Core views:

As a giant in the domestic corn deep-processing industry with more than 30 years of experience, COFCO Biotech is committed to reshaping the corn deep processing industry with modern biotechnology and has built a product matrix with fuel ethanol, starch and starch sugar at the core supplemented by specialized offerings such as modified starch and special syrup and a strong pipeline of technology covering polylactic acid （PLA）， cellulosic bioethanol, sugar substitute on the back of its industry-leading systems, low-cost raw materials, optimal production and processing capabilities, and ever-deepening technology reforms. We believe that the Company's bio-based energy business will steadily expand and contribute to the bottom line, the bio-based food ingredient business will continue to optimize in profitability, and the bio-based material business will shape the second growth curve. Considering its operating performance, industry position, technical capabilities and growth headroom, we estimate the 2022E target market cap at Rmb27.9bn, corresponding to a target price of Rmb15, and initiate coverage with a “BUY” rating.

Abstract:

Bio-based energy: Cost advantage secures leading position in clean energy. COFCO Biotech is the fuel ethanol leader in China, with both production capacity and market share ranking first in the sector. The Company secures its leading position in corn ethanol, leveraging its cost controls on adaptability to diversified raw materials, rising gross profit margin （GPM） on adjustability to flexible production lines, stable selling prices on market-oriented price negotiation, and upside potential on non-grain-based technological reforms, which enables it to effectively hedge the two major risks of prices and policies. Meanwhile, it plays as the "adjuster" in the national grain market and the "consumption engine" of problematic grains, and lead the sector to explore new development space for non-grain fuel ethanol. As COFCO Biotech’s basic business, we expect that bio-based energy has the ability to continuously generate stable revenue and profit.

Bio-based food ingredients: Deepened processing creates high value-added food ingredients. COFCO Biotech is one of the largest processors of starch and starch sugar, as well as a key manufacturer of organic acid and amino acid in China. In terms of starch, the Company has reduced costs and upgraded products through continuous process optimizations. In terms of starch sugar, it has ventured the processing from starch to starch sugar, alongside the comprehensively upgrading to "small, special and new" products to generate higher added value. We believe bio-based food ingredients can continuously optimize the profitability of the Company, improve overall GPM, and meanwhile promote COFCO Biotech to upgrade from the manufacturer of traditional bulk products to the manufacturer of tailor-made functional products in small batches.

Bio-based materials: Build a complete value chain of bio-degradable materials backed by technological breakthroughs. Under the carbon peak and carbon neutrality goals and the launch of the national plastic restriction order, bio-degradable materials boast great upside potential. COFCO Biotech has been actively building a presence in the early stage of bio-degradable materials, and has now formed a complete value chain of PLA, with key breakthroughs in lactide. Meanwhile, with the stable progress in the Company's bio-degradable material-related projects, the cost advantage of corns has initially emerged, and the technological buildout in forward-looking Polyhydroxyalkanoate （PHA） has also been launched. We expect COFCO Biotech to become a leader in bio-degradable materials. The bio-based materials segment is likely to be the most important growth driver for the Company going forward, which may shape a second growth curve.

Competitive edges: Based on the advanced management concept and mature business model of the complete corn value chain, COFCO Biotech has established a systematic and low-cost raw material control system with an overall optimized production and processing capability, and has built a relatively higher entry barrier backed by continuous and in-depth technological reforms. The Company's product matrix features diversification yet same sources, with rich categories and distinct levels. Meanwhile, it has a solid channel network and customer resources, and has effective controls over risks of prices and policies. The three major segments of bio-based energy, bio-based food ingredients, and bio-based materials are all based on corns, which have become a pivot in the Company's business scale, bottom line, and growth prospects, lending support to high growth and earnings visibility.

Potential risks: Fluctuations in food prices; fluctuations in crude oil prices; uncertainties brought by Covid-19; disappointing progress of projects under construction; food safety issues; production safety issues.

Investment recommendation: The comprehensive operating capability of COFCO Biotech's bio-based energy business has continued to improve, which has effectively offset the impacts brought by fluctuations in grain prices and international oil prices on results. Bio-based food ingredients are likely to continue to improve the Company's profitability through product structure optimization, and bio-based materials have achieved major technological breakthroughs with launches of buildout in the capability of key areas, which will likely provide sufficient elasticity for the Company's growth going forward. We forecast COFCO Biotech’s 2022E-24E attributable net profit （ANP） to be Rmb1.266bn/1.398bn/1.546bn, corresponding to EPS of Rmb0.68/0.75/0.83 and 14x/13x/12x PE. Considering the Company's operating results, industry position, technical capabilities and growth prospects, with the average comps valuation of 22x 2022E PE as a reference, we assign COFCO Biotech 22x 2022E PE to derive a target market cap of Rmb27.9bn, equivalent to a target price of Rmb15, and initiate coverage with a "BUY" rating.