Key points of investment
Due to the company's high market share and brand reputation in domestic low temperature storage, the market has always believed that the company's main business revenue and long-term growth engine come from the domestic low temperature storage sector. Combined with limited space to increase market share, equipment cycle attributes and weak downstream customer sentiment, there are certain doubts about the company's high growth potential. We believe that Haier Biotech's development logic has changed from “import substitution of ace products” to continuous monetization of the “Haier brand” in the medical and life sciences fields. Both [Customer Number Expansion] and [Single Customer Value Increase] have been realized. Group empowerment continues to show, and platform value may continue to increase. In this report, we will answer “Why are we optimistic about the long-term high growth of Haier Biology?” from four perspectives.
How can the company achieve “Single Customer Value Enhancement”?
As a domestic low temperature storage leader covering tens of thousands of hospitals, pharmaceutical and biological enterprises, university research institutions, disease control, plasma stations, testing institutions, etc., Haier Biotech has a good customer base and brand reputation.
The non-storage industry, which continues to enrich the product matrix, is an important sector for increasing the value of the company's single customer. Looking at the company's revenue structure in 2023, the new non-storage industry accounted for 38% of revenue, an increase of more than 30% over the previous year, and the share of revenue increased again in 2024Q1. The growth curve of the new non-storage industry has gradually become clear, gradually becoming the main driving force for the company's growth.
Looking at product segmentation, the company's non-storage sector is mainly divided into self-developed and merger products. Self-developed products include biosafety cabinets, centrifuges, incubators, etc., and some products have already achieved breakthroughs in Europe and the US. Another part comes from mergers and acquisitions. Since its listing, the company has continued to rapidly improve sector capabilities through epitaxial expansion. Haier Biomedical Technology (Chengdu) (formerly “Sichuan Haishengjie Low Temperature Technology Co., Ltd.”), Haier Hematology (formerly “Chongqing Sanweiye Pharmaceutical Co., Ltd.”), Jin Weixin, Kangsheng Biology, Haier Biomedical Technology (Suzhou) (formerly “Suzhou Houhong Intelligent Technology Co., Ltd.”), and Shanghai Yuanshi joined the company one after another to clearly enrich the categories and enhance its own growth.
What are the company's endogenous and epitaxial development ideas other than storage?
The company mentioned “good industry, good company, seeking common ground” as a merger and acquisition strategy in its 2023 annual report. Broadly speaking, we believe that non-storage merger and acquisition strategies are mainly divided into the following points:
① Good industry - large space, mature products, and partly monopolized by imports: We found that Haier Biotech did not invest heavily in flexible emerging tracks in development ideas, but instead used the definitive needs of existing customers to choose varieties with large market space and relatively mature products such as plasma separators (Haier Blood Technology), analytical instruments (Shanghai Yuanshi), laboratory consumables (Kangsheng Biology), biosafety cabinets, etc. Due to consumer attributes where upstream prices are not sensitive and brand reputation is sensitive, such products are expected to be quickly sold through Haier's channels and brand endorsements.
② Good company -- It has a certain growth potential, which is not much different from the profitability of the parent company: We found that Haier Biotech continues to maintain a very stable and high gross margin level (about 50%) under the continuous enrichment of non-storage product categories. Take Haier Blood Technology, which was acquired at the end of 2020, as an example. The net interest rate for the target 2018-2020.07 was stable at around 28% before the acquisition, and the net interest rate in the year of the company's acquisition increased to 33% with the help of channels. In terms of growth, the company's annual report revealed that Haier Blood Technology's revenue in 2023 has doubled compared to before the acquisition. Despite overcoming many adverse effects of the environment in recent years, it still achieved a high CAGR increase of 19% in revenue in 2019-2023.
③ Seek common ground - match the needs of the original customers and retain some of the shares: We found that the selection of the company's mergers and acquisitions coincided with the original customer base, anchoring end users such as hospitals, pharmaceutical and biological enterprises, university research institutions, disease control, plasma stations, testing institutions, etc., and achieving channel sharing. Furthermore, during mergers and acquisitions, the company will retain minority shares for the founding team of the target company, so that all parties can create a win-win situation.
