Quantum Hi-Tech China Biological (Quantum) reported 1H20 revenue ofRMB270mn, up 9% YoY, while revenue in 2Q20 grew strongly by 23% YoY.

Attributable net profit (loss) turned around from RMB14mn loss in 1Q20 toRMB55mn in 2Q20, up 132% YoY in 2Q20. Business recovery was mainly drivenby the operation continuation after COVID-19 pandemic in China, growingcustomer base and capacity expansion. Gross margin recovered significantlyfrom 24.4% in 1Q20 to 40.3% in 2Q20 thanks higher capacity utilization rate.

Expanding CRO/CDMO customer base. ChemPartner is one of the fewChina-based companies offering a broad range of services, including preclinicalCRO services and CDMO services for both small molecule drugs andbiologics. In 1H20, ChemPartner recorded RMB531mn revenue in 1H20, up3% YoY, while revenue increased 14% YoY in 2Q20. ChemPartner addedover 100 new customers in 1H20, indicating promising growth outlook in thefuture driven by expanding customer base. 74% of CRO/CDMO income werefrom overseas customers. ChemPartner has maintained stable customerrelationship with 18 out of the global top 20 pharma companies. ChemPartneris also acquiring new biotech customers from both China and overseas.

Fast growing capacity to drive business growth. ChemPartner hasexpanded its CRO capacity by over 30% to 24,000 m2 from early 2020 thanksto the launch of a new laboratory facility in Shanghai. ChemPartner isaggressively expanding its CDMO capacity to meet the strong demand.

ChemPartner plans to expand its biologicals CDMO capacity from current450L to 4,950L by the end of 2020E, and further expand to 13,950L~18,450Lin the coming three years. In addition, ChemPartner’s new cGMP facility inFengxian, Shanghai will gradually commence operation from 2021E to fulfillmanufacturing demand from clinical stage to commercial stage. Driven by thestrong demand and expanding capacity, we forecast ChemPartner’s revenueto grow at a 26% CAGR in 2019-22E, contributing 83% of the Company’s totalrevenue in 2022E.

Strengthening leadership in prebiotics industry. Prebiotics aresubstances which stimulate the growth of beneficial bacteria in the digestivesystem. The Company’s prebiotics revenue grew 48% YoY in 1H20 from alow base in 1H19, driven by the industry’s demand recovery from the“Quanjian” scandal in 2019.

Maintain BUY. We expect revenue to grow at a 25% CAGR in FY19-22E, andattributable net profit to increase 35%/41%/39% YoY in FY20/21/22E.

Maintain DCF-based TP unchanged at RMB25.52.

Catalyst: CDMO capacity expansion; Risk: Weak organic growth.