respectively), further opening up the company's bio-based polyamide There is room for market growth. The company's biological manufacturing technology can effectively reduce carbon emissions in the field of basic materials manufacturing, and environmentally friendly materials can be applied to various industrial sectors under China Merchants Group. We believe that the cooperation between the company and China Merchants Group can give full play to their respective advantages in product technology and markets, give full play to the synergy in the industrial chain, enhance the company's overall competitiveness, and promote the high-quality development of the company.

It has a high-throughput R&D platform for the entire synthetic biology industry chain, and continues to carry out R&D iterations. The company has R&D teams in fields such as synthetic biology, cell engineering, biochemistry, polymer materials and engineering. The mature complex team has the ability to develop, iterate and expand applications, creating a high-throughput R&D platform across multiple disciplines. The company relies on independent research and development to develop existing commercial products, and continues research and development based on existing biomanufactured technology to carry out application development and testing of continuous fiber-reinforced bio-based polyamide composites in various fields. 1H23 has completed a strategic investment in Molecular Heart, an AI protein design platform company. The company will carry out in-depth cooperation with Molecular Heart at the business level, introduce AI technology into the biological manufacturing R&D system, and greatly improve the research efficiency of new technologies and products. The company's Taiyuan Synthetic Biology Research Institute undertook the construction of a key laboratory for synthetic biology in Shanxi Province, which will reserve talents and technology for the development of the biological manufacturing industry. The company's high-throughput platform combining R&D, pilot and factory has achieved initial results. In addition, the company's “Bio-based Polyamide Engineering Technology Research Center” project in Shanghai was completed and put into use, taking advantage of the advantages of Shanghai as a core region to better integrate and optimize various resources such as talents, technology, and equipment, and enhance the company's overall R&D strength.

Production of core products continues to expand, and the straw lactic acid pilot project strives to solve the problem of raw material supply and reuse.

The company's annual production of 500,000 tons of bio-based pentylenediamine and 900,000 tons of bio-based polyamide projects, 30,000 tons of long-chain dihydride and 20,000 tons of long-chain polyamide projects, deep processing of 2.4 million tons of corn per year and 5 million tons of bioferment liquid per year are under construction, and the production capacity of the company's core products such as long-chain binary acid and bio-based polyamide continues to rise. The company strives to become a “pioneer in the synthetic biology industry”. In order to solve the problems of long-term supply of biomanufactured raw materials and the reuse of biological waste, the company is actively exploring the use of agricultural waste such as straw to replace grain raw materials such as corn as raw materials for biological manufacturing, and has carried out a 10,000-ton straw lactic acid test project at the Shanxi Synthetic Biology Industrial Park, which is currently progressing smoothly.

Investment suggestions: The company is expected to achieve operating income of 22.85/45.17/7610 billion yuan in 2023-2025, and net profit of 4.56/7.05/1,041 billion yuan respectively, corresponding EPS of 0.78/1.21/1.78, respectively. The PE multiples corresponding to the current stock price are 65.5X, 42.3X, and 28.7X, respectively. Based on the following three aspects, 1) the company has a complete production platform with a complete production platform with remarkable integration and synergy; 2) the company has an interdisciplinary high-throughput R&D platform and continues to promote product development and application testing, building high technical barriers; 3) Under the dual carbon policy, the company's low-cost, carbon-reducing biobased products have outstanding advantages, superimposed cooperation with the China Merchants Bureau, and the bio-based polyamide market promotion prospects are good. We are optimistic about the low-carbon environmental advantages of biomanufactures and the company's bio-based polyamide promotion prospects. We covered it for the first time and gave it a “buy” rating.

Risk warning: risk of fluctuations in downstream industries; risk of technology development lagging behind; construction projects not progressing as expected; risk of fluctuations in raw materials and energy prices; risk of environmental compliance risks.