Vitamin prices remain high, the industry boom promotes the company's performance volume: VA, VE industry concentration is relatively high, VA, 20 years of new Hecheng, DSM's market share of 27% and 22% of TVE, DSM, Xinhecheng, Zhejiang Pharmaceutical, BASF and other major manufacturers accounted for more than 87% of the market in 20 years. As the vitamin supply side presents an oligopoly pattern, the changes in the supply side often become the main driving force of vitamin price fluctuations.

For example, in 2014-2015, Nengte Technology intermediate sales superimposed VE overcapacity led to VE prices all the way down; in 2017, the explosion of the BASF citral plant caused a shortage of VA intermediates, driving prices up. Over the past 20 years, affected by the blockade of the epidemic, vitamin production and transportation have been blocked, and at the same time, some production lines in BASF have been overhauled and accidents have occurred. In addition, the resumption of work in the joint venture plant between Nengte and DSM has been delayed, the production of vitamin An and E has been greatly affected, and the price of vitamins has continued to rise. In the past 21 years, the scale of resuming production has been lower than expected, and the industry inventory is becoming increasingly tight; at the same time, leading enterprises may face production suspension and maintenance in the second half of the year, and the supply of VA and VE may be further tightened. On the demand side, the stock of live pigs and breeding sows continued to rise in the first half of the year, the breeding industry has a strong demand for upstream products, and vitamins are expected to usher in an upward cycle again. The annual price of Q1 of VA and VE21 rises rapidly, Q2 appears differentiation, VA falls back to a certain extent, while the price of VE continues to rise. In 2020, the VA sector accounts for 15% of the company's revenue structure, and the VE plate accounts for 29%. The VE vitamins account for a relatively high share of revenue and prices are steadily rising, the industry has maintained a high demeanor, while the downward space for VA prices is limited, and the company's 21-year performance is expected to continue to increase.

Technical transformation and transformation of comprehensive pharmaceutical enterprises continue to advance, cyclical fluctuations are expected to reduce: the company's operating income and return net profit fluctuated year by year, and the net profit growth rate in 2017 experienced a large decline compared with the same period last year, and began to rebound in 2018, mainly caused by the company's main products vitamins downstream breeding demand fluctuations. The trend of gross profit margin is good and stable, mainly due to the success of the company's vitamin technical reform to reduce product costs, and the industry pattern is improved year by year, the profitability of the vitamin sector is guaranteed. From 2017 to 2020, the R & D expenditure rate increased year by year, from 258 million to 546 million, which is related to the company's strategic goal of transforming into a comprehensive pharmaceutical enterprise, and the investment in the field of innovative drugs continues to increase. The improvement of the profitability of the vitamin sector and the gradual landing of the achievements of innovative drug research and development in the future will reduce the cyclical fluctuation of the company's performance, which is conducive to the improvement of valuation.

Subsidiary Xincode Biology completed round A financing, and the clinical research and development process of ADC accelerated: on March 18, Zhejiang Pharmaceutical subsidiary Xinma Biology announced that it had received 415 million yuan in round A financing, with investors including top strategic investors such as Lilly Asia Fund and Matrix Partners China, indicating that the potential of Suncode Biological products has been highly recognized in the primary capital market. The financing will be used to support the clinical development and commercial preparation of the company's core product ARX788, product line expansion and the construction of independent innovation technology platform. ADC clinical research is expected to be accelerated, and the product landing prospect is expected in the future.

The innovative drug product ARX788 is progressing smoothly and is expected to enter the market of hundreds of billions of dollars. On February 24, Zhejiang Medical announcement innovative Drug ARX788 received the "Drug Clinical trial approval notice" approved and issued by the State Drug Administration. Recombinant humanized anti-HER2 monoclonal antibody-AS269 coupling injection (ARX788) is a new generation of monoclonal antibody coupling drugs for the treatment of HER2 positive advanced breast cancer and gastric cancer.

By the end of 2020, the company's ARX788 project has invested a total of 345 million yuan in research and development, which is a major research and development project of the company. According to EVALUATEPHARMA, the global sales of HER2 target anti-tumor market reached US $11.07 billion in 2018 and is expected to grow to US $15.6 billion in 2024. If the related products are successfully listed, the company will officially enter the market of hundreds of billions of targeted anti-cancer drugs.

