Main points of investment

Event: the company issued a clarification announcement that the media's report on "the company's south plant will be completely suspended by the end of 2018 and the north plant will be demolished" is not comprehensive and inaccurate.

The project of going back to the city to enter the garden continues to move forward, the new plant area has been gradually put into production, the company's production is normal and its production capacity has been expanded. The company launched the retreat project in 2015, and the preparation plate and raw material medicine plate will be relocated to Jining High-tech Zone and Zoucheng respectively. The north-south factory area reported by the media belongs to the old factory area, which is still in normal production and will gradually complete the relocation in accordance with the plan. The new preparation plant has all been put into full production and has passed the GMP certification. Human and veterinary API relocation projects have all been completed, production license transfer, product registration transfer and GMP certification are being processed, and some production lines have passed the production license on-site inspection. Before the suspension of production in the north-south plant, all the new capacity will reach production according to the plan, and the production and operation will not be affected. The whole relocation process is rolling relocation, the north-south plant area is still in production, and the capacity of the new plant area is further expanded, overall, the actual production capacity has also been expanded.

On the demand side, human and animal antibiotics are gradually withdrawn from the market, and the demand for professional veterinary antimicrobials in Shandong anti-medicine is increasing.

Common antimicrobials are used frequently, which can easily lead to the production of drug-resistant bacteria. Europe and the United States have banned the use of common antimicrobials in animal breeding. China's Ministry of Agriculture has also issued a decree to gradually stop its use, banning four kinds of antibiotics in 2015, one in 2016, three in 2018, and requiring all antibiotics to be withdrawn from the market by 2020. We calculated the 54 varieties of antimicrobials involved in the veterinary drug prescription drug catalogue, of which the ratio of common and professional veterinary antibiotics was 34:20. It is estimated that with the gradual withdrawal of common antimicrobials from the market, the market demand for professional veterinary antimicrobials is expected to increase by 1.7 times, which will continue to be prosperous. Tylosin and its derivatives Tylosin, tilmicosin and tilmicosin phosphate are professional veterinary antimicrobials, which will fill the gap in the market for common antimicrobials and the demand will continue to grow.

Tighter environmental protection on the demand side has led to the suspension of production by its biggest competitor, which is unlikely to resume production in 2018. From the perspective of market competition, Ningxia Teri is the industry leader of tylosin and its derivatives, with a market share of 63% and 54% respectively. Due to the stricter environmental protection policy, Yongning County issued a document on December 4, 2017 requiring Ningxia Teri Yongning plant to stop production. Although the Helan plant is still in production, the production capacity is very small. According to the announcement, it is estimated that the proportion of Ningxia Teri stop production capacity is more than 75%, which means that the supply gap of the whole industry is not less than 40%. We estimate that tylosin is unlikely to resume production for the whole of 18 years: 1) the environmental protection policy is extremely strict. In 2017, the Ministry of Environmental Protection suggested that Ningxia stop production of enterprises with odor problems. Ningxia Environmental Protection Department issued a proposal to order fermentation enterprises in Yongning County to stop production. Yongning County issued a document on December 4 requiring Ningxia Teri and other three enterprises to stop production. With the strict implementation of the national environmental protection policy, enterprises are facing severe pressure on environmental protection. If they do not meet the standards, they will not be able to resume production. 2) it is difficult to deal with the stench problem of Teri. There are residential areas around the factory, and the stench pollution is serious. Over the years, residents have complained to the environmental protection department many times, and the technical reform has failed to solve the problem for many years. It is reported that more than 200 million yuan has been invested in treatment in the last two years. In July 2017, Yongning County also signed an agreement with the Chinese Academy of Sciences to help solve the problem of odor disturbing people in Teri and other enterprises, but it has not yet been solved, and Teri stopped production in December 2017.

Considering the huge environmental pressure in Ningxia and the difficulty of Teri's management, we estimate that Ningxia Teri is unlikely to return to production in 2018.

Demand side and supply side resonance, tylosin quotation nearly doubled, 18 years may continue to rise. The change in demand-side structure has led to an increase in demand for professional veterinary antibiotics such as tylosin, and environmental protection pressure on the supply side has led to the suspension of production of Ningxia Teri, which has a market share of more than 50%, and the possibility of resuming production in 2018 is very low. The price of tylosin series products continues to rise. Data from Health.com show that the price of tylosin has risen from 200 yuan at the beginning of 2017 to 400 yuan / kg at the end of 2017 and has now reached about 500 yuan, while that for tilmicosin has risen from about 300 yuan / kg in July 2017 to about 500 yuan. With the normal inventory consumption of API enterprises and downstream customers for 3 months, prices may continue to rise in March or so. Considering that Ningxia Teri has little chance of resuming production in 2018, prices will remain high or even continue to rise throughout the year. The new plant of professional veterinary antimicrobials of Lu Kang Medicine has been gradually put into production, the production capacity has been further increased, and it can enjoy the performance flexibility brought by the rise in quantity and price.

Profit forecast and investment advice. It is estimated that the EPS from 2017 to 2019 is 0.20,0.48,0.60 yuan respectively, and the corresponding PE is 48,20 and 16 times respectively. Maintain a "buy" rating. With reference to the average valuation of the chemical preparation and API industry is 36 times and 30 times respectively, the company is conservatively valued at 30 times in 2018, with a target price of 14.40 yuan.

Risk hints: the risk of competitors resuming production or exceeding expectations; the risk of price reduction of veterinary drug products; the risk of capacity release progress or lower than expected risk.