Focusing on health product OEM, the pharmaceutical company Genesis Company's forward-looking layout The predecessor of Xianle Health was born in 1993. The company started as a pharmaceutical company, converted to health product contract production in 2000, and strengthened its focus on health product CDMO after selling its own brand Qianlin in 2016. The company focuses on R&D and overseas business layout. Early on, it obtained multinational health product qualifications represented by the US NPA-GMP, and continues to lead the domestic industry in export business. The company's domestic production capacity is located in Shantou, Maanshan and Zhuhai, and overseas manufacturing layout was achieved through acquisitions of production capacity in Germany and the United States in 2016 and 2023. In terms of dosage forms, the company currently has a complete product matrix. Softgels are the company's largest dosage form, accounting for about 43% of revenue in 2023. At the same time, benefiting from forward-looking insight into overseas export business, the company discovered market opportunities in the gummy business earlier than its domestic peers. With continuous investment in R&D and production capacity, the compound growth rate of the company's softgel/tablet/powder/gummy sales reached about 6%/7%/13%/45%, respectively, from 2016 to 2023, and the gummy business was strong.
Demand in the industry continues to be booming, and the need for midstream OEM is highlighted. Compared with ordinary food, the market share of leading companies is rising, and health products are subject to relatively stricter supervision in all core markets. Judging from the differences in laws and regulations, the VDS market demand for health products in China mainly consists of health foods and functional foods. Among them, health foods (including registration and filing systems) have a long review cycle and high utility requirements, and functional foods (low barriers to entry) are not strictly regulated. Against the backdrop of the rapid rise in e-commerce consumption, the consumption of health products in China is rapidly tilting towards an online model. In 2023, China's VDS e-commerce retail sales accounted for 56%, an increase of 42pct/21pct compared with 2013/2019, respectively. At the same time, this industry phenomenon has also spawned a large number of downstream brands. The industry is characterized by a steady increase in leading market share and rapid iteration of medium- and long-tail brands. In the context of fierce downstream competition, brands pay more attention to product marketing and channel operation, are not good at asset-heavy manufacturing, and require suppliers to continuously provide innovative products to increase marketing advantages. As a result, their reliance on midstream foundry has increased, and the latter has benefited from this and accelerated development. According to estimates, in 2023, China's health products OEM business market is about 22.534 billion yuan, of which Xianle Health's market share is about 8.2%, making it the leading domestic market. At the same time, since 2020, although downstream demand in the industry has risen overall, there have also been annual fluctuations, which has intensified the rapid iteration of small and medium-sized brands.
The instability of small to medium customers has caused small OEM companies that are less resilient to risks and do not have strong dosage forms/categories of their own to withdraw from the market one after another. Leading (especially integrated enterprises) manufacturers continued to expand through capacity building and acquisitions, and industry concentration showed an upward trend.
R&D and service platformization continue to increase, and overseas business capacity replication leverages marginal growth. Judging from the business model, Xianle Health focuses on R&D empowerment, compounding the strong service capabilities accumulated over many years. The company continues to strengthen the recognition of key customers and high-quality new customers in the industry; on the other hand, the company's German production capacity has gradually reduced costs and increased efficiency since the acquisition in 2016. With the replication of lean processing, category expansion, and supply chain collaboration capabilities, the company's newly acquired American company BF is also expected to achieve a rapid rise in profit levels. Combined with the increasing prosperity of the Chinese market, the company is expected to improve operating efficiency, and many benefits resonate.
Equity incentives and employee stock ownership plans indicate high growth, strong personnel bundling to achieve common growth, the company's share structure is stable, and the desire to share the company's growth with employees is strong. In 2023, the company introduced equity incentives and employee stock ownership plans to further strengthen the binding of core employees (including relevant overseas managers). Driven by high target expectations and endogenous outreach strategies, the company is expected to continue to achieve rapid growth. The company's net profit for 2024/2025/2026 is expected to reach 4.06/464/538 million yuan, and EPS is 2.24/2.56/2.96 yuan/share, respectively. The corresponding PE is 18/16/13 times, respectively, covered for the first time, giving it a “buy” rating.
Risk warning
1. Risk of slow demand recovery; 2. Industry competition further exacerbates risks; 3. Risk of changes in consumer consumption habits; 4. Risk that profit forecasting assumptions are untrue or falling short of expectations, etc.