Traditional cinnamomycin leader, multiple businesses go hand in hand

The company has a comprehensive annual production capacity of 55,000 tons of quinomycin. It is the world's largest production base for fodder, with sales in key markets around the world. Furthermore, the company has multiple locations in other related fields, and has now formed a business pattern of “animal protection, environmental protection, and agricultural product processing” in the three major sectors and six major fields, including “veterinary APIs, animal protection, animal vaccines, animal nutrition, corn starch and by-products, and comprehensive environmental protection management.” Affected by the industry's “anti-drug” policy and pig cycle factors, the company's net profit continued to decline in 2019-2022, but the company actively expanded its vaccine business. Coupled with the gradual recovery of the quinomycin market, the company's net profit bottomed out in 2023, showing signs of recovery in profitability.

Chemical pharmaceutical business: The cinnamomycin market is gradually picking up, and the advantages of capacity expansion and scale highlight the gradual recovery of the market: Overseas: According to FDA data, the sales volume of important medical antibiotics (MIA) in the aquaculture industry dropped sharply to 5,296 tons in 2017, -34% over the same period last year due to the impact of the implementation of the US Veterinary Drug Feed Directive (VFD). However, since 2018, MIA sales have been rising steadily, and sales volume rebounded to 6,200 tons in 2022. Domestic: Currently, cinnamomycin is currently only used in pigs in China. The company is actively applying for kinomycin to increase target animals in cattle and sheep. It is expected to be approved in 2024 or 2025. After approval, it is expected to increase the sales volume of kinomycin by 10,000 tons/year.

Double the expansion of production capacity: The company's six-phase project is expected to be put into operation in 2024. After commissioning, the total annual chemical production capacity is expected to increase by 60,000 tons, including the annual production capacity of quinomycin by 52,000 tons and the annual production capacity of quinomycin hydrochloride by 1,000 tons. At that time, the company's chemical production capacity will double, steadily occupy the leading position in the world, and the scale advantage is expected to be further prominent.

Vaccine business: The inactivated vaccine for blue ear takes first place in the market. Vaccines against influenza are expected to become a new generation of major single products. Non-plague vaccines are progressing smoothly

Blue ear vaccine: The company continues to cultivate the blue ear vaccine field and has successively launched the blue ear live vaccine, blue ear inactivated vaccine, and blue ear chimera vaccine. In 2023, the number of blue ear vaccine batches issued by the company was 77, accounting for 12.22% of the total number of batches issued, +3.13 pct. Of these, the total number of blue ear vaccine batches issued was 113 million, ranking first in the industry with more than 34 million heads.

Vaccine for bruxism: There is a logic of double increase in volume and price, and there is huge room for market growth. In 2023, the company's epoch-making live vaccine (BA0711 strain) product has characteristics such as “usable for pregnant animals, high biosafety, universal use for cattle and sheep, testing and purification”. It is the first animal vaccine that meets the ideal standards of the World Health Organization, and has a clear leading edge in the industry.

Anti-plague vaccine: In May 2023, the company invested 288 million yuan to acquire 60% of the shares of Jilin Best Wanko Company and enter the anti-plague vaccine circuit. The company's route is a gene-deficient freeze-dried inactivated vaccine. Experimental results show that the vaccine works well. It has been submitted to the Ministry of Agriculture and Rural Affairs for emergency evaluation, and is currently planning to produce 200 million doses of the African swine fever vaccine.

Investment advice:

At present, there are signs of recovery on the pig breeding side, and the sentiment of farmers using drug seedlings is expected to rebound. The company's overall profitability is expected to rebound and achieve net profit of 1.4/1.8/220 million yuan in 2024-2026, a year-on-year growth rate of 57.4%/30.8%/23.9%, and the corresponding EPS is 0.17/0.23/0.28. The company's chemical business is stable, leading the vaccine industry. The African swine fever vaccine is undergoing emergency evaluation. If successfully marketed, the company's performance will expand drastically, so it can enjoy a certain valuation premium. Animal insurance companies with similar business structures were selected as comparable companies. Referring to the 2024 wind consensus average of 22 times PE, the company was given 30 times PE in 2024. The corresponding target price for 6 months was 5.23 yuan, which covered the “buy-A” investment rating for the first time.

Risk warning: Risk of cyclical fluctuations in the downstream aquaculture industry, risk of product approval progress falling short of expectations, risk of product promotion falling short of expectations, risk of profit predictions falling short of expectations.