The monosodium glutamate industry presents an oligopoly, and Meihua Bio: the leader of amino acids, with outstanding platform advantages

(Report Producer/Analyst: Liu Hairong, Minsheng Securities)

01. Meihua Biotechnology: a leading enterprise of amino acids, leading in production and sales in the world

1.1 The company has a leading production scale and is a leading company in the amino acid industry

The predecessor of the company is Hebei Meihua MSG Group Co., Ltd., which was formally established in 2002 and started with monosodium glutamate; in 2006, the company achieved full production in the west area of Tongliao base, and the company became one of the largest monosodium glutamate enterprises in the world, which laid a certain scale advantage for the company; in 2008, the company's first amino acid glutamine was put into production, and the first phase of Tongliao threonine project was successfully put into operation, which marked the company's formal entry into the field of animal nutrition amino acids; New Horizon Capital has invested 230 million yuan strategically, providing sufficient financial guarantee for its comprehensive entry into the amino acid field.

At the end of 2010, the company successfully landed in the capital market, and Tongliaodong District was also fully completed and put into operation; in 2013, the company's Xinjiang base was officially put into operation; in 2017, the company's Jilin Baicheng subsidiary was established to seek a new force point, in 2018, the first phase of 400,000 tons of lysine was put into production, the second phase of 250,000 tons of monosodium glutamate and the third phase of 300,000 tons of lysine, xanthan gum project was completed and put into operation in 2020, 2021, and 2023 respectively.

The company's main amino acid products cover many fields such as feed, food, and medicine. After more than 20 years of development, the company has become a full-chain synthetic biology company mainly engaged in amino acid products, with leading production and marketing capabilities in the industry.

Specifically, the company's main products include:

(1) Animal nutrition amino acid products: lysine, threonine, tryptophan, feed grade valine, monosodium glutamate residue, starch by-products feed fiber, corn germ, bacterial protein, etc.;

(2) Food taste trait optimization products: glutamic acid, sodium glutamate, disodium nucleotide, disodium inosinate, food-grade xanthan gum, trehalose, natamycin, etc.;

(3) Human medical amino acids: glutamine, proline, leucine, isoleucine, pharmaceutical grade valine, inosinate, guanosine, adenosine, pullulan polysaccharide, vitamin B2, etc.;

(4) Other products: petroleum-grade xanthan gum, bio-organic fertilizer, etc.

Animal nutrition amino acid products and food taste trait optimization products are the company's main products.

From 2018 to 2022, animal nutrition amino acids and food taste trait optimization products accounted for more than 80% of the total and were the company's main products, with 53.73% and 36.40% of the company's two major products in 2022, respectively, and in terms of product gross profit margin, the gross profit margin of the company's animal nutrition amino acid products increased year by year, achieving a gross profit margin of 23.20% in 2022, and the gross profit margin of food taste trait optimization products remained relatively stable, achieving a gross profit of 21.68% in 2022.

1.2 Steady growth in performance, outstanding product anti-cyclicality

In recent years, the company's revenue and net profit attributable to the parent company have increased year by year.

According to the company's announcement, from 2018 to 2022, the company's revenue increased from 12.648 billion yuan to 27.937 billion yuan, with a CAGR of 21.91%, and the net profit attributable to the parent company increased from 1.002 billion yuan to 4.406 billion yuan, with a CAGR of 44.81%.

According to the latest three quarterly report announcement data, in Q1-3 of 2023, the company achieved revenue of 20.526 billion yuan, a year-on-year decrease of 1.42%, and a net profit attributable to the parent company of 2.161 billion yuan, a year-on-year decrease of 37.26%, mainly due to the price adjustment of corn raw materials and main products.

Gross profit margin growth momentum was strong, and the expense ratio remained stable overall during the period.

From 2018 to 2023Q1-3, the company's gross profit margin was at a high level as a whole, of which in 2023Q1-3, the company's gross profit margin and net profit margin were 18.43% and 10.09% respectively.

In terms of expenses during the period, the company's three major expense ratios from 2018 to 2023Q1-3 showed an overall downward trend, indicating that the company's ability to control expenses has improved in recent years, of which the company's financial expenses, management expenses, and sales expense ratios in 2023Q1-3 were -0.10%, 3.06%, and 1.50%, respectively.

In terms of R&D expenses, the company's R&D expense ratio has remained at about 1% in the past three years, and the R&D expense rate in Q1-3 of 2023 will reach 1.14%.

Continuous investment in basic R&D and applied R&D can bring about continuous optimization of technical indicators and improvement of conversion efficiency, save production costs, and at the same time, reduce the carbon footprint of the production process and reduce energy consumption.

The gross profit margin and net profit margin levels will be adjusted briefly in 2022, and then show a steady improvement trend.

Before 2022, the company's gross profit margin and net profit showed a steady improvement trend, with the company's gross profit margin reaching 22.87% in 2021, an increase of 4.84 percentage points compared with 2015, and the net profit margin reaching 6.58%, an increase of 5.29 percentage points compared with 2015.

In 2022, due to the superposition of unfavorable factors in the industry, coupled with domestic health incidents, natural gas price increases and other reasons, the company's gross profit margin and net profit margin will decline slightly, achieving 15.87% and 7.97% respectively, and entering 2023, especially in the second half of the year, the company will actively develop brand customers, strengthen internal and external cost control, and the gross profit margin and net profit margin in the first three quarters of 2023 will improve quarter by quarter, and the company's gross profit margin and net profit margin will be 22.27% and 7.27% respectively in 2023Q3.

From the expense side, except for a brief increase in the expense ratio in 2022, the company's expense ratio (except for R&D expenses) during the period showed a stable trend as a whole, indicating that the company has a good grasp of expense control.

1.3 The shareholding structure is reasonable, and the share repurchase boosts the company's confidence

The company's shareholding structure is reasonable, and the shareholding plan is deeply bound to core personnel.

According to the company's third quarter report of 2023, as of the end of the third quarter of 2023, the three of them held more than 30% of the company's shares, and the equity was relatively concentrated and stable. In addition, in order to further stabilize and motivate the core team, the company has cooperated with well-known consulting companies such as McKinsey and Boston to continuously improve the organizational structure and improve the talent training system and training system.

From 2017 to the present, the company has achieved four phases of employee stock ownership plan and one phase of restricted stock incentives, and set challenging company performance goals and personal assessment goals in each phase, which deeply binds the company's development and personal growth, which can not only stimulate the enthusiasm of employees, but also provide important support for the achievement of the company's strategic goals and business performance goals, as well as the stability of the core management team

02. Amino acid industry: the increase in grain prices + the reduction and substitution of soybean meal has landed, and Su and Lai have ushered in an upward space for prosperity

2.1 Amino acids are mainly produced by biological methods, with a global market size of nearly 30 billion US dollars

2.1.1 There are many varieties of amino acid products, and industrialization experience is very important

Amino acids are a general term for a class of organic compounds containing amino and carboxyl groups. Amino acids are the basic structures that make up protein macromolecules, and almost all life activities are related to them.

