1. China's VDS industry: steady improvement, long-term growth space can be expected 1) Market size: Driven by multiple drivers, the VDS market continues to expand, and there is still room for improvement in the future. According to Euromonitor data, China's VDS market grew to 225.341 billion yuan in 2023, which is much higher than that of developed countries. China's VDS industry has been developing for a short time, residents' consumption awareness and habits have yet to take shape, and there is room for high growth in per capita consumption levels. There are three main drivers of market growth: ① the rise in public health awareness combined with lifestyle improvements has led to a jump in health demand; ② the aging of the population has deepened, and the silver economy has brought new growth; ③ changes in the mentality of young people have brought about new consumption forces. According to Euromonitor International data, the VDS market will reach 293.153 billion yuan in 2028, and there is room for future growth.

2) Market pattern:

① The proportion of online channels continues to increase, and e-commerce channels can be expected to grow. Due to multiple policy factors and the impact of the epidemic, the share of online channels continues to increase, gradually surpassing direct sales channels to rank first. In 23 years, the share of online sales has exceeded half. With the development of e-commerce channels, the development of pharmacy channels will continue to be under pressure and shift, and the share is likely to continue to decline. Online channels have become the focus of enterprise deployment; ② Industry concentration is low, and there is still room for improvement in the market share of leading companies. Compared to countries such as Canada and Australia, China's VDS market concentration is lower, and CR5 in '23 was 30%. The main reasons are that the technical and financial thresholds of the industry are low; product homogenization is serious, making it difficult to form core competitiveness; and the market share of leading enterprises is low.

2. Company competitiveness: Adequate R&D and production experience, external layout of the global market 1) Industrial chain: Multinational mergers and acquisitions create a global industrial chain to help localize supply and marketing for overseas businesses. The company completed the acquisition of German company Ayanda in 2016, a major European contract manufacturer in the nutritional health food industry focusing on complex formula softgels. Major customers include internationally renowned pharmaceutical and nutraceutical companies such as Takeda, Queisser Pharma, Orthomol, etc. The company acquired control of Best Formulations in the US in January 2023. The company had an operating entity in the US as early as 2012, and has good practical experience in US corporate governance, compliance, fiscal and tax control, business practices, etc. Since acquiring Ayanda in Germany in 2016, the company has gradually accumulated management experience in overseas manufacturing plants, all of which have provided a good foundation for the company to successfully integrate American Best Formulations.

2) Product side: The company's product reserves and R&D are now excellent, creating a competitive advantage for the product. The company strengthens R&D innovation, has a number of patents and health food certifications, has a high conversion rate of new products, and rich reserves. The company covers a full range of dosage forms and has seven major production and R&D bases in China, the US, and Europe. As production capacity for innovative dosage forms such as gummies is gradually released, it is expected to contribute additional volume.

3) Channel side: B side relies on one-stop service for major customers, and C side has both online and offline efforts. 1) The company is deeply involved in the B-side of nutritious health food and provides one-stop service. The B-side channel is relatively stable. The company provides customers with a one-stop service from product line planning, product formulation development and upgrade, product registration support, product production and packaging, product delivery and marketing support. Over the years, the company has established strategic partnerships with well-known companies such as Jianhe, Bayer, Mars, Chr. Hansen, Siemens, and Tmall. The company's products and services have been highly recognized by customers and the industry. 2) Double efforts on the C-side, offline and online, and cross-border e-commerce business to help expand the brand. The company's customers are mainly distributed in China, Asia Pacific, Europe and America, covering various types and leading companies with different business models, such as pharmaceutical companies, direct sales companies, non-direct sales brand companies, pharmacy chains, modern supermarkets, and social e-commerce, food and cosmetics companies expanding new businesses in the field of nutrition and health, which together form the company's stable and high-viscosity customer base. In addition, the company is vigorously developing cross-border business, deepening innovation in the cross-border supply chain with international cooperation with Tmall, and creating new growth points for the company's C-end e-commerce business.

3. Investment advice: The company's 2024/25/26 revenue is expected to be 4.353/5.175/5.945 billion yuan, yoy +22%/19%/15%, net profit to mother 0.407/0.505/0.591 billion yuan, +45%/24%/17% year over year. We believe that the company's health product coverage is comprehensive, and shows that after BestFormulations in the US, it is expected that the supply capacity of China, the US, and Europe will be fully integrated, and the global supply system will be consolidated. The target price will be 20xPE in 24 years, with a target market value of 8.1 billion yuan, and a target price of 34.5 yuan. For the first time, coverage will be given a “buy” rating.

Risk warning: weak market demand, low market acceptance of new products, surging raw material costs, exchange rate fluctuations, risk of uncertainty in overseas business, product quality and food safety management risks