Incident: The company released its 2020 report, achieving revenue of 1,914 million yuan, a year-on-year decrease of 6.51%; net profit of 161 million yuan, up 26.81% year on year; net profit after deducting 11 million yuan, an increase of 14.06% over the previous year; earnings per share were 0.34 yuan, and profit distribution plans to distribute a cash dividend of 0.7 yuan (tax included) for every 10 shares. The review is as follows:

1. The volume and profit of anti-antibody products increased, and the cost side sank

The amount of antagonist products is increasing. 2020 is the first year of the domestic feed ban. Entering the second half of the year, due to the official implementation of the feed ban policy, the withdrawal of growth-promoting antibiotics from the market triggered a rapid increase in market demand for anti-bacterial products. Benefiting from this, the company's sales volume of a series of anti-antibody combination products formed with Boluo Huai extract as the core was 5184 tons, an increase of 141.71% over the previous year; the gross profit margin was 63.54%, an increase of 9.57 percentage points over the previous year; the main reason for the increase in gross margin was due to the scale effect that became apparent after mass production of replacement products, and the cost side declined. In 2020, the unit cost of anti-antibody products was 13,900 yuan/ton, a year-on-year decrease of 43.4%. In 2020, the company began building a new planting base for raw materials from Boluo. It is expected that with the expansion of production capacity at the base, the cost side of replacement products will also sink.

Substitution became the main growth point in performance. The anti-defense business achieved revenue of 197 million yuan, an increase of 72.68% over the previous year. Among them, revenue for the second half of the year was 131 million yuan, an increase of 99% over the first half of the year.

The alternative defense business is jointly operated by Shiwei Technology, a subsidiary of 51% holding, and the parent company. In 2020, Shiwei Technology's net profit was 39.9979 million yuan, an increase of 70.82% over the previous year. The profit contribution to the consolidated statement was estimated to be 13.9579 million yuan. The total contribution of Shiwei Technology and the parent company to the consolidated statement profit was estimated to be about 25 million yuan, an increase of about 15 million yuan over the previous year, accounting for 90% of the increase in the company's net profit after deduction.

Continued high growth in alternative antibodies can be expected. During the 14th Five-Year Plan period, domestic feed bans and regulations became stricter, compounded by restrictions on aquaculture, and market demand for alternative anti-resistance products is expected to still have a lot of room for growth. The company's main anti-drug products, Boluo Hui Extract (veterinary drug raw material) and Boluo Huisan (veterinary drug formulation), have obtained the National New Veterinary Drug Certificate. Among them, Boluo Huishan also obtained a pharmaceutical feed additive certificate issued by the Ministry of Agriculture. It is the first patented product in China to independently develop a natural plant-derived pharmaceutical feed additive that can be added and used for a long time. It has antibacterial and anti-inflammatory effects comparable to antibiotics. We are optimistic about the company's large single product advantage in the field of alternatives and judge that it will continue to grow at a high rate in the next 5 years.

It is estimated that sales of anti-resistance products in 21/22/23 will be 9331 tons/13996 tons/20995 tons, respectively, with a year-on-year increase of 80%/50%/50%/50%.

2. Feed enzyme preparations have increased significantly. It is expected to continue to grow rapidly in 2021. Sales of enzyme preparations are 39,611 tons, up 6.95% year on year, revenue is 555 million yuan, and 9.01% year on year. The increase mainly comes from feed enzyme preparations. We believe that benefiting from high downstream demand, the company's feed enzyme preparations will continue to grow rapidly in 2021. The main reasons are: 1) The level of livestock and poultry storage has rebounded markedly, driving demand for feed enzymes in the market. According to data from the Ministry of Agriculture, the number of sows kept in the country at the end of 2020 was 35.1% higher than at the end of the previous year. We expect the level of commercial pig inventory and listing to increase by more than 30% year-on-year in 2021. 2) The price of wheat and corn is seriously inverted, the trend of wheat replacing corn will continue, and the wheat enzyme market will continue to expand.

The gross margin of enzyme preparations was 46.42%, down 4.47 percentage points from the previous year. The decline in gross margin was mainly affected by the adjustment of freight accounting accounts in the new version of the accounting standards. The actual gross margin after excluding this influence was 51.8%, up 1 percentage point from the previous year.

3. API production capacity has increased, and gross margin has been rising steadily

In 2020, revenue from the API business was 1,087 billion yuan, a year-on-year decrease of 9.92%; gross profit margin was 31.21%, an increase over the previous year. The decline in revenue was mainly affected by the slump in the API industry. We believe that the API business is about to enter the bottom-up stage. The main reasons are: 1) environmental tightening will raise industry barriers, compounded by the current slump in the industry, the rate of removal of small production capacity will inevitably accelerate, and API prices will stop falling and stabilize; 2) the company's API product structure is dominated by intermediates, and the focus of future development will be on downstream APIs. The gross margin of APIs is relatively stable, and the average level is higher than that of intermediates, which will open up room for increased gross profit; 3) In 2020, the wholly-owned subsidiary Keyi will complete trial operation of a new production of 1,200 tons of steroidal drugs and intermediates. As the new project is put into operation, API production capacity will double.

Profit prediction

Net profit for 2021/2022/2023 is estimated to be 249/35/498 million yuan. Considering the high growth of the replacement business, the company will be given 30 times PE in '21, with a target market value of 7.47 billion yuan. There is 60% space from the current price, and a “buy” rating.

Risk Reminder

The implementation of the national substitution policy is weak, the company's R&D and project construction progress falls short of expectations, environmental shutdown and production restrictions, etc.