How can the company achieve “customer number expansion”?
In addition to breaking through a gap in the user base through continuous domestic segmentation and decline, overseas expansion is an important direction for the company to expand the number of customers. The company's overseas revenue accounted for 34.33% in 2023, and it has become an important growth sector for the company. 2023 is an important overseas year for the company, and the company has enhanced its overseas competitiveness in various aspects such as products, marketing, and warehousing.
① Product: By the end of 2023, the company had more than 400 models certified overseas. In addition to the superior category of ultra-low temperature products, categories such as liquid nitrogen tanks, incubators, centrifuges, and laboratory consumables have also achieved rapid growth. Furthermore, the company's 2023 ESG rating is AAA, which once again reflects the core competitiveness of the company's products and the concept of sustainable development.
② Marketing: Localized layout strengthened. In 2023, the company established a user experience training center system centered on the United Arab Emirates, Nigeria, Singapore, and the United Kingdom, as well as warehousing and logistics center systems in the Netherlands and the United States, and maintained long-term and continuous cooperative relationships with more than 60 international organizations such as the World Health Organization (WHO) and the United Nations Children's Fund (UNICEF). Localized marketing teams are expected to open up local markets more quickly and achieve brand recognition and performance transformation.
③ Warehousing: The company added a new warehousing and logistics center system in the Netherlands and the United States in 2023. On the one hand, it helps improve service and delivery capabilities. On the other hand, the company's overseas expansion is not affected by fluctuations in shipping prices, and it can continuously and stably serve overseas customers.
What do you think of Haier Biotech's platform value?
The domestic biomedical and scientific research services market pattern has the characteristics of import monopolies, scattered domestic capital, and diverse products. We believe that Haier Biotech's platform value is mainly reflected in the following aspects:
① Stable cornerstone products: wide customer coverage and excellent brand reputation. The company's low temperature storage products have a strong brand and a broad and good market base, providing a solid foundation for the company to expand its new growth curve.
② Strong integrated service capabilities: Due to the fragmentation of products and market patterns, the upstream sector has strong demand for scenario construction. The company not only continues to enrich its product matrix, but also continues to provide value-added services based on products. The share of service revenue has increased from 3.02% in 2020 to 17% in 2023. Service is one of Haier's key advantages in gaining customer recognition in non-competitive fields.
③ Platform Mutual Assistance and Empowerment: The 2023 Company Annual Report mentions that one of the main ways of cooperation between the company and M&A targets is the complementarity of R&D, supply chain, and marketing systems. For example, Haier Biotech (Suzhou) increased new orders by 50% in 2023, and Haier Blood Technology's growth rate increased markedly in the year of the merger and acquisition. Moreover, this characteristic is reflected not only in the mutual empowerment of Haier Biotech's internal subsidiaries, but also in the mutual empowerment of the Haier Group's big health sector. On June 18, 2024, Haier Group officially held Shanghai Rice. Blood products customers are one of Haier Biotech's important customer directions, and collaboration between brother companies is expected to increase further in the future. Furthermore, the shares were sold to Fangilifu as a global healthcare company, or to help Haier Group's big health sector go overseas faster.
Profit forecasting and valuation
We expect the company's net profit for 2024-2026 to be 598 million, 733 million yuan and 893 million yuan, respectively, and EPS of 1.88, 2.31, and 2.81 yuan respectively, corresponding to the closing price on June 20, 2024, about 20 times PE in 2024. As the company's non-storage business product matrix gradually becomes richer and proportion continues to increase, the second growth curve gradually becomes clear, which is expected to usher in valuation reshaping. Maintain an “gain” rating based on comparable company valuations and industry positions.
Risk warning
Risk of business development falling short of expectations; increased risk of market competition; risk of overseas geopolitical risk; risk of merger and acquisition company integration falling short of expectations.