Core views:

Sino Biological is a leading “one-stop” platform for biological reagents (BRs) and technical services in China. On the one hand, with the normalized spread of the pandemic globally, we expect the proportion of its Covid-19-related revenue to gradually decrease in the future, thus gradually eliminating the impact of the high base. On the other hand, considering its leadership in the industry in terms of product quantity and technical capabilities, Sino Biological may expect to continuously enhance its competitiveness in the global market on the back of its own advantages as it continues to expand overseas markets. We see strong visibility that its non-Covid-19 business will maintain rapid growth in the long term. In summary, we value the stock at 36x 2023E PE to assign a target price of Rmb122 and initiate coverage with a “BUY” rating

Abstract:

A domestic BR leader embraces exponential growth under the pandemic.

Sino Biological has been engaged in the reagent industry for 15 years, and its main business includes products such as recombinant proteins, antibodies, genes and culture media, as well as services such as the development and biological analysis of recombinant proteins and antibodies. With its complete product structure and high product quality, Sino Biological provides comprehensive products and services for a large number of customers in basic research of life science, pharmaceutical development, production quality control and other links. After years of product development and marketing, the Company has become one of the leading technology companies in the BR industry in China. Its customers include universities, research institutes, pharmaceutical R&D enterprises and other domestic and foreign biological R&D units. Since the outbreak of Covid-19 in early 2020, the Company took the lead in developing a series of Covid-19 related proteins, including antibodies and other BR products. In 2020-21, the total sales revenue of Covid-19 related products reached Rmb1,948mn, achieving an explosive growth. Its non-Covid-19 businesses recorded revenue of Rmb359mn (+41.41% YoY) in 2021, with a CAGR of 37.31% in 2017-21, maintaining a rapid growth trend.

Leading number of products backed by strong R&D capabilities and long-term growth room fueled by the presence in the global market.

BR industry has high technical barriers, and Sino Biological currently has four core technology platforms on the back of its strong R&D capabilities and years of accumulation, which could meet customer demand for diverse biological reagents and technology services. By the end of 2021, the Company has independently built a relatively large proteins and antibodies reagent product library (spot), in which, the number of protein reagent / antibody reagent / gene products reached more than 6,500/about 14,000/nearly 32,000 varieties. The Company could independently produce culture media for cultivating HEK293, insect cells, etc., among which the number of protein products is in the leading position in the industry. In addition, it independently masters the development and preparation of many key raw materials in the production process, which has obvious cost advantages under the "closed-loop" system. We believe that the Company's products enjoy high recognition in the market. As it continues to expand overseas markets and sets up subsidiaries in the US, Germany and Japan successively, Sino Biological may steadily enhance its competitiveness in the global market on the back of its own advantages in cost performance and the quantity of recombinant protein products, and present a medium-/ long-term high-speed growth visibility.

Experience from Bio-Techne (TECH.O): A BR giant's development path through acquisition to enrich product matrix while accelerating its global expansion.

Founded in 1981, Bio-Techne provides high-quality reagents, instruments, custom manufacturing and testing services to life science and clinical diagnostic researchers by integrating multidisciplinary expertise to provide holistic solutions and expanding its product range through strategic acquisitions. At present, it owns a series of sub-brands such as R&D Systems, Novus Biologicals, Tocris and so on. By the end of Aug 2022, Bio-Techne had more than 3,000 employees worldwide, developed more than 500,000 products and published journals with more than 350,000 citations, with a market cap of more than US$12bn. In FY2022, Bio-Techne's operating revenue/profit reached US$1,106mn/US$297mn, with a CAGR of 14.51%/21.48% in FY2018-22. Reviewing the nearly 30-year history of Bio-Techne, its main strategy is to focus on innovative R&D to enhance the competitiveness of its core products, continuous acquisition and global expansion, and reorganization of resources in a timely manner. We judge that domestic BR companies are likely to learn from Bio-Techne's successful experience, and gradually develop from domestic BR leader to a leader across the globe in the future.

Potential risks: New product R&D issues; intensified industry competition; trade frictions; overseas business operation risks; capacity expansion risks; bad debts of accounts receivable; exchange loss.

Investment recommendation: Sino Biological is a leading "one-stop" platform for BR and technical services in China. On the one hand, with the normalized spread of the pandemic globally, we expect the proportion of its Covid-19-related revenue to gradually decrease in the future, thus gradually eliminating the impact of the high base. On the other hand, considering its leadership in the industry in terms of product quantity and technical capabilities, Sino Biological may expect to continuously enhance its competitiveness in the global market on the back of its own advantages as it continues to expand overseas markets. We see strong visibility that its non-Covid-19 business will maintain rapid growth in the long term. We estimate the Company's 2022E/23E/24E net profit to be Rmb397mn/438mn/549mn, respectively, corresponding to EPS forecasts of Rmb3.07/3.39/4.25, respectively. Base on the average valuation of comparable companies at 36x 2023E PE, we value the stock at 36x 2023E PE to assign a target price of Rmb122, corresponding to PE of 40x/36x/29x, respectively at the current price, and initiate coverage with a "BUY" rating.