The company is a leading enterprise in the animal insurance industry in China. In 2014-2023, the company's revenue grew steadily from 585 million yuan to 2,249 million yuan, CAGR +16%; judging from net profit to mother, in 2010-2018, the company's net profit fluctuated around 100 million yuan. In 2019, benefiting from increased industry concentration, the company's net profit to mother surged 63% year-on-year, and declined in 2022 due to the low downstream boom. In 2023, with the launch of new products such as pet products and continued deepening cooperation with breeding groups, the company achieved a record high of 453 million yuan in net profit to mother. Downstream fundamentals are gradually improving, and industry sentiment is expected to rise from the bottom: (1) The market size of APIs, chemical preparations and biological agents accounts for the main market share. Compared with the world, the concentration of China's animal insurance industry is expected to increase further. (2) Animal insurance is a typical post-cycle industry. Performance is strongly correlated with downstream profit levels. As production capacity is removed and the fundamentals of aquaculture gradually improve, the activity insurance boom is expected to rise from the bottom.
(3) The pet economy is booming. Pet medicine accounts for 29% of pet consumer products, of which medicinal products account for 13%. The proportion is higher than traditional economic animals, and the development prospects for pet animal protection are broad. (4) As one of the future industries, synthetic biology has high growth potential, is strategic and pioneering, and is currently on the cusp of policy.
The main business is operating steadily, and I am optimistic about the future development of the new business: (1) The company has a strong innovation atmosphere, complete software & hardware facilities, and the R&D investment in 2023 ranks first in the industry, and the system is perfect; (2) Poultry biological products are the main source of revenue for the company, accounting for 41% of revenue in 2023. According to our estimates, in 2015-2018, the company's poultry vaccine market share stabilized at around 10%. In 2019, benefiting from increased concentration in the animal protection industry and downstream farming industry, the company's poultry vaccine market share increased to 13%, and further increased to 14% in 2020. (3) The livestock vaccine product line is rich, and the company is expected to benefit from increased concentration in the farming industry in the future. (4) The pet industry has been in business for many years, and now it is in a harvest period. (5) The company's forward-looking layout of the synthetic biology business in 2023 is currently on the cusp of policy.
Profit forecasting and investment advice: The company's main business is stable and the product matrix is rich. As sow production capacity continues to decline, corresponding to the current monthly decline in pig supply, combined with the peak demand season in the second half of the year, breeding is expected to improve and drive the upward trend in conservation. Based on this, we raised the company's 2024-2026 revenue of 26.07/30.61/36.49 billion yuan to 26.61/32.06/38.23 billion yuan, and increased net profit to mother of 5.02/6.07/721 million yuan to 541/62/726 million yuan, and increase EPS 1.08/1.30/1.55 yuan to 1.16/1.40/1.56 yuan. On May 17, 2024, the closing price was 16.76 yuan/share, corresponding to the 24-26 PE, which was 14/12/11X, respectively, maintaining the “gain” rating.
Risk warning: Animal epidemic risk, market competition risk, product development risk, synthetic biology business progress fell short of expectations. In 2019-2020, the company and some executives received warning letters because the marketing center opened accounts in the names of employees to collect customer payments, and some payments were not included in the company's account storage and accounting.