Focusing on the animal insurance industry for more than 30 years, equity incentives show confidence in performance restoration, Jinhe Biotech has been in the animal insurance industry for more than 30 years, forming three major sectors and six major fields of “animal protection, environmental protection, and agricultural product processing”. Affected by policy changes and rising raw material prices, the company's performance continued to decline in 2019-2022, but there are already signs of bottoming out and recovering in Q1 2023. The unlocking conditions for the company's equity incentives in 2023 are no less than 176 million, 222 million, and 286 million, respectively, after deducting non-net profit from 2023-2025, demonstrating the company's confidence in improving performance.

The veterinary chlormycin industry has bottomed out and improved, and the degree of marketization of animal vaccines has increased. The market is gradually recovering, and there is still plenty of room for the future. The period most affected by the “ban on resistance” is over. The US and China are the largest consumers of chlormycin. Among them, the US market's drug policy changed in 2017 and the market basically recovered in 2019; China is also undergoing rapid recovery: 1) Usage doses have increased, and the penetration rate on the farming side has increased. The 2020 annemycin premix symbol changed from “veterinary drug addition” to “veterinary drug word”, and the usage dose was adjusted from adding 25-75 ppm to feed to 400-600 ppm added on site. Chlormycin is effective in controlling respiratory diseases and intestinal diseases in animals. Currently, it is widely used in small to medium pig farms, and the amount is gradually being increased in large pig farms. 2) The domestic ruminant market is expected to increase by 150,000 to 20,000 tons in the future.

Animal vaccines: The degree of marketization is increasing rapidly, and new vaccines are constantly being introduced. China has made it clear that “government tenders and procurement of strong immunization vaccines will be completely abolished in 2025,” the animal vaccine market is moving towards full marketization, and “big single products” and “big customers” have become key strategies for enterprise competition. A number of products being developed and declared at the same time, including the vaccines for bovine and sheep cloth disease and African swine fever, are expected to enter the market one after another in the next few years.

Jinhe Biotech is the world leader in veterinary chlormycin, and a new animal vaccine company, has both the scale and efficiency advantages of its kinmycin business. On the one hand, the company has a comprehensive annual production capacity of 55,000 tons of chlormycin premix, with a global market share of more than 50%. Moreover, the construction of the new phase of the project will be completed by the end of 23, and the company's production capacity will double. In the US market, the company has renewed a five-year general procurement agreement with Shuoteng, the world's largest animal insurance company; at the same time, it has established contacts with most domestic breeding companies. On the other hand, the company is located in Inner Mongolia, close to major corn production areas and has low energy costs. The company's production costs are lower than the industry average.

The animal vaccine business is developing rapidly, and stocks of new products are abundant. The company has formed four major production bases, and its products cover a variety of pig vaccines and pet vaccines. The company's blue ear inactivated vaccine has the highest market share in the country. At the same time, the company is releasing various new products, or is about to be released: for example, the US subsidiary's round branch vaccine is already sold as a domestic agent, and the vaccine is awaiting the issuance of a new veterinary drug certificate and production license. In addition, the company acquired Jilin Bestvancé and laid out a non-plague vaccine ahead of schedule.

First coverage, giving a “buy” rating

Jinhe Biotech is on the fast track of performance repair: on the one hand, the company is the global leader in veterinary kinmycin and its production capacity will double in 2024. As the bottom of the veterinary quinmycin industry recovers, the company's kinmycin business performance will continue to recover; on the other hand, the company's new animal vaccine varieties will be launched one after another, and the profitability of the company's animal vaccine business will increase markedly. We expect the company's EPS to be 0.19 yuan, 0.22 yuan, and 0.26 yuan respectively from 2023 to 2025. We are optimistic about the company, cover it for the first time, and give it a “buy” rating.

Risk warning:

Risk of rising raw materials and energy prices, risk of market fluctuations, risk of R&D falling short of expectations