We initiate coverage on Quantum Hi-Tech China Biological (“The Company” or“Quantum”) at BUY with TP of RMB25.5, given its fast-growing CRO/CDMObusiness and its leading position in prebiotics industry in China. Through theacquisition of ChemPartner in 2018, the Company has built integratedCRO/CDMO platforms for both chemistry drugs and biological drugs.

Fast growing CRO/CDMO business. ChemPartner is one of the few Chinabasedcompany offering a broad range of services, including pre-clinical CROservices and CDMO services for both small molecule drugs and biologics.

ChemPartner has expanded its CRO capacity by over 30% to 24,000 m2 fromearly 2020 thanks to the launch of a new laboratory facility in Shanghai, whichwill further strengthen the Company’s leading position in CRO industry.

ChemPartner is aggressively expanding its CDMO capacity to meet the strongdemand from customers. ChemPartner plans to expand its capacity ofbiologicals CDMO from current 450L to 4,950L by the end of 2020E, andfurther expand to 13,950L~18,450L in the coming 3 years. In addition,ChemPartner’s new cGMP facility in Fengxian, Shanghai will graduallycommence operation from 2021E to fulfill manufacturing demand from clinicalstage to commercial stage. Driven by the strong demand and expandingcapacity, we forecast ChemPartner’s revenue to grow at a 27% CAGR in2019-22E, contributing 84% of the Company’s total revenue in 2022E.

Strengthening leadership in prebiotics industry. Prebiotics aresubstances which stimulate the growth of beneficial bacteria in the digestivesystem. As a conceptual intermediary between foods and drugs, prebioticsare added into different foods & beverages. The Company’s core products,FOS and GOS, are the two most widely used prebiotics. The Company is alsoone of the major drafters of the FOS and GOS national standards. Accordingto Global Market Insights, global prebiotic market size grew from US$3.3bn in2015 to over US$4.0bn in 2018, and is expected to growth to US$8.0bn in2026E, representing a CAGR of 9.5%.

Initiate at BUY with TP of RMB25.5. We expect the Company’s revenue togrow at a 26% CAGR in FY19-22E, driven by a 27% CAGR in CRO/CDMObusiness and a 23% CAGR in prebiotics business. We forecast theCompany’s attributable net profit to increase 41%/45%/34% YoY inFY20/21/22E. We derive TP of RMB25.5 based on 10-year DCF model(WACC:10.2%, terminal growth rate: 3.0%).

Catalysts: CDMO capacity expansion; Risks: slower-than-expected organicgrowth.