As the material basis of life metabolism, amino acids play an extremely important role in the activity and physiological functions of biological macromolecules, and play a vital role in the fields of nutrition and health such as feed, food, medicine, culture media, and health care products.

According to the classification of nutritional function, it can be divided into three kinds of essential amino acids, semi-essential amino acids and non-essential amino acids; according to its metabolic pathway in the body, it can be divided into ketogenic amino acids and sugar-forming amino acids; according to the classification of chemical properties, it can be divided into neutral amino acids, acidic amino acids and alkaline amino acids, and most of the amino acids belong to neutral.

The production methods of amino acids include extraction, chemical synthesis and biological methods (including direct fermentation and enzymatic conversion).

Among them, the extraction method is limited by the limited protein raw materials and easy to cause environmental pollution, and is only used for the production of a few amino acids such as cysteine; the chemical synthesis method is only used for the production of a few amino acids such as methionine and glycine due to the harsh reaction conditions and the easy racemicization of the product; the biological method has the characteristics of low raw material cost, mild reaction conditions and easy large-scale production, so the biological method has become the main method for the production of amino acids at present.

2.1.2 The scale of amino acids has developed rapidly, and the mainland is a major producer and consumer of amino acids

The market size and demand of the global amino acid industry are increasing year by year. With the rapid development of the global economy, especially the developed economies, which pay more attention to the health of nutritional intake, the world's amino acid industry has been able to grow rapidly.

In terms of global market size, according to the data of Beijing Yanjing Bizhi Information Consulting, as of the end of 2020, the market size of the global amino acid industry was about 24 billion US dollars, a year-on-year increase of 27.66%, and the global market size further increased to about 28.5 billion US dollars in 2021, a year-on-year increase of 18.75%, and the global amino acid industry market size is expected to reach more than 50 billion US dollars in 2025, with a CAGR of about 15.09% from 2021 to 2025.

In terms of global market demand, according to the statistics of Beijing Yanjing Bizhi Information Consulting, the global market demand in 2020 will be about 8 million tons, a year-on-year increase of 12.11%, and the global demand for amino acids will further increase to 8.62 million tons in 2021, a year-on-year increase of 7.75%, and the global demand for amino acids is expected to increase to more than 10 million tons in 2025, with a CAGR of about 3.78% from 2021 to 2025.

From the perspective of amino acid market segments, the global market demand for lysine and threonine accounts for a relatively large proportion.

According to the data of Beijing Yanjing Bizhi Information Consulting, the global market demand for lysine in 2020 will be about 3.25 million tons, accounting for 40.63% of the global market in the same period, and the market demand for threonine will be about 800,000 tons, accounting for 10.00%.

In 2021, the global market demand for lysine will be about 3.55 million tons, accounting for 41.18%, and the market demand for threonine will be about 920,000 tons, accounting for 10.67%.

The scale and output of domestic amino acid markets are also increasing year by year.

In terms of the scale of the domestic market, with the continuous acceleration of the development process of domestic amino acids, the scale of the mainland amino acid market is also gradually increasing, and it has become a major producer and consumer of amino acids in the world.

According to the data of Beijing Yanjing Bizhi Information Consulting, in 2020, the size of China's amino acid market was about 9.2 billion US dollars, a year-on-year increase of 16.16%, and in 2021, the size of China's amino acid market reached 10.8 billion US dollars, a year-on-year increase of 16.30%, and it is expected that the size of China's amino acid market will reach more than 15 billion US dollars in 2025.

In terms of output in the domestic market, with the application of amino acids in human nutrition additives, flavorings and various feed additives, the output of the mainland market is also gradually increasing.

According to the data of Beijing Yanjing Bizhi Information Consulting, the output of China's amino acid market will reach 2.05 million tons in 2020, a year-on-year increase of 12.64%, and the output of China's amino acid market will reach 2.21 million tons in 2021, a year-on-year increase of 7.80%, and it is expected that the domestic output of amino acids will reach more than 2.5 million tons in 2025.

2.2 The increase in grain prices + the reduction and substitution of soybean meal has landed, and the demand of Jiangsu and Lai has ushered in growth

2.2.1 The feed grain is mainly corn and soybean meal, and the reduction and substitution are imminent

The definition of feed grain is divided into broad and narrow senses, in a narrow sense, feed grain mainly refers to a part of the feed demand according to the grain consumption demand; in a broad sense, feed grain refers to the grain consumed by directly making feed from the grain that is not processed with a husk in order to meet the needs of breeding animals, compared with the narrow concept of introducing grain processing by-products such as meal, bran bran, dried distiller's grains and its solubles, mainly including corn, rice, wheat, soybean meal and potatoes. In actual production, all crop resources used for feeding can be called feed grains.

The compound feed of the domestic aquaculture industry has long been dominated by corn and soybean meal formula. In the main livestock and poultry feed formula structure in the mainland, the proportion of energy feed raw materials is generally 65%, of which corn accounts for about 50-55%, wheat, barley, sorghum, rice and other cereals and grain processing by-products account for about 10-15%; protein feed raw materials account for 30%, of which soybean meal accounts for about 15%-20%, rapeseed, cotton meal, peanut meal, sunflower meal and other cake meals account for about 10-15%, corn and soybean meal account for the majority of feed grains.

The overall import dependence of feed grains is high, especially soybeans have remained at a high level all year round. In 2022, domestic feed grain consumption accounted for 48% of total grain consumption, exceeding food ration consumption by nearly 15 percentage points.

In terms of rations, the mainland's grain production has achieved 19 consecutive bumpers, with grain output hitting a record high in 2022 and a self-sufficiency rate of more than 100 percent, but in terms of feed grains, the mainland has a large amount of grain imports and a high dependence on imports, especially soybeans.

From 2015 to 2022, the import volume of soybean in the mainland increased from 83.22 million tons to 99.8 million tons, and the import dependence was at a high level all year round, reaching 83.11% in 2022, and the import volume of corn in the mainland increased from 3.17 million tons to 18.71 million tons, with a low import dependence of 6.49% in 2022, but the total import volume was still at a high level.

Animal products have driven the consumption of corn and soybeans to increase, and the gap between supply and demand still exists.

According to the National Bureau of Statistics, from 2000 to 2022, the total feed output in the mainland increased from 36.64 million tons to 272.2 million tons, with a CAGR of 9.54%. In the future, with the continuous improvement of consumption level, the per capita food consumption in mainland China will gradually decrease, while the consumption demand for animal products will increase year by year.

It is expected that by the end of 2032, the total consumption of meat, poultry eggs and dairy products will reach 104.85 million tons, 35.55 million tons and 79.02 million tons respectively, which will lead to an increase of 119.47 million tons and 332.35 million tons of soybean and corn consumption respectively

The price of soybean meal continues to rise, and the reduction and substitution of feed grain is imminent.

In recent years, due to factors such as Sino-US trade frictions, the price of soybean meal has shown an upward trend. According to Baichuan Yingfu data, the average price of soybean meal in China in 2018 was 3174.48 yuan/ton, and as of the end of December 2023, the price has reached 4359.93 yuan/ton, an increase of 37.34%.

