Rating: BUY (Initiation) 

Target price: RMB156.93 

Share price (10 Aug): RMB89.42 

Market Cap (RMBm): 7,869.0 

Up/downside: 75.5% 

We initiate coverage with a BUY call and PT of RMB156.93 (75.5% upside potential). With China’s currently low flu vaccine coverage and Covid-19 raising overall vaccination awareness, we believe that growing total vaccination rates and the proportion of tetravalent flu vaccines would benefit the company, a key tetravalent flu vaccine manufacturer. 

Core product, tetravalent flu virus split vaccines, performing well 

GDK Biotechnology is a human vaccine manufacturer driven by R&D and sales. It was established in December 2008. Its tetravalent influenza virus split vaccine entered the market in 2019. In 2020, revenue amounted to RMB589m, up 777.3% yoy, and net profit turned around into the black at RMB155m. The company expects revenue of RMB31m-36m in 1H21 with a net loss of RMB33m-36m, due to strong seasonality in flu vaccine sales, where most of the annual net profit would be reflected in 2H21. 

We expect China’s flu vaccination rates to improve; tetravalent flu vaccine production volume boom 

Annual flu vaccination is the most effective measure to prevent flu, in our view. We believe China’s flu vaccination rate will improve. According to data from the Chinese Procuratorate, batch issues of flu vaccines in China in 2020 amounted to 58m doses, with a vaccination rate at less than 4.2% of the population. According to the Centers for Disease Control and Prevention in the US, the country’s flu vaccination rates for adults and children were at 48.4% and 63.8%, respectively. China’s tetravalent flu vaccine was first marketed in 2018 and the proportion of batch issuance of tetravalent flu vaccines was 58.4% in 2020. In 2013, the US began to market tetravalent flu vaccines, and by lot release volume, this type of vaccination accounted 86.6% for the total vaccines in the 2019-20 flu season. With China providing a wider coverage of tetravalent flu vaccine strains, and with the roll-out of tetravalent flu vaccine production capacity by Chinese vaccine companies, tetravalent flu vaccine volume will grow, in our view. 

Rising tetravalent flu vaccine capacity is set to drive net profit growth 

With GDK’s flu vaccine workshop design capacity at about 10m doses p.a., it produced 5.117m doses in 2020. The company is building a new tetravalent flu vaccine workshop with a capacity of 30m doses p.a. In addition, its research pipeline includes nine vaccines that cover five types of diseases. Among these, freeze-dried human rabies vaccine (Vero cells) has completed phase III clinical trials, and the design capacity of its rabies vaccine workshop is about 15m doses p.a. 

Valuation and risks 

We believe that China currently has a low flu vaccine coverage rate. Covid-19 has helped raise awareness of vaccination. Flu vaccination needs to be done every year. Tetravalent flu vaccines offer better protection. The overall vaccination rate and the rise in the proportion of tetravalent flu vaccines would benefit the company, which is a key tetravalent flu vaccine manufacturer. We expect revenue of RMB1.07bn/1.25bn/2.43bn, up 82.1%/16.3%/94.8% yoy, and net profit of RMB314m/377m/748m, up 102.5%/ 20.0%/ 98.7% yoy in 2021-2023E. Relative to peer PEs (44x on average), we assign a PE of 44x to GDK, corresponding to a market cap of RMB13.81bn. We derive a price target of RMB156.93. Risks include: China’s flu vaccine coverage rate falls below expectations; tetravalent flu vaccine proportion falls below expectations; tech know-how and R&D progress worsens; policy risks; vaccine product safety risks; intensifying competition; risks related to an overly simple product mix; a widening funding gap; and share price fluctuation risks related to new stock. 

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