In 2020, benefiting from the continuous increase in sales of the company's health-care products and the sharp increase in gross margin of its main products, the company achieved significant performance growth. Through the acquisition of Chengxin Pharmaceutical and increasing the production capacity of its production base in Inner Mongolia, the company's raw material advantages have become more and more remarkable. DRB, Kunwu, Zipfizz, and Jin Lexin have formed a series of differentiated product portfolios to increase market share through diversified online and offline marketing channels. In a context where global demand for health food continues to grow, the company is expected to become a leading world-class health food company in China with its raw material cost manufacturing advantages, differentiated multi-brand strategy, and diversified channel terminal-oriented development strategy. Considering the company's continuous launch of new products, we expect the company's net profit to be 13.3/16.0/1.93 billion yuan from 2021 to 2023, maintaining the target price of 56 yuan and the “buy” rating.

Benefiting from the sharp rise in the prices of the company's products, the company's performance is impressive. The company achieved net profit of 3.5 billion yuan in 2020, an increase of 9.8% over the previous year, and achieved net profit of 960 million yuan, an increase of 113% over the previous year; Q1 of 2021 achieved sales revenue of 900 million yuan, an increase of 12.6% over the previous year, and achieved net profit of 300 million yuan, an increase of 38.4% over the previous year. The sharp rise in the company's performance was mainly due to the sharp rise in the prices of the company's main products, which led to an increase in gross margin, compounded by an increase in health product sales.

Perfect the layout of the entire nutritional health food industry chain to build a global first-tier company. The company is the world's largest supplier of coenzyme Q10. In addition, it also has production capacity for various products such as vitamin A and vitamin K2; starting in 2015, the company officially entered the dietary supplement industry through the acquisition of DRB, a well-known nutritional and health food brand in the United States; in the same year, the company acquired Vitatech's main operating assets to build a midstream production and processing base; in 2016, a joint venture company, Maikon Health Food Co., Ltd. was established in Japan to enter the natural health food industry; in 2017, it officially entered sports nutrition and In the field of weight management; in the same year, the company's participation in PROSUPPS continued to increase the sports nutrition industry; in 2018, the company acquired functional energy product brand Zipfizz to further increase the functional nutrition industry; in the same year, the company improved the downstream channel sales sector through participation in the world-renowned health products e-commerce platform iHerb. At this point, the company has completed a complete industrial chain layout from upstream raw material supply, to midstream health product production and processing, to downstream terminal product sales.

Acquire Chengxin Pharmaceutical to expand the layout of the raw materials industry. In December 2020, on the basis of maintaining the original raw material supply advantage, the company expanded the company's layout in the raw materials industry by purchasing 86% of Chengxin Pharmaceutical's shares. Chengxin Pharmaceutical mainly produces pharmaceutical raw materials, cosmetics and dietary supplements, etc., and has rich enzyme bank resources. Currently, it mainly sells the three major raw material products praziquantel, oxiracetam, and beta-niacinamide mononucleotide. Propyramyl glutamine will soon be put into production. At the same time, using its existing enzyme technology platform, efforts are being made to develop green enzymatic technology, form a synergistic relationship with the company's business system, better utilize the advantages of the “dual main business” model, enhance the company's overall competitiveness, and have a positive impact on the company's future business development and improvement of business performance.

The new production capacity at the Inner Mongolia base is expected to be put into operation this year, further enhancing the company's market competitiveness. The company currently has vitamin A production capacity, coenzyme Q10 and vitamin K2 production capacity of 2,700, 600, and 100 tons/year respectively. Currently, 800 tons/year of vitamin A oil, 200 tons/year of vitamin D3 oil, and 500 tons/year of coenzyme NMN transformation and expansion projects are all expected to be put into operation this year. Furthermore, the company plans to gradually carry out feasibility studies and projects for food grade, cosmetic grade and pharmaceutical grade “hyaluronic acid” raw materials.

The number of popular products continues to be released, and the company is actively deploying a series of medical and aesthetic products. In the field of health and FMCG, the company mainly covers three sections, including health products, sports nutrition, and beauty and daily necessities. As a dietary additive with anti-aging and sleep-aiding functions, we think NMN is expected to become a new major product. The company's products went online for sale in the third quarter of 2020. In less than half a year, NMN products sold 58,267 bottles of NMN products, achieving sales revenue of 64.781 million yuan. We expect a significant increase in '21. In addition, the company plans to rely on its strong raw material resources to gradually carry out early development work on beauty and skin care products including hyaluronic acid oral liquid and gummies, hyaluronic acid medical and aesthetic series, NMN masks, NAD masks, Q10 masks, and hyaluronic acid series according to market demand. At present, some products have been launched on the market, such as Wukun's new product NMN+ hyaluronic acid and hyaluronic acid jelly, which are already sold at the Wukun Tmall flagship store.

Risk factors: The company's product sales growth fell short of expectations; the company's product prices fell short of expectations; the progress of the company's new construction projects fell short of expectations; raw material prices rose sharply.

Investment strategy: The company is gradually expanding the layout of the entire health food industry chain, achieving and continuously expanding the complete industrial chain layout from upstream raw material supply, to midstream health product production and processing, and downstream terminal product sales, to become a global nutrition and health pioneer. In a context where global demand for health food continues to grow, the company is expected to become a leading world-class health food company in China with its raw material cost manufacturing advantages, differentiated multi-brand strategy, and diversified channel terminal-oriented development strategy. The company's net profit forecast for 2021-2022 was adjusted to 1,330 million/1,603 billion yuan (originally 1,417 billion/1,647 billion yuan), adding the 2023 forecast of 1,928 million yuan. The corresponding EPS forecast was 2.16/2.60/3.13 yuan respectively. Maintain the target price of 56 yuan (corresponding to 26 times PE valuation in 2021) and the “buy” rating.