At the end of December 2023, the unit price of crude protein of soybean meal was 9.86 yuan/kg, while the unit price of peanut meal, rapeseed meal and cotton meal crude protein was 9.44 yuan/kg, 8.83 yuan/kg and 8.40 yuan/kg, respectively. The overall yield increase potential of corn is limited, so promoting the reduction of the use of feed grains, especially the reduction of soybean meal, is an objective need to reduce the risk of national food security and ensure the steady development of the aquaculture industry.

2.2.2 The state implements the reduction and substitution of soybean meal, and the key measure is the substitution of low-protein diet + miscellaneous meal

The state attaches great importance to the reduction and substitution of feed grains, and a number of policies guide the development of the industry.

In 2020, the State Council issued the "Opinions on Promoting the High-quality Development of Animal Husbandry", emphasizing the need to adjust and optimize the structure of feed formulas and promote the reduction and substitution of corn and soybean meal. In 2021, the Animal Husbandry Bureau of the Ministry of Agriculture and Rural Affairs issued a notice on promoting the reduction and substitution of corn feed, and issued the "Work Plan for the Reduction and Substitution of Corn and Soybean Meal in Feed", which requires the promotion of the reduction and substitution of corn and soybean meal in feed by grains and miscellaneous meal;

In 2022, the China Feed Industry Association approved the issuance of two group standards: "Technical Specifications for the Production of Diversified Diets for Broiler Chickens with Low Protein and Low Soybean Meal" and "Technical Specifications for the Production of Diversified Diets with Low Protein and Low Soybean Meal for Grass Carp".

In 2023, the Ministry of Agriculture and Rural Affairs issued the "Three-year Action Plan for Reducing and Replacing Soybean Meal for Feed", proposing that the proportion of soybean meal in feed should be reduced by more than 0.5 percentage points per year on the premise of ensuring the stability of livestock and poultry production efficiency, and should be reduced to less than 13% by 2025.

The key measure to reduce the demand for soybean meal feed is to vigorously promote high-quality low-protein diets + miscellaneous meal substitution, both of which are conducive to the increase in demand for industrial amino acids.

(1) low-protein diet: protein is one of the three major nutrients of animals, the essence of animal growth protein is to obtain the required amino acids, in the past conventional raw material configuration feed, in order to ensure that all essential amino acids can meet the needs of animals, often lead to excess protein in the feed.

At present, the average protein in the feed of the mainland is about 18%, but the actual use efficiency is only about 50%, while the low-protein diet is based on the "barrel principle", using industrial amino acids to make up for the shortcomings of varieties and reduce the waste of other varieties, so as to achieve the purpose of reducing the amount of protein in the feed. Practice has proved that the addition of 5 to 6 essential amino acids, combined with the application of the net energy system, can reduce the feed protein level to about 13% throughout the whole process of pig breeding.

Lysine can not be synthesized by itself, is the first limiting amino acid of pig feed, is the second limiting amino acid of chicken and poultry feed, can significantly promote appetite, promote growth, threonine is the second limiting amino acid of pig feed and the third limiting amino acid of poultry feed, has the effect of promoting the growth of livestock and poultry, enhancing immunity, and improving the nitrogen utilization rate of feed. In actual commercial formulations, it is common practice to balance the ratio between the first limiting amino acid and the essential amino acid according to the ideal protein model. Among them, the concept of ideal protein refers to the optimal ratio of essential amino acids in the diet to a level that is neither wasted nor deficient.

(2) Miscellaneous meal substitution: the main substitutes of soybean meal are rapeseed meal, cotton meal, peanut meal and other relatively high protein content of miscellaneous meal, and according to the "China Feed Composition and Nutritional Value Table (31st Edition)", from the nutritional composition of soybean meal and miscellaneous meal, the amino acid level of miscellaneous meal is generally lower than that of soybean meal; In order to ensure the overall amino acid balance in the feed and improve the feeding efficiency, it is also necessary to increase the addition of industrial amino acids.

The livestock breeding industry shows a large-scale development trend, which is also conducive to the demand for amino acids. In June 2023, the Ministry of Agriculture and Rural Affairs, together with the National Development Commission, the Ministry of Finance and the Ministry of Natural Resources, issued the National Plan for the Construction of Modern Facility Agriculture (2023-2030), pointing out that "by 2030, the large-scale rate of animal husbandry will reach 83%", which is conducive to the growth of demand for amino acids in animal nutrition.

Due to the lack of comprehensive understanding of feed additives in traditional free-range farming, and large-scale farms with professional breeding methods and experience, the level of awareness of feed additives is relatively high, so the acceptance of animal amino acids will be higher, so the large-scale development of the breeding industry is expected to increase the demand for animal nutrition amino acids.

2.3 The global production capacity of Suzhou and Lai continues to increase, and the industry shows a trend of head concentration

The development of the global lysine industry is characterized by cyclical fluctuations and high supply concentration. From the perspective of the development history of lysine, the lysine industry has experienced two rounds of expansion and contraction from 2010 to 2015 and 2016 to 2020.

(1) The first stage (2010-2015): from 2010 to 2013, the lysine industry ushered in a round of expansion, with CR3 of about 56% in 2013; from 2014 to 2015, the industry faced industry integration and liquidation, and the production capacity decreased from about 3.68 million tons in 2014 to about 3.2 million tons in 2015, and the main production enterprises decreased from 21 to 13, and CR3 decreased to 51%.

(2) The second stage (2016-2020): From 2016 to 2018, with a new round of capacity expansion + new manufacturers entering the market, the industry concentration continued to decline, and at the end of 2018, the number of major lysine manufacturers in the world increased to 17, the global production capacity reached about 3.89 million tons, and CR3 was further reduced to 48%.

From 2019 to 2020, the industry once again entered a period of consolidation, and at the end of 2020, the number of major global lysine manufacturers remained at 17, and the concentration of CR3 production capacity increased to about 50%. By the end of 2021, the global lysine production capacity was reduced to 3.86 million tons, the number of major production enterprises increased to 19, and the CR3 decreased to 49%.

The industry planning and expansion are limited, and the competitive advantage of the leading enterprises represented by the company has been steadily improved.

From 2021 to the present, with the gradual elimination of backward production capacity, the further consolidation of leading advantages, and the long-term support brought by the reduction and substitution of downstream soybean meal, the pattern of the lysine industry will gradually improve, and the industry pattern will gradually stabilize.

In the short term, in addition to Fufeng Group's plan to build a factory in the United States in 2025 to expand production, there is no further large-scale expansion plan for global lysine, and the competitive advantage of leading enterprises dominated by plum blossoms will be further highlighted. In 2021, Meihua Biotechnology ranked first in the global industry with a million-ton lysine production capacity, with a global production capacity market share of 19%.

Threonine exhibits similar cyclical development characteristics to lysine, but its supply concentration is higher and the competition pattern is more stable.