Newly registered products won the bid for centralized procurement, and the layout of pharmaceutical products was accelerated: the company's sales revenue of miglitol tablets in 2020 was 171 million yuan, accounting for 2.33% of revenue; sales revenue of levofloxacin lactate preparation series was 749 million yuan, accounting for 10.23% of revenue. The two products passed the consistency evaluation in April 2020 and June 2021, respectively. The newly registered products have been purchased centrally, which shows the company's excellent R & D strength and market recognition. At present, the procurement contract for the two products has not yet been signed, and if the follow-up contract is signed smoothly, it will increase the company's market share and brand influence, and increase the revenue of the pharmaceutical manufacturing sector.

High barrier new products have been densely approved for listing, and the room for growth continues to open: in June, the company issued a notice that vancomycin hydrochloride for injection passed the generic drug consistency evaluation. Vancomycin is a narrow-band glycopeptide antibiotic produced by Streptomyces orientalis, which is mainly effective against Gram-positive bacteria and plays a quick bactericidal effect by inhibiting the synthesis of bacterial cell walls. Do not compete with penicillins for binding sites, bacteria are not easy to develop resistance to penicillins. At present, there are only three domestic approved production enterprises of vancomycin hydrochloride for injection: Lizhu Group, Zhejiang Zhenghai Pharmaceutical Co., Ltd., and Zhejiang Pharmaceutical Co., Ltd. June 22, the company announced that nainofloxacin malate sodium chloride injection and levofloxacin sodium chloride injection obtained drug registration certificate. Nenofloxacin is a new fluorine-free quinolone antibiotic, which has both oral and injection forms, which is not easy to produce drug-resistant strains, reduces fluoride-related adverse reactions and enhances antibacterial activity against Gram-positive bacteria. At present, only Zhejiang Medicine in mainland China has approved nenofloxacin malate and sodium chloride injection, while levofloxacin sodium chloride injection has been approved by 8 domestic manufacturers. The market of the three new products is broad and has considerable technical barriers, and the domestic competition pattern is good. The continuous introduction of new products with high barriers has enriched the company's product layout and will open up a broad space for growth.

Holding sodium innovative energy, entering the field of sodium ion battery: the company participated in the establishment of Zhejiang Sodium innovative Energy Co., Ltd. in May 2018, and held 40% of the shares. Sodium innovative energy is the leading manufacturer of sodium ion in China. at present, sodium innovative energy sodium ion battery products are in pilot test and promotion cooperation, and other plans are also under way. Sodium ion battery is a kind of secondary battery (rechargeable battery), which mainly depends on the movement of sodium ion between positive and negative electrodes, which is similar to the working principle of lithium ion battery. Sodium ion battery technology not only meets the requirements of low cost, long life and high safety performance in the field of new energy, but also has many advantages, such as abundant sodium resources, wide distribution, low price, environment-friendly, good power characteristics, wide temperature range adaptability, good safety performance and compatibility with the existing production equipment of lithium-ion battery. To some extent, it can alleviate the limited development of energy storage battery caused by the shortage of lithium resources, and it is an excellent substitute for lithium-ion battery. At the same time, it can also replace lead-acid battery. Nowadays, through the efforts of various research groups around the world, sodium ion batteries have made continuous breakthroughs in electrode materials, electrolyte materials, characterization analysis, exploration of sodium storage mechanism and battery technology, and the number of articles and patent applications related to sodium ion batteries has increased significantly. With the rapid development of the field of sodium ion battery in China, important progress has been made initially, and the development space of China's sodium ion battery market is expected in the future.

Earnings Forecast, valuation and rating: we maintain the company's profit forecast for 2021-2023. We expect net profit for 2021-2023 to be 1.2736 billion yuan, equivalent to 1.28 trillion yuan for EPS, and maintain a "buy" rating.

Risk hint: the progress of new production capacity is not as expected, the global economic recovery is not as expected, the international crude oil price fluctuates, and the risk of environmental protection policy.