Investment logic:

The company has a complete VD3 industry chain and has obvious competitive advantages. The company has been focusing on the upstream and downstream aspects of vitamin D3 for a long time. The core products include lanolin cholesterol, VD3, and 25-hydroxy VD3. On the cost side, the company has integrated production capacity from lanolin to NF grade cholesterol to vitamin D3. Compared with listed companies in the same industry that directly outsource NF grade cholesterol to produce vitamin D3, the company's gross margin is more advantageous. In terms of production capacity, VD3 is mainly supplied by a few large listed companies. The total production capacity of VD3 under construction by the company reached 4140 tons. By the end of 2023, the project progress had reached 100%, and the production capacity advantage was remarkable. The VD3 supply price has been at a historically low level in the past few years. As industry consolidation accelerates and downstream demand grows, the VD3 price is expected to gradually rise. According to Choice data, as of June 25, 2024, the VD3 price has gradually rebounded to 74 yuan/kg.

It lays out high-value-added products such as 25-hydroxyl VD3 and cooperates with international giants to further strengthen its leading position. 25-hydroxy VD3 is a metabolite of ordinary VD3 and has advantages such as faster absorption. Currently, there are only two major suppliers in the world, DSM and the company, and the competition pattern is good. In addition, the company also reached an agreement with BASF, a global chemical leader. BASF will continue to provide high-quality raw materials for the garden, and cooperation with the giant will further enhance the company's competitiveness in this field.

Actively promote vertical and horizontal development strategies and enter the generic drug field. On the one hand, the company is further expanding the VD3 upstream and downstream industrial chain. On the other hand, the company issued convertible bonds in 2023 to raise 1.2 billion dollars to expand production capacity for vitamins A, B6, E, and biotin. The closing price of Huayuan Convertible Bonds was 118.6 yuan on June 24, 2024. The new production capacity will be put into operation one after another in the near future. Compared with the existing production capacity of other companies in the same industry, the total production capacity of the company is expected to reach the highest level in the world after all production capacity under construction is put into operation. In addition, the company also deployed high-end generic drugs through the acquisition of Huayuan Pharmaceutical. Currently, 6 generic drugs have been included in national collection or provincial alliance collection, and 3 more products are being reviewed and 11 varieties are under development. The generic drug business contributed 570 million yuan in revenue in 2023, accounting for 52.3% of the company's total revenue.

Profit forecasts, valuations, and ratings

We forecast that in 2024/2025/2026, the company will achieve operating income of 1,479 million yuan, 1,955 billion yuan, and net profit to mother of 325 million yuan, 438 million yuan, and 575 million yuan, corresponding EPS of 0.60/0.81/1.06 yuan. We selected a relative valuation method for valuation, and gave the company 29 times PE in 2024, with a target price of 17.37 yuan. For the first time, we covered it for the first time, and gave it a “buy” rating.

Risk warning

Risk of price fluctuations of vitamin D3, A, B6, E, and biotin; risk of not being selected for centralized drug procurement, or that the selected price falls short of expectations; changes in regulatory policies; new capacity release falls short of expectations; changes in the competitive pattern of 25-hydroxyvitamin D3; risk of equity pledges by majority shareholders; risk of excessive inventory.