Since 2010, the domestic threonine production capacity has achieved rapid expansion;From 2013 to 2015, with the elimination of backward production capacity, the market share of the world's leading threonine production enterprises has been gradually established;At the end of 2015, the CR3 production capacity concentration was about 60%;Since 2016, the world's major threonine production enterprises have expanded one after another, and the industry's leading production capacity concentration trend is significant;In 2020, there are 9 major threonine producers in the world, and the CR3 production capacity concentration has increased to 84%; In 2021, the actual number of global threonine manufacturers will be reduced to 8, the global threonine production capacity will be reduced to 1.08 million tons, and the CR3 production capacity concentration will be reduced to 80%.

Similar to lysine, threonine will expand production in the future, and the business environment of major manufacturers dominated by plum blossoms is expected to improve.

From 2021 to the present, the number of global threonine industry manufacturers has remained stable, and in the short term, except for Fufeng's plan to build a factory in the United States in 2025 and Xijie's plan to expand production in Brazil in 2025, the world's major threonine manufacturers have no further expansion plans for the time being, which is good for the development of leading enterprises dominated by Meihua.

In 2021, Meihua Biotechnology ranked first in the global industry with a production capacity of 300,000 tons of threonine, and the global production capacity market share reached 31%. In 2023, with the commissioning of the Tongliao threonine project, the company's threonine production capacity advantage will be further improved.

2.4 The long-term price of corn follows that of corn, and the short-term price depends on supply and demand

The mainstream fermentation process of lysine is prepared with corn as the main raw material, and the procurement cost of corn accounts for more than 60% of the total production cost of lysine, so the price trend of lysine will be affected by corn price, industry demand, supply pattern/strategy, etc.

Since 2019, the industry's production capacity has continued to expand, and the overall profit level of the industry has narrowed, especially since 2020, the domestic corn price has repeatedly hit a new high in recent years, and the pressure on the cost of raw materials for lysine has increased significantly, but the downstream demand side has not seen a significant demand improvement, and the price cannot be smoothly transmitted, so the overall profit level of the industry has further declined;In 2021, the price of corn is still in the stage of high shock, but the overall profit has declined slightly, and the coal price has increased significantly, and the pressure of rising cost still exists, but the domestic pig inventory continues to recoverDriven by factors such as the rise in the overall price of international bulk commodities, the demand side has made significant improvements, lysine companies have been able to transfer incremental costs to the downstream, and the overall profit level of the industry has been significantly improved.

In 2022, lysine was mixed, and the overall downside. In the first half of the year, lysine exports maintained a strong momentum in the fourth quarter of 2021 due to factors such as overseas stocking demand + high spot prices in Europe, and global demand shrank in the second half of the year, overseas inventory digestion was slow, domestic supply capacity increased significantly, and prices declined.

Exports remain weak in the first half of 2023, and lysine prices show a weak adjustment. In the second half of the year, due to factors such as the replenishment demand for the Mid-Autumn Festival, National Day and overseas Christmas, the price of lysine ushered in a certain recovery.

Similar to lysine, the mainstream route of threonine is also a biological fermentation production method using corn as raw material, and the procurement cost of corn is the main production cost of threonine, and its price is also affected by factors such as corn price, downstream demand, and supply pattern/strategy. However, considering that the industry concentration of threonine is much higher than that of the lysine industry, and the differences in the practical application of threonine in different nutritional effects, the price change of threonine is not exactly the same as that of the lysine industry.

Since 2019, the industry's leading threonine production enterprises have continued to expand and increase production, and the market supply has been highly concentrated, but due to the overall weak demand of downstream customers, the situation of oversupply in the industry has become increasingly intensified, and the domestic threonine market price has shown a downward trend of shocks, and reached the lowest in October 2019, and from the fourth quarter of 2019, due to the high supply concentration, the bargaining power of several major domestic threonine manufacturers has improved, and the market price has bottomed out and rebounded, and the shock has risen.

From 2020 to 2021, with the successive clearance of domestic inefficient production capacity, the high concentration of industry supply, and the continuous recovery of product demand in downstream aquaculture production capacity, coupled with the continuous rise in raw materials, the market price of threonine as a whole is running at a high level, and the profit level of the industry has also achieved a certain recovery and improvement.

In 2022, due to weak overseas demand, reduced exports, and sufficient domestic supply, the market price of threonine will show an overall decline, and the market oversupply situation will be maintained.

In the first half of 2023, the downstream aquaculture industry suffered deep losses, only needed to replenish stocks, and the overall price declined, and the price increased slightly in the second quarter due to the tightening of supply. In the second half of 2023, the demand side is obviously positive, and the overall price has recovered slightly.

2.5 The market space for small varieties of amino acids is broad, which is expected to contribute to the company's second growth pole

2.5.1 The demand for valine and isoleucine has grown rapidly

Valine is one of the amino acids that make up the proteins of living organisms, which are also not synthesized by the animal body itself and must be ingested from the diet to meet its nutritional needs. As one of the three branched-chain amino acids, L-valine plays an important role in promoting protein synthesis, maintaining normal metabolism and health of animals, repairing body tissues, and maintaining nitrogen metabolism in the body, and is widely used in feed, medicine, and food industries.

Valine also benefited from the reduction of soybean meal, which showed rapid growth.

(1) On the demand side, the rapid growth of valine demand also benefits from the reduction and substitution of soybean meal and the continuous promotion of low-protein diet technology; (2) On the supply side, with the gradual deepening of the global feed market's awareness and application of valine, according to the company's annual report citing data from Boya Hexun, it is expected that the domestic valine production capacity will exceed 130,000 tons/year in 2022, and the industry supply will continue to grow.

In 2022, the company will make significant progress in the research and development of valine, and the production cost will be further reduced.

Isoleucine has become the main force in the industry of small varieties of amino acids, and the demand will continue to maintain rapid growth in the future.

Isoleucine can be added to low-protein diets as a nutritional supplement, which can not only reduce the amount of high-value plant protein such as soybean meal, but also reduce fecal nitrogen emissions, optimize feed efficiency and economy, and reduce breeding costs while ensuring the demand for animal amino acids.

Meihua Bio began to produce isoleucine in 2009, with the expansion of the company's overall amino acid production capacity, 2014-present, isoleucine production has increased 10 times, has become the main force of the industry of small varieties of amino acids. Isoleucine was originally mainly increased by a small number of head breeding enterprises, and after the price of soybean meal rose sharply in 2022, other breeding enterprises also began to gradually add, with the reduction and substitution of soybean meal and the promotion of low-protein diet technology, it is expected that the demand for isoleucine will also maintain rapid growth in the future.

2.5.2 The application prospect of pharmaceutical-grade amino acids is relatively broad

The company's pharmaceutical-grade amino acid products mainly include proline, glutamine and nucleoside products.

(1) Proline. Proline is one of the important amino acids for the synthesis of human proteins, an important raw material for amino acid infusion, and the main intermediate for the synthesis of first-line antihypertensive drugs such as captelap and enalapril, which has been widely used in food and pharmaceutical industries. The L-proline produced by the company is fermented by corn, which eliminates the need for various chemical reagents added in the synthesis process, and is safer.

Meihua Bio has become an important producer of proline in the world. On the one hand, the proline products produced by the company are used in the manufacturing industry and are important intermediates for the production of chronic disease drugs (such as antihypertensive drugs and diabetes drugs).

