Chuanning Biotechnology is a leading enterprise in antibiotic intermediate industry. Considering the stable competitive landscape of relevant products, abundant market demand, and steadily rising prices, we expect the revenue and profits contributed by Chuanning’s antibiotic intermediate business to grow steadily going forward. The Company has built an in-depth presence in synthetic biology, aiming to form a contract development and manufacturing organization (CDMO) platform in this field. It has been promoting the commercialization of new products such as bisabolol, 5-hydroxytryptophan, and ergothioneine, which are likely to become new growth drivers for earnings. We assign a market cap of Rmb25bn for the coming year and a target price of Rmb11.2 on 36x 2023E PE, and initiate coverage with a “BUY” rating.
The core enterprise in the field of antibiotic intermediates.
Chuanning Biotechnology was established in Yili, Xinjiang by Kelun Pharmaceutical in 2010, engaging in R&D and industrialization of bio-fermentation technology. Its main products include erythromycin thiocyanate, cephalosporin intermediates (7-ACA, 7-ADCA, D-7ACA) and penicillin intermediates (6-APA, potassium penicillin G), etc., making it one of the large-sized antibiotic intermediate suppliers domestically and globally. In 2022, Chuanning achieved attributable net profit (ANP) of Rmb412mn (+269.58% YoY). In 1Q23, Chuanning maintained a sound growth momentum with booming production and sales, achieving ANP of Rmb175mn (+74.41% YoY).
The demand is steadily rising and the landscape is highly concentrated.
There is a rigid demand for antibiotics in clinical treatment. According to Grand View Research, the global antibiotic market size reached US$48.7bn in 2022, and will likely reach US$68bn by 2030, with a 4.26% CAGR over 2022-30. The steady growth of antibiotic preparations ensures the development of active pharmaceutical ingredients (API) and intermediates. Cephalosporin, penicillin, and macrolide intermediates are the relatively large sub-markets, and the competitive landscape of them are highly concentrated.
Competitive moat built by “resource + technology + scale + environmental protection”.
Chuanning’s cutting edges in antibiotic intermediates mainly come from four aspects. 1) Resources: The Company is located in Yili, Xinjiang, boasting cost advantages in terms of raw materials, energy and labor compared to the mainland; 2) Technologies: Through long-term research and development (R&D), Chuanning has formed core technologies such as strain selection technology platform, bio-fermentation technology platform, and separation and purification, enzyme technology application platform; 3) Scale: Chuanning has significant advantages in production scale and coverage of antibiotic intermediates, with pronounced scale benefits of 500-cubic-meter bio-fermenters; 4) Environmental protection: Industry environmental supervision is becoming more and more strict, and Chuanning’s treatment capabilities in wastewater, exhaust gas, and waste residue have reached advanced levels. Additionally, by combining strain breeding technology with genetic engineering, the Company optimizes fermentation strains from the source and has successfully developed a complete process fermentation enzyme method for 7-ADCA production. This is likely to enhance the profitability of cephalosporin products and bolster overall performance.
Building synthetic biology CDMO platform to create a second growth curve.
Biomanufacturing based on synthetic biology technology is a revolutionary production method with a wide range of applications. According to BCC Research, the global synthetic biology market size was approximately US$9.5bn in 2021, and will likely reach US$33.2bn in 2026, corresponding to an about 28% CAGR from 2021 to 2026. Through the Shanghai research institute R&D project and the green circular industry park project, the Company is establishing an integrated full-industry chain focused on synthetic biology research and production. This initiative aims to create a synthetic biology CDMO industry platform with future products in the areas of health supplement ingredients, biopesticides, high-value natural products and premium cosmetic ingredients, etc. Currently, the Company is advancing the commercialization of new synthetic biology products such as bisabolol, 5-hydroxytryptophan, and ergothioneine. We expect that it will start generate profits in 2023 and make significant profit contributions starting in 2024, making these products a new growth driver for the Company.
Potential risks:
Industry policy risks; significant price fluctuations in the main product market; fluctuations in supply and prices of raw materials; environmental protection risks; overseas business market risks; intensified market competition; risks of new product and new technology development.
Investment strategy:
Chuanning Biotechnology is a leading enterprise in the antibiotic intermediate market in China and even globally. It is building presence in the field of synthetic biology to create a second growth curve, and will likely grow steadily in the future. We forecast 2023E-25E ANP of Rmb694mn/819mn/970mn, corresponding to EPS of Rmb0.31/0.37/0.44. Based on the averaged PE multiples of A-share comparable companies, combined with the valuation range by the discounted cashflow (DCF) method, we assign 36x 2023E PE to derive a market cap of Rmb25bn and a target price of Rmb11.2 and initiate coverage with a “BUY” rating.
