In the large and promising market of scientific research services, platform-based enterprises have advantages: from 2015 to 2021, the CAGR of research funding from universities & research institutes and enterprises was 11% and 12% respectively, showing a steady growth trend. We expect the domestic market size for research reagents, consumables, and equipment to exceed RMB200bn. The proportion of R&D expenditure to GDP in China is less than 2.5%, which is still significantly lower than 3%+ in developed countries. Therefore, we believe that the scientific research services industry is a large and promising market with long-term growth prospects. As the domestic market has long been monopolized by international giants, domestic substitution rate is still relatively low. However, with the ongoing efforts of domestic enterprises and the catalysis of Covid, domestic firms see the opportunity to grow. Reviewing the development of international leader Fisher Scientific and its financial improvement after merging with Thermo, we believe that comprehensive service platform-based enterprises have greater advantages.
Driven by advantageous products and channels, Titan continues to acquire and integrate to connect the entire industry chain: 1) Product: the company adopts a sales model that combines independent brands and third-party brands. By 2022, with number of SKUs exceeding 5 million, titan has formed a complete product matrix and enjoys leading capabilities of comprehensive service. In addition, Titan's independent brand SKU has exceeded 200,000, and it will continue to increase future R&D expenses (2018-2021 CAGR of 41%) to expand self-developed brands. With the increase in the proportion of independent brands, we expect Titan's GPM to gradually improve. 2) Channel: Titan's national warehousing and distribution system has been largely completed in 2021, and regional center warehouses have basically achieved next-day delivery coverage. In addition, the company has established an e-commerce "exploration platform", and the proportion of online orders in revenue has increased to 11.69% in 2019 and is expected to further increase in the future. As per traffic data of its website, its business has not yet returned to the level before Covid, but we believe it is likely to recover in Q2. 3) With the joint efforts of products and channels, the company's performance has maintained high- speed growth, with a CAGR of 42%/43% in revenue and net profit2013 to 2021, respectively. After the company's listing, it continues to focus on "heavy" manufacturing and "deep" technology and has acquired high-quality targets such as Anhui Tiandi and strategically invested in companies like Hanhai New Enzyme, gradually connecting the entire industry chain and further synergizing with the company's existing products and channels. Therefore, we believe that the company's future performance growth is also highly guaranteed.
Earnings Forecast & Rating: We expect Titan to achieve revenue and net profit of RMB2.63/3.56/4.8bn and Rmb126/233/326mn in 2022-2024, with corresponding P/E at 81x/44x/31x. We initiate with the Buy rating.
Risks: Lower-than-expected domestic substitution; operational cash flow risk; intensified market competition; lower-than-expected business expansion.