On the other hand, the company has actively expanded its application in the special medical food market, and in 2021, the company's products successfully passed the strict product audits of Danone and Nestle, and began to supply them in batches in 2022, expanding the company's market share in the field of special medicine.

(2) Glutamine. Glutamine can prevent muscle breakdown, promote muscle growth, is an important nutritional supplement for bodybuilding and bodybuilding enthusiasts, and glutamine can also improve people's immunity and antioxidant capacity, and has a very good health care and even medical effect on the gastrointestinal digestive system.

Meihua biological glutamine products can meet the dual needs of food and medicine, and will be the first to benefit from the recovery of industry demand. The company's glutamine products have the characteristics of high purity, high density and low miscellaneous acid, which can meet the needs of food-grade and pharmaceutical-grade customers, and can be customized according to customer index requirements. Since 2020, the demand for glutamine has grown relatively slowly and prices have fluctuated, and the company is expected to be the first to benefit from the recovery of market demand due to its high market share and wide customer base.

(3) Nucleosides. Nucleosides and deoxynucleosides are composed of nucleoside bases and ribose or deoxyribose in the form of glycosid bonds, which are the basic elements that make up ribonucleic acid (RNA) and deoxyribonucleic acid (DNA) and are the basis of genetic genes. Nucleosides and deoxynucleoside derivatives have a variety of bioactive substances, which can be used directly or indirectly as drugs and play an important role in the treatment of important diseases. Nucleoside drugs are an important class of drugs used in clinical treatment of viral infectious diseases, tumors and AIDS, such as HIV/hepatitis B drug Technofosid (TDF, TAF), anti-herpes virus drugs aprovir, famciclovir, valacyclovir, antiviral drug ribavirin, etc.

Meihua Biotech has an obvious dominant position in the nucleotide market. The company's nucleoside production began in 2013 and mainly supplies adenosine, guanosine and creatinine. As the starting material of antiviral drugs, the customers who directly or indirectly cooperate are mainly the head enterprises of various antiviral drugs, such as Mylan Pharmaceutical in India, Laurus Pharmaceutical in India and Zhejiang Chetou Pharmaceutical, Anhui Baker Pharmaceutical, Qilu Pharmaceutical, etc.

03. Umami agent industry: The monosodium glutamate industry presents an oligopoly, and the I+G market ushers in rapid development

3.1 MSG: Food industrialization promotes the development of demand, and the price center is expected to rise

Monosodium glutamate is an umami seasoning, and its main downstream is the food processing industry. The chemical composition of monosodium glutamate is monosodium glutamate, which is an umami seasoning, easily soluble in water, and its aqueous solution has a strong umami taste, and when it is with table salt, its taste is more umami.

Monosodium glutamate will be digested and decomposed after entering the human body, and glutamic acid, one of the decomposed products, is one of the amino acids existing in nature, and it can participate in the synthesis of various physiologically necessary proteins after being absorbed by the human body. As the basic condiment of the food industry, monosodium glutamate is widely used in food industry enterprises, catering industry and household consumption, of which the demand for monosodium glutamate in the food processing industry accounts for about 50%, which is the main field of downstream applications.

China is the world's largest producer and consumer of monosodium glutamate, with steady growth in output and demand. According to Baichuan Yingfu data, from 2019 to 2022, the demand for MSG in mainland China has increased from 2.28 million tons to 2.44 million tons, with a CAGR of 2.28%, and the output has increased from 2.27 million tons to 2.43 million tons, with a CAGR of 2.35%, showing a steady growth trend in both supply and demand

Prepared dishes are a mainstream trend in the food industry in recent years. After 2020, the demand for home catering is growing, and pre-made dishes have come into being. Prefabricated dishes mainly refer to finished or semi-finished dishes made of agricultural, livestock and aquatic products as raw materials, pre-processed or pre-cooked with various auxiliary materials, and stored, transported and sold at room temperature, refrigerated or frozen conditions after packaging.

According to the degree of food processing and the convenience of eating, pre-made food can be divided into ready-to-eat food (such as eight-treasure porridge, ready-to-eat canned food), ready-to-heat food (such as quick-frozen rice balls, self-heating hot pot), ready-to-cook food (semi-finished dishes that need to be heated and cooked) and ready-to-serve food (such as clean vegetables without washing and cutting).

The scale of the prefabricated food market has increased steadily, which is conducive to the development of demand for monosodium glutamate. According to iiMedia Research, the market size of prefabricated dishes in mainland China has increased from 244.5 billion yuan in 2019 to 419.6 billion yuan in 2022, with a CAGR of 19.73%. Compared with other countries in the world, the current penetration rate of domestic prefabricated dishes is only 10-15%, while the penetration rate of prefabricated dishes in the United States and Japan has reached more than 60%, and the future development space of China's prefabricated food market is large.

From 2022 to 2026, the CAGR of China's prefabricated food market will be as high as 26.43%, reaching 516.5 billion yuan in 2023 and 1,072 billion yuan in 2026, becoming the next trillion-level market.

We believe that the prefabricated food industry will significantly promote the increase in the use of flavoring additives such as monosodium glutamate, and the growth of its market size will also significantly drive the demand growth of monosodium glutamate.

The monosodium glutamate industry presents a stable pattern and a high degree of market concentration.

Since 2002, the mainland has become the world's most important MSG production area, accounting for about 72% of the world's total MSG production capacity, and by 2021, the total production capacity of global MSG production enterprises will be about 4.22 million tons, of which the production capacity of Chinese MSG enterprises will account for 78%.

At the end of 2021, there were 10 major MSG manufacturers in the world, including 5 major MSG manufacturers in China, and gradually formed a competitive pattern dominated by three leading enterprises of Fufeng Group, Meihua Biotechnology and Xinghu Technology, supplemented by other medium-sized MSG production enterprises, with CR3 reaching 67%.

The market demand of the monosodium glutamate industry is relatively rigid, so the price changes also show strong anti-cyclical and anti-inflation characteristics. In the first half of 2019, the price of monosodium glutamate continued to rise, and in the second half of 2019, the price of monosodium glutamate fell due to the price of phased overcapacity, and the profit level of the industry narrowed.

3.2 I+G: Strong monosodium glutamate ushered in rapid development, and the industry competition pattern was better

I+G, also known as "strong monosodium glutamate", is a 1:1 mixture of IMP and GMP. Nucleotides have a variety of isomers, and umami can only be produced if the carbon atom at the 5th position links the phosphate group and the two carboxyl groups in the phosphate group are dissociated, the hydrophilic ribose phosphoric acid is the positioning group, and the hydrophobic substituent on the aromatic ring is the flavor group, so it must be in the form of a disodium (or dipotassium, dicalcium) salt.

Flavor nucleotides include inosinate, guanylate, cytidylate, uridine and xanthotide, but due to cost and other issues officially commercialized only 5′ sodium inosinate (IMP), 5′ sodium guanylate (GMP) products, I+G is composed of IMP: GMP according to 1:1, the characteristics are white to beige crystals or powder, odorless, fresh, can be directly added to food, play a role in increasing freshness; I+G can also be mixed with monosodium glutamate, and the dosage is about 2-5% of monosodium glutamate, which is known as "strong monosodium glutamate".

