As the scale and intensity of China's aquaculture industry continues to increase, the veterinary drug industry's industry supervision system is also being continuously improved. The industry market concentration is expected to increase, and the industry competition pattern is gradually moving towards an oligopoly pattern.

In recent years, China's veterinary biological products industry as a whole has shown a fluctuating upward trend. As the country increases its support for animal husbandry and breeding, pig production continues to recover at an accelerated pace, and the market size is expected to continue to expand.

In particular, since 2018, policies such as “resistance reduction” requirements and new GMP revisions have been introduced one after another, further promoting the standardization of the veterinary chemical industry, while encouraging enterprises to develop into the field of high-quality growth-promoting drugs and continuously improving the level of technological innovation. Through new technology and innovative service models, high-quality enterprises are expected to further increase industry concentration.

As a supplier of major veterinary vaccines for pigs, poultry, cows, sheep, etc., Zhengye Biotech (ZYBT.US) updated its prospectus and once again attacked NASDAQ.

Revenue and net profit declined year-on-year, but net cash from operating activities did not decrease but increased

The Zhitong Finance App learned that Zhengye Biotech was founded in 2004, but if you trace its history, its predecessor was the Harbin Veterinary Biopharmaceutical Factory of the Ministry of Agriculture, which now has a history of more than 50 years, and Zhengye Biotech was restructured in 2004.

From being delisted on the New Third Board in 2016, to submitting the Beijing Stock Exchange listing guidance filing application materials in 2021, to now hitting the NASDAQ in the US, Zhengye Biotech has been working with the capital market for a long time.

However, when the company first submitted the statement at the beginning of this year, the Securities Regulatory Commission also requested the company to provide additional explanations on compliance with the establishment of an equity control structure, the tax payment status of Senhan Biotech's acquisition of shares in Zenghan Biotech, the pricing basis for Zenghan Biotech's acquisition of shares in Windsor Holdings, price fairness, and tax payments.

Previously, China's animal vaccine market was mainly based on government tenders and procurement. Zhengye Biotech was one of the first 28 veterinary biological products companies directly under the Ministry of Agriculture, and “vaccine procurement” once accounted for 80% of its sales. Today, with the liberalization of immunization vaccine management and the implementation of independent procurement by farmers, marketization places higher demands on the channel capabilities of veterinary biological products companies.

In terms of sales area, authentic biological physical products currently cover 29 provinces across the country and are exported to overseas markets such as Vietnam, Pakistan, and Egypt. In 2023, there are 210 domestic distributors and 2 export distributors respectively. In terms of sales channels, the company mainly relies on direct sales channels and distribution networks for sales, and channel revenue through government bidding and procurement accounts for only 1.2%.

In 2023, the company's direct sales channel accounted for 75.4%, which is the most important sales method; in addition, the share of distribution channels also increased in 2023, from 18.4% to 23.4% year-on-year.

In terms of product types, swine vaccines are the company's main source of revenue, contributing nearly 90% of revenue.

In fiscal year 2023, Zhengye Biotech achieved revenue of 261 million yuan and 212 million yuan respectively, a year-on-year decrease of 18.7%. This was mainly affected by the adjustment of the veterinary vaccine market and the decline in pig vaccine sales after the company made strategic adjustments to diversify its customer base and reduce the risk of concentration.

Net profit fell from RMB 557.42 million in 2022 to RMB 37.5.09 million, a year-on-year decrease of 32.7%; net profit margin fell from 21.4% to 17.7%, down 3.7 percentage points year-on-year.

On the financial side, in 2023, the net cash generated by the company's operating activities did not decrease but increased, reaching RMB 48.184 million in 2023 and RMB 17.335 million in the same period in 2022, mainly due to a decrease in accounts receivable, etc.

If the listing is successful, is it a risk or an opportunity?

In terms of market share, in 2022, Zhengye Biotech ranked 10th in market share among domestic veterinary vaccine companies, with a corresponding revenue scale of 260 million yuan. Among them, in the most important swine vaccine race, Zhengye Biotech's market share ranked 8th, corresponding to pig vaccine revenue of 236 million yuan.

Judging from the nature of the industry, veterinary vaccines are a downstream part of the industry, and the animal insurance industry shows post-cycle characteristics. Performance is related to breeding profits and strong storage volume. For example, if pig prices rise, breeding profits will increase, farmers' willingness to raise and fill stocks will also improve. Demand for epidemic prevention and vaccine sales will also improve, which is ultimately reflected in the gradual recovery in the income and performance of animal insurance companies.

According to CICC Research, the inflection point in the performance of animal insurance companies lags behind the inflection point of aquaculture profits by about 1-2 quarters. From the perspective of the industry as a whole, there is a certain time lag based on the transmission process described above. April 2022 to February 2024: Animal Insurance rebounded simultaneously with the farming market, and the high point was delayed by about 8 months. Looking at the inflection point, after entering a new cycle and the official reversal of pig prices, the breeding index and the animal protection index showed a simultaneous rebound.

According to CICC Research, the insurance policy contains two investment opportunities, which occur when the inflection point of pig prices is confirmed and when pig prices enter a downward cycle.

Among them, when the inflection point of pig prices was confirmed, the animal insurance market rebounded; on the other hand, when pig prices entered a downward cycle, the later cycle realized, the theme concept catalyzed, or continued to rise in the animal insurance market. For example, pig prices fell from a high point in October 2022 and fell by about 51% in February '23, but based on the implementation of post-animal insurance cycle performance, combined with frequent cases of animal diseases in winter and the promotion of non-plague vaccines, the animal insurance index bucked the trend and rose by about 12%.

On the other hand, the boom in the farming industry is the most important influencing factor, and from the perspective of the pig and white chicken cycle, both are currently in the phase of reducing production capacity, and pig and chicken prices are low.

In response, SDIC Securities believes that judging that the pig cycle will reverse in 2024 H2, and that the white chicken cycle will reverse in Q1 2024. As a post-cycle industry, animal insurance is expected to fully benefit from the increase in farming prosperity and further enhance the level of performance.

Furthermore, since non-plague seriously threatens the health of pigs, demand on the breeding side is high, and the market space is broad, and it is expected that the animal protection market will be greatly expanded. Currently, many companies' anti-plague vaccine projects are progressing smoothly, and emergency reviews are progressing steadily. According to SDIC Securities estimates, the initial penetration rate of the listing was 30%, and the unit price was 20 yuan/branch. The estimated market share was 9.1 billion yuan. Subsequently, the market penetration rate gradually increased to 80%, and the unit price dropped to 15 yuan/branch. The corresponding market space is estimated to reach 18.2 billion yuan.

Looking at the industry at a macro level, if the company can be successfully listed in the near future, it is expected to benefit from reversal expectations in the second half of the pig cycle.

At the same time, however, there is still a need to pay attention to the potential risk of companies depending on a single customer. In 2023, the sales revenue of the company's largest customer fell from 194 million yuan in 2022 to 110 million yuan in 2023, which was an important factor in the company's revenue decline for the full year of 2023. Among them, the largest customer accounted for 75.0% of the company's total accounts receivable in 2022. Although this ratio fell to 53.2% in 2023, it still poses a potential risk to the company's revenue.