\u3000\u3 Guocheng Mining Co.Ltd(000688) 089 Cabio Biotech (Wuhan) Co.Ltd(688089) )
Downstream applications continue to expand, and there is a large space for new markets such as cosmetics
The company initially focused on the production of ARA, and gradually expanded to DHA, SA and β- Carotene. With the development of the company’s products, the company’s downstream market has also expanded from a single infant formula food to health food, cosmetics and other fields. In 2020, the scale of China’s infant milk powder market was 176.4 billion yuan, with a compound growth rate of 6.8% from 2014 to 2017. It is expected that with the increase of disposable income and urbanization rate of urban residents, the change of family structure and the improvement of residents’ consumption ability, the demand for high-end infant milk powder will increase, and the overall industry is expected to grow steadily. Meanwhile, the scale of China’s cosmetics market reached 477.7 billion yuan in 2019, with a year-on-year growth rate of 14%, much higher than 1% of the global market. Among them, the growth rate of high-end market reached 31% and that of mass market was 8%. China’s cosmetics market is in the stage of rapid growth and has a large market capacity. The cosmetics channel is expected to become a new growth point of the company.
Long term moat: technology + channel + scale
Technical advantages: the production process of nutrients is complex. For enterprises, obtaining specific high-yield strains is the first step, and mastering efficient fermentation process and post-treatment technology is an important threshold for product industrialization and commercialization. The fermentation and post-treatment process of microorganisms requires a high combination of equipment, technology and management. The company has mastered the core technology in strain breeding, fermentation, separation and purification, microcapsule embedding, product application and detection, which is difficult to be replicated in a short time.
Channel advantages: infant formula manufacturers have strict food safety review on their suppliers. The development cycle of new suppliers of infant formula manufacturers is about 1 ~ 3 years, and the development cycle is long, so the viscosity of downstream customers is high. As the largest ara supplier in China, the company has accumulated high-quality customer resources. The company has maintained close cooperation with well-known Chinese customers such as Beingmate Co.Ltd(002570) , Yili, Feihe and JUNLEBAO, and some customers have cooperated for more than 10 years. It is expected that with the continuous introduction of new products by customers, the demand for the company’s products will continue to increase.
Scale advantage: the production of ARA, DHA, algal oil, SA and other products requires a lot of equipment and plant investment, so the scale effect is obvious. With the gradual improvement of capacity utilization, the production cost of products shows an obvious downward trend. For example, from 2016 to 2020, the unit cost of Ara is 374, 344, 315, 298 and 271 yuan / kg respectively. Once the scale effect is formed, the company’s pricing is more flexible at low unit cost. Compared with companies in the same industry, the company has obvious price advantages and has the ability to seize the market at a low price.
Short term catalysis: DSM patent expires + new national standard + Sa Cosmetics new raw materials approved
In the short term, the company will have three catalysts: (1) DSM patents will expire one after another before 2023. Therefore, the restrictions on the company’s overseas expansion will be lifted. Since the production cost of the company is lower than that of DSM, it is expected that more new customers will be obtained in the current patent area market in the future after the restrictions are released, and the international market share of the company’s products is expected to be further improved. (2) The new national standard for milk powder will be implemented in 2023. In the new national standard, the upper limit of DHA addition is increased by about 36%, and the upper limit of Ara is increased by about 37%, and the lower limit of DHA additive content is clearly specified. Therefore, after the implementation of the new national standard, it is expected that the addition of Ara and DHA by Chinese milk powder brands will increase greatly. (3) In June 2021, SA bird’s nest acid was approved for use in cosmetics. According to the requirements of cosmetics filing management, new raw materials will have a three-year monitoring period. During the monitoring period, the cosmetics brands using the raw materials need to be related and confirmed by the company, which provides time for the company to expand the cosmetics market.
Investment advice
As a leading nutrient manufacturer in China, the company has formed high barriers in terms of technology, channel and scale, and it is difficult for new enterprises to replicate in the short term. And with the expansion of the company’s products from ara to DHA, SA and β- Carotene, the company’s downstream customers expand to health food, cosmetics and other industries with high growth rate. With the expiration of DSM’s patent and the implementation of the new national standard of Chinese milk powder, it is expected that the company’s ARA and DHA business will grow rapidly outside China. At the same time, the company’s SA has been approved for new cosmetics raw materials, and the company’s SA business is expected to usher in new growth. We expect that the company’s EPS from 2021 to 2023 will be 1.07, 1.43 and 1.81 yuan / share respectively, corresponding to 38, 28 and 22 times of the current share price PE respectively. For the first time, give a “buy” rating.
Risk tips
Food safety risks; Intensified market competition; Product price fluctuation, etc