The output and demand of I+G in mainland China maintained steady growth, and the supply pattern was good. According to data from Zhiyan Consulting, from 2015 to 2019, the output of I+G in mainland China increased from 25,400 tons to 28,500 tons, and the demand increased from 18,500 tons to 21,800 tons. Considering the compound ratio of I+G and monosodium glutamate, based on the demand for monosodium glutamate in 2022, we estimate that the market demand space for I+G is about 72,900 tons, compared with the existing demand, the future demand space for I+G is large, and with the demand for monosodium glutamate and I+G in the food processing industry, I+G has great development potential in the future.

On the supply side, the supply of I+G in mainland China is dominated by Xijie, Meihua Biotechnology and Xinghu Technology, and Meihua Biotechnology accounted for about 23.81% in 2019.

04. Colloidal polysaccharide industry: the downstream promotes the upward trend of xanthan gum, and the polysaccharide market has a broad space

Xanthan gum, also known as corn sugar gum and Hansheng gum, is a kind of sugar (glucose, sucrose, lactose) complex polysaccharide produced by the fermentation of Xanthomonas rape, usually made of corn starch through aerobic fermentation bioengineering technology, and is white or light yellow powder under normal conditions.

Xanthan gum has superior properties and is widely used in the downstream. Xanthan gum is a kind of biological additive with thickening and suspension characteristics that can be applied in a wide range of pH and temperature, and can still maintain extremely high viscosity at low concentration, has unique rheological properties, and shows excellent quality in solubility, compatibility, suspension, emulsification, preservation, edible safety and stability to temperature, external force, acid, alkali, salt, enzyme, etc., and is widely used in food, petroleum, geology and minerals, medicine, Among the hundreds of uses in more than 20 industries such as environmental protection, it is an ideal supplementary product and alternative product for natural water-soluble polymers, semi-synthetic water-soluble polymers, and synthetic water-soluble polymers that are widely used at present

The oil and food industries are the most important downstream uses for xanthan gum. According to QY Research data, affected by the conflict between Russia and Ukraine, the global xanthan gum market demand has increased significantly, and the market price is at a high level in recent years. In 2022, the global xanthan gum market will reach US$1.567 billion, a year-on-year increase of 102%, of which the downstream sales from the oil industry will account for 49%, followed by the food and beverage industry with 42%, in addition, xanthan gum can also be used in medicine, cosmetics and other industrial fields.

(1) Food field: food-grade xanthan gum as a salt-resistant, acid-resistant thickener, high-efficiency suspension emulsifier, high-viscosity filler, can be widely used in food, beverages, feed and pet food, can significantly improve the water retention, shape retention ability and freeze-thaw stability of the product, improve the taste, extend the shelf life of the product, greatly reduce the difficulty of transportation, canning and sterilization in the processing process, and then reduce the production cost.

(2) Petroleum field: xanthan gum can be used as an efficient, high-quality, environmentally friendly oil drilling mud additive, with a wide range of applications, and has a strong tolerance to temperature (≥94 °C), acid, alkali and salt, which can significantly improve the permeability of mud and the ability of suspended solid substances, reduce the pressure loss in the drilling process, and can stabilize the well wall, reduce the damage to the travel layer, and significantly improve the efficiency of drilling, workover and completion.

At the same time, as a bio-type oil displacement additive, xanthan gum can greatly improve the anatomical effect and oil recovery rate, improve resource utilization, reduce production costs and improve economic benefits while protecting the environment.

According to QY Research, the global xanthan gum market is expected to reach $1.916 billion in 2029, with a CAGR of 1.59% from 2023 to 2019, according to QY Research.

At the same time, the xanthan gum market is facing many uncertainties such as raw material supply, the trend of the Russia-Ukraine conflict, and the trade policies of various countries, which will affect the market trend of xanthan gum in the future

China is the world's largest producer of xanthan gum, and the production pattern is good. The mainland is the country with the largest production volume of xanthan gum, and more than 70% of the world's xanthan gum will be supplied by China in 2022, among which Fufeng Group, Meihua Biotechnology and Zhongxuan Biochemical are the most important suppliers of xanthan gum in China.

The company seized the opportunity of the industry, and in the first half of 23 years, Jilin xanthan gum was successfully put into production. In order to maintain the company's scale and cost advantages in the colloidal field, the company has actively established the construction of the Jilin xanthan gum project on the basis of the efficient operation of the xanthan gum production line in Xinjiang, and the project has achieved production and efficiency in the first half of 2023. The commissioning of the project can strengthen the company's scale advantage in xanthan gum and further enhance the company's competitiveness.

4.2 Prandosan and trehalose: the demand potential is large, and the market development space is broad

4.2.1 pullulan polysaccharide can be used as a new type of plant capsule, and there is a large space for development

Pullulan polysaccharides are widely used in capsule film formers, thickeners, adhesives, food packaging, etc. Pullulan polysaccharide is an extracellular polysaccharide produced by Bacillus spore, which is mainly composed of α-1,6-glycosidic bond combined with maltose to form a common polysaccharide, that is, glucose is combined into maltotriose according to α-1,4-glycosidic bond, and then combined with another maltotriose with α-1,6-glycosidic bond at both ends, so repeatedly linked to form a polymer polysaccharide.

pullulan is a colorless, odorless, tasteless polymer substance, can be processed into a variety of products, has good film-forming properties, the formation of pullulan film is very stable, and has excellent oxygen isolation performance, in the pharmaceutical food industry is widely used in capsule forming, thickener, binder, food packaging, etc., and has environmental protection characteristics - pullulan polysaccharides can be degraded and utilized by microorganisms in nature, will not cause environmental pollution.

Softgel is a kind of oily, suspension or emulsion that has no dissolving effect on the skin of the softgel in the preparation of the internal chamber of the capsule, the main capsule material commonly used on the market is gelatin, gelatin is generally extracted from the bones or raw skins of pigs and cows, and the source of materials cannot be accepted for some vegetarians and some people with special cultural beliefs, so it is urgent to develop a high-performance, A new type of capsule of non-animal origin, among which a new type of capsule prepared using plant or water-soluble polysaccharide as the main material, has the characteristics of wide source, safety and good physical and chemical properties, and is considered to be a new type of capsule with good development prospects.

Pullulan polysaccharide is a new type of vegetable capsule material, and the replacement market is broad in the future. pullulan polysaccharide is an extracellular water-soluble polysaccharide produced by fermentation or extracted from algae plants, which has the characteristics of elasticity and easy soluble in water, and the gel prepared by it has the advantages of dense structure and low oil permeability, and has a good development prospect in the preparation of soft capsule shell. In the future, the company will increase the output of pullulan polysaccharides, reduce production costs, and continuously improve the promotion of pullulan polysaccharides in the downstream.

4.2.2 Trehalose is a typical stress metabolite and is widely used in food and cosmetics

Trehalose is a typical stress metabolite. Trehalose can form a protective film on the cell surface in harsh environments such as freezing, drying, and high osmotic pressure, effectively protecting the biomolecular structure from being damaged.

Trehalose can be widely used in the food and cosmetics industries, among which trehalose is expected to become a new hot spot in the market as a new generation of moisturizing factors in the cosmetics field.

The addition of trehalose in cosmetics can effectively protect the epidermal cell membrane structure, activate cells, maintain the original nutrients and moisture of the skin, avoid skin sunburn and melanin precipitation, and also have the function of radiating external heat, effectively resist skin aging, gently moisturize the skin, and make the skin bright, shiny, soft, healthy and naturally elastic. The company has taken a leading position in the market in the field of trehalose.

05. Deeply cultivate the corn deep processing industry chain and actively lay out the field of synthetic biology

5.1 The leader of the corn deep processing chain, the main business has strong pricing power

The company's production capacity is industry-leading, and the scale advantage is prominent under the oligopoly pattern. After more than 20 years of deep cultivation in the industry, the production capacity of lysine and monosodium glutamate has reached one million tons and 300,000 tons of threonine respectively (the new production capacity in 2023 is not counted), and the production capacity of other starch by-products, fertilizer products, colloidal polysaccharides and pharmaceuticals is also in the forefront of the industry, and the scale advantage is more prominent.

We believe that the company's main products downstream for the feed industry, products have the characteristics of low price elasticity, with the future industry concentration continues to improve, the competitive advantage of leading enterprises will become increasingly prominent, the bargaining power of the production process or will be further enhanced.

The company's production bases all have integrated production lines for comprehensive utilization of resources, and the production advantages are outstanding.

The company's three major bases, Tongliao in Inner Mongolia, Wujiaqu in Xinjiang and Baicheng in Jilin, are the main producing areas of thermal coal and corn in mainland China, and the cost of raw material procurement is low.

In terms of raw materials, according to wind data, from 2018 to 2023 (as of the end of December 2023), the national average corn storage price is 2460.05 yuan/ton, while the average corn storage prices in Xinjiang, Inner Mongolia and Jilin are 2237.01 yuan/ton, 2305.71 yuan/ton, and 2307.36 yuan/ respectively. In terms of energy, according to data quoted by Wind from Baichuan Yingfu, from 2018 to 2023 (as of the end of December 2023), the national average thermal coal plate price is 704.43 yuan/ton, while the price of thermal coal in Urumqi, Inner Mongolia, and Jilin Tonghua is 364.98 yuan/ton, 596.29 yuan/ton, and 605.46 yuan/ respectively. tonnes, the purchase price of thermal coal in the representative regions of the three places is also lower than the national average price, which has a cost advantage.

At the same time, not only the cost of raw materials and energy, the production lines built by the company's various bases are advanced production equipment at home and abroad, and the production process parameters have reached the international leading level in the same industry, and each base has an integrated production line for comprehensive utilization of resources, from corn raw materials, self-supplied electric heating and steam, products, waste water to biological organic fertilizer, to achieve the cascade recycling of energy, which can further save costs, develop circular economy, and promote energy conservation and emission reduction.

The strong industrialization capability is also reflected in the flexible adjustment production of the production line. Based on the in-depth integrated production line and strong industrialization capabilities, the company can flexibly adjust the production capacity and output of upstream and downstream products according to the downstream market demand, saving capital expenditure. For example, leucine, isoleucine, and valine can be mixed with other formulas at the same time in proportion to produce major raw materials for sports health care; guanosine and adenosine can be further processed into guanine and adenine as antiviral APIs; idle monosodium glutamate, amino acids and other large product production lines can be transformed to produce valine, tryptophan and other small amino acid products, and so on.

5.2 Lay out the field of synthetic biology and continue to promote process innovation

Since 2010, the company has begun to lay out the field of synthetic biology, with a multi-point layout inside and outside. Internally, the company has two R&D centers in Langfang and Shanghai, of which the Langfang R&D Technology Center has been recognized as a national enterprise technology center, with more than 150 synthetic biology engineers (data as of the end of 2022), specializing in computer-aided strain design and amino acid production chassis cell genome editing.

(1) In terms of platform construction, strain construction is the core technology of synthetic biology, with the help of computer-aided strain design and genome editing of amino acid production chassis cells, the company has built a chassis bacteria development platform for Escherichia coli, Corynebacterium glutamami and Bacillus and a technology platform based on enzyme biotransformation, and the multi-strain platform provides more possibilities for future production;

(2) In terms of strain iteration, the company has advanced equipment such as a new generation of sequencers, and has formed the company's own strain modification gene database, combined with the establishment of high-throughput screening methods, as of the end of 2022, the company has the ability to build 2,000 strains of engineered bacteria per month, and can complete the iterative improvement of the performance of a generation of strains in 6-9 months to ensure that existing products always maintain a leading position.

(3) In terms of potential products and technical reserves, with the company's continuous investment in the synthesis of biotechnology of Escherichia coli and Corynebacterium glutamate in the amino acid production chassis, the company continues to optimize the cell factory for the production of amino acids and other categories, and continuously upgrades the gene editing tools used. At the same time, the company's chassis cells have been expanded to more challenging industrial microorganisms such as bacillus, and can design and efficiently construct a new generation of production strains of polysaccharides and glycosides such as adenosine, guanosine and inosine from scratch, which will further cover other new fields of synthetic biology applications such as pharmaceutical intermediates, functional foods and functional sugars in the future.

(4) In terms of intellectual property protection, the technology of synthetic biology is very important, and the risk of technology leakage is greater, while the company continues to achieve results, it has formed a patent network layout for key products, and applied for patent protection for each product, and in 2022, the company has authorized a total of 27 invention patents, including 2 authorized patents in Japan, and 12 new patents in 2022.

Externally, the company has actively established close ties with Shanghai Industrial Biotechnology Research Center, Institute of Microbiology of the Chinese Academy of Sciences, Jiangnan University and other domestic first-class universities and research institutes to jointly develop high-performance strains in synthetic biology, invested in Sense-Up, a German biotechnology company, and used its high-throughput equipment to rapidly evolve and iterate amino acid strains, and at the same time expanded the company's international cooperation in the field of synthetic biology.

One of the company's core advantages when the laboratory process is scaled up and industrialization is advancing rapidly. On the basis of strong application research and development, it is also necessary to industrialize the amplification of technological achievements to achieve the commercial benefits of products, and independent engineering design capabilities are the company's advantages.

In 2022, the company set up a production technology research institute to conduct research on the production technology of the whole industry chain and continue to lead technological innovation.

The company's engineering department has cultivated a group of engineering teams with rich experience in building biological fermentation production lines, which makes the company have unique technical advantages and processes in engineering design, engineering construction, technical index control, environmental protection and comprehensive recycling.

5.3 We will pay dividends to shareholders and repurchase to demonstrate medium and long-term confidence

The company's dividend yield and dividend rate are both high. Except for 2011, the company's dividend yield and dividend rate have remained at a high level for a long time since its listing, with the average dividend yield and dividend rate of 3.82% and 69.54% from 2011 to 2022, respectively, and from 2018 to 2022, the company's dividend yield will reach 7.82%, 5.84%, 6.44%, 5.22% and 3.93% respectively, and the dividend rate will reach 102.28%, 80.32%, 94.28%, 51.76% and 26.72% respectively.

The repeated share repurchases demonstrate medium- and long-term confidence.

In addition to large dividends, based on confidence in the company's long-term development and recognition of the company's value, the company has carried out share repurchase operations many times in the past five years, and has launched a total of 5 share repurchase plans from 2019 to the present. The latest equity repurchase plan was disclosed on April 29, 2023, and the company intends to repurchase shares at a repurchase price of no more than RMB 12 per share, with a total repurchase amount of not less than RMB 800 million and no more than RMB 1 billion, and the repurchased shares will be used for cancellation and reduce the registered capital.

The upper limit of the repurchase price is a premium of 25.79% from the closing price of 9.54 yuan on April 29, which demonstrates the company's confidence in its own development and the recognition of the company's value, which is conducive to boosting investor confidence.

According to the company's latest share repurchase progress announcement disclosed on December 2, 2023, as of the end of November 2023, the company's repurchase of shares reached 65 million shares, accounting for 0.22% of the company's current total share capital (2.943 billion shares), with the lowest purchase price of 9.27 yuan per share and the highest price of 9.51 yuan per share

06. Earnings Forecast and Valuation

6.1 Earnings Forecast Assumptions and Business Splits

1) Animal nutrition amino acid business: The main products of this sector are lysine, threonine, tryptophan, feed grade valine and other products.

(1) In terms of sales, the future demand side is expected to benefit from the promotion of low-protein diets + soybean meal reduction and substitution, and the demand will grow greatly, superimposed on the expansion of threonine and valine projects in 23 years, we expect that the sales volume of this sector will maintain a growth trend in 23-25 years, assuming that the sales volume in 23-25 years will be 2.89 million tons, 3.18 million tons, and 3.5 million tons, respectively, with a year-on-year growth rate of 18%, 12%, and 12%;

(2) In terms of price, in the first half of the year, the mainstream amino acid varieties were oversupplied, and the overall price showed a weak trend, and after entering Q3, the price increased under the pull of factors such as downstream stocking demand, so we expect the overall price to increase slightly year-on-year in 23, and in 24-25 years, considering the resonance of supply and demand, it is expected to usher in a further increase, assuming that the after-tax prices in 23-25 years are 6565 yuan/ton, 7090 yuan/ton, and 7657 yuan/ton, respectively, with a year-on-year growth rate of 8%, 8%, and 8%;

(3) In terms of gross profit margin, due to the increase in the price center of the mainstream products in this sector in 23 years, we expect that the gross profit margin of this sector is also expected to increase in 23 years, and the supply and demand will improve in 24-25 years, and the gross profit margin is expected to be further improved due to the company's own production capacity and cost advantages, and the gross profit margin of the price in 23-25 years will be 23%, 23% and 23% respectively.

2) Human medical amino acid business: The main products of this segment are glutamine, proline, leucine, isoleucine, etc.

(1) In terms of sales, the overall production and sales scale of the sector is small, but considering the layout of small varieties of amino acids and downstream market development in the future, it is expected that the sales volume of this sector will maintain a year-on-year growth trend, assuming that the sales volume in 23-25 years will be 10,500 tons, 12,000 tons, and 13,800 tons, respectively, with a year-on-year growth rate of 10%, 15%, and 15% respectively;

(2) In terms of price, with the expansion of downstream demand, the price of this sector is expected to maintain an increasing trend in the future, assuming that the after-tax prices in 23-25 years are 66,612 yuan/ton, 76,603 yuan/ton, and 88,094 yuan/ton, respectively, with a year-on-year growth rate of 15%, 15%, and 15% respectively;

(3) In terms of gross profit margin, considering the high barriers of the medical amino acid industry, referring to the trend of gross profit margin changes over the years, and driven by factors such as the company's deepening of production capacity layout, the gross profit margin of this sector will maintain an upward trend, assuming that the gross profit margin in 23-25 years will be 35%, 36% and 37% respectively.

3) Food taste trait optimization products: The main products in this sector are monosodium glutamate and I+G.

(1) In terms of sales, based on the current stable supply and demand pattern of monosodium glutamate, we believe that the future production and sales scale of this sector will maintain a relatively stable or slight growth trend, assuming that the sales volume in 23-25 years will be 1.05 million tons, 1.07 million tons and 1.1 million tons respectively, with a year-on-year growth rate of 2%, 2% and 2% respectively;

(2) In terms of price, the overall price of monosodium glutamate in 23 years has moved downward, and the price is expected to maintain a relatively stable trend due to the impact of market supply and demand in 24-25 years, assuming that the after-tax prices in 23-25 years are 8992 yuan/ton, 8992 yuan/ton, and 8992 yuan/ton, respectively, with a year-on-year growth rate of -8%, 0%, and 0% respectively;

(3) In terms of gross profit margin, based on the price in terms of price, superimposed on the company's continuous cost reduction and efficiency increase, the gross profit margin of this sector is expected to improve, assuming that the gross profit margin in 23-25 years is 22%, 22% and 23% respectively.

4) Others: The main products of this sector are xanthan gum, organic fertilizer, etc., and the price of xanthan gum in 22 years is driven by the downstream industrial field. Gross profit margin rose sharply, 23 years with the expansion of industry capacity and other factors of prosperity has fallen, we believe that the demand side of the positive factors in the short term is not significant, with the gradual digestion of the supply side of production capacity, 23 years of the price and gross profit margin of the sector may move down, sales volume will also be under pressure; 24-25 years with the digestion of the supply side, as well as the support of downstream food demand, the downward trend is expected to gradually slow down.

Core financial data forecasts

We assume that the company's sales expense ratio is 1.5%, 1.5%, and 1.5% in 2023-2025, the administrative expense ratio is 3.5%, 3.5%, and 3.5%, and the R&D expense ratio is 1.0%, 1.0%, and 1.0%.

To sum up, we predict that the company's operating income from 2023 to 2025 will be 314.32, 354.17 and 40.150 billion yuan respectively, and the net profit attributable to the parent company will be 32.13, 3.895 and 4.636 billion yuan respectively, and the corresponding EPS forecasts will be 1.09, 1.32 and 1.57 yuan respectively.

6.2 Valuation Analysis

The company is a leading amino acid enterprise in China, mainly engaged in amino acid products, covering many fields such as feed, food, medicine and so on. The company has companies of the same type of business in the market and has the conditions to use the PE valuation method, so we choose the PE valuation method to value the company. We selected Jinhe Industrial, Xinhecheng and Huaheng Biotech with similar businesses for comparison.

Jinhe Industrial: The company is a major producer of the sweetener acesulfame potassium, sucralose and flavored maltol. After years of development, based on the diversified product layout, the company has continuously integrated resources around the upstream and downstream of the industrial chain, actively expanded the market, and shaped brand power, and has formed a large-scale