Report summary:
The company focuses on health products CDMO, which accounts for about 50% of domestic revenue, and its overseas export business is mainly concentrated in America and Europe. The company has production sites and marketing centers in China, Europe and the United States. 1) Chinese market: The customer base market is stable, and the construction of the production capacity base in Maanshan is completed. 2) American market: Growing rapidly, demand for innovative formulations such as gummies continues to increase. The company has acquired 71% of the shares of BF, the largest manufacturer of plant-based softgels in the US, and continues to deepen cooperation with leading brand customers in North America. 3) European market: The company completed the merger and acquisition of European softgel nutritional health food CDMO manufacturer Ayanda in 2016 to achieve a European production capacity base layout. Affected by the epidemic, revenue declined slightly in 2020-2022. European revenue increased 34% year over year in 2023. 4) Southeast Asia, Australia and New Zealand: Revenue CAGR reached 93.3% in 2019-2022, with strong growth momentum.
The competitive landscape of the VDS market is fragmented, leading to OEM demand. In 2023, China's nutritional health food scale reached 387.9 billion yuan, of which the dietary supplement VDS industry was 225.341 billion yuan, 2017-
The 2023 CAGR was 6.85%, but the penetration rate and per capita consumption are lower than those of developed countries such as the US and Japan.
Currently, the competitive pattern of the VDS market in China and the US is scattered, and CR5 is below 30%. A large number of small and medium-sized enterprises are in strong demand for OEM, which helps the company to make full use of its R&D and production capabilities. Currently, the domestic health products contract manufacturing rate is only 6.4%, and there is plenty of room for improvement compared to mature markets.
The company develops multiple dosage forms in a balanced manner, focusing on B-side business. In 2023, the company's softgels/gummies/functional drinks/tablets/powders accounted for 42.6%/20.7%/11.8%/10.1%/8.2%. A balanced product structure can calm the impact of fluctuations in gross margin of a single product. In addition, the company's innovative dosage forms are well prepared for marketization. More than 500 new products will be launched in 2022, and the domestic new product conversion rate will exceed 30%, which is expected to become a new growth point for the company. In 2016, Xianle Health began to focus on B-side customers, and the sales expenses rate dropped from 13.9% in 2015 to 7.75% in 2023.
With the implementation of a new round of equity incentives, the growth potential is expected to continue. In November 2023, the company granted restricted shares to management/core technology/business personnel and several overseas team managers, accounting for about 0.86% of the total share capital. The 2024-2026 revenue assessment target was 43.1/49.3/5.57 billion yuan, which is conducive to increasing team motivation and continuing to explore domestic and foreign markets.
Investment advice: The company's revenue for 2024-2026 is expected to be 43.16/49.75/5.640 billion yuan, net profit to mother is 4.02/4.98/591 million yuan, EPS is 2.21/2.74/3.26 yuan, corresponding to 2024-2026 PE is 18X/15X/12X, which is covered for the first time, giving the company an “increase in wealth” rating.
Risk warning: Sales of core products fall short of expectations, overseas market development falls short of expectations, exchange rate fluctuations.