Key investment points

A sentence of logic: For large tonnage API companies with an advantage in scale, the recovery in the animal insurance business is expected to drive performance beyond expectations.

Fundamentals: Pharmaceuticals are growing steadily, and activity is expected to pick up

1. Pharmaceutical business: Volume and price increases, production expansion is expected. The supply pattern for the company's macrolide APIs is relatively good, and demand is rising steadily. Among them, the price of the core product azithromycin API increased 11% from the beginning of the year to October, driven by supply and demand. Furthermore, according to the company's EIA report, the company plans to expand production of azithromycin to 1,200 tons (adding 450 tons). We are optimistic that the price of the company's dominant ingredient, macrolide APIs, will stabilize, and the market share will further increase as new production capacity is released. Furthermore, sales of key intermediates are expected to continue to rise as demand exploits potential, and the specialty APIs business is expected to maintain strong growth.

2. Animal insurance business: seize the market and recover from the bottom. The November price of flufenicol increased by about 14% from the lowest price in mid-September, and the November price of doxycycline increased by about 23% from the lowest price in early April. Considering the price trends of major animal insurance products, we believe that the market share of fluphenicol and other varieties in the 2024H2 animal insurance sector is expected to continue to increase as production capacity utilization increases and shipments increase. Overall, the company has a complete product lineup in the field of animal protection APIs. Brands such as fluphenicol and doxycycline have obvious advantages. It is also a major supplier of specialty animal protection APIs such as mabofloxacin and sarafloxacin. It has strong comprehensive competitiveness. It is expected to contribute flexibility to the company's performance after prices and demand for animal insurance products are fixed.

Cycle or growth?

Some market opinions believe that the company is cyclical, and that performance is greatly affected by the product volume and price cycle. We believe that this perception ignores the core competitiveness that the company's size advantage can be replicated. The company is based on large tonnage products and the complete layout of the supply chain. Among many antibiotics, intermediates, and animal protection products, it has verified large-scale manufacturing advantages through high market share and relatively stable profitability; in terms of medium- to long-term strategy, the company plans to “achieve global leadership of 30 large-scale products, routine production of 80 products, and a production capacity of 120 products”, through horizontal product replication and vertical expansion of the industrial chain, from project establishment → production expansion → capacity utilization rate improvement → leading market share coverage, and it is expected that the overall product cycle fluctuation will be reduced. The impact of performance to support the company's long-term upward channel.

Looking at company size advantage from doxycycline to replicate competitiveness

In 2021, the company successfully completed the first phase of doxycycline (production capacity of 1000 tons) and began large-scale market sales; in 2023, the company successfully put into operation the second phase of doxycycline with an annual output of 1,500 tons; according to the October 2024 public exchange minutes, “Doxycycline production capacity is 2,500 tons, which is basically at full production”. From a market share perspective, according to Health Network statistics, Guobang Pharmaceutical's share of doxycycline exports reached 16.18% from January to September 2024, second only to Yangzhou Lianbo. The company's market share of doxycycline ranked in the top three in four years from launch to the completion of the second phase of production capacity. We believe the main benefits are: ① complete industrial chain, obvious cost advantage & scale advantage; ② doxycycline has a high degree of overlap with the customer base of the company's dominant product, fluphenicol, and can achieve rapid promotion. What is behind it is the company's intensive manufacturing advantage for large-scale production of large-tonnage products and the ability to control “extensive and effective global market channels” to ensure rapid industrial expansion of products, and to seize the market by relying on existing channel networks to quickly sell products and seize the market with cost and quality advantages.

From price wars to value wars, can the dominant players have a premium?

We believe that behind the price war is a high-quality comprehensive per capita efficiency competition. Take fluphenicol as an example. Affected by many factors such as falling production costs, increasing number of manufacturers and fierce competition, the price of fluorfenicol began to decline in October 2021. The price price dropped from 727 yuan/kg to 179 yuan/kg in September '24, a decrease of 75%. Guobang Pharmaceutical's new 2,000-ton fluorophenicol project began construction in 2022 and successfully put into operation in 2023. In the competitive expansion stage of fluorfenicol, the company used competitive pricing to actively expand sales, and its market share increased steadily: judging from the advantage of scale, the company's fluorfenicol production capacity was 4,000 tons/year, and production capacity was constantly climbing. The advantage of scale manufacturing helped the company gain an advantage in cost control and market supply. Looking at the technical process, fluorfenicol's biosynthetic enzyme catalysis technology has been completely industrialized in '23, and technological innovation has optimized production costs. Looking at the supply chain, the company's fluorophenicol industry chain is complete, covering the main key intermediates in the production process. Looking at the overall per capita ratio, since some manufacturers of fluphenicol are not listed, judging only from the overall per capita efficiency of listed companies, the company's per capita revenue generation is second only to that of Proplex Pharmaceuticals. In summary, we believe that the company is in the “leader” position in the price war. When the supply of the industry is saturated and enters the clearance model, “leaders” with economies of scale/technical barriers/channel advantages often show profit resilience, and are expected to enjoy the triple premium of market share expansion, terminal price recovery, and low level of capital expenditure after the industry clears up.

Profit forecasting and valuation

We expect the company's 2024-2026 EPS to be 1.40, 1.76, and 2.18 yuan respectively, and the closing price on November 28, 2024 corresponds to 15 times the 2024 PE. We are optimistic that the company is based on large-scale manufacturing advantages. Increased market share of core products strengthens manufacturing advantages, creates new momentum for commercialization of new varieties, weakens the impact of the cycle, and weakens the impact of the cycle by enriching the product matrix and the self-supply capacity of the industrial chain, and raising it to a “buy” rating.

Risk warning

Risk of sales falling short of expectations for core products; risk of exchange rate fluctuations; risk of order delivery volatility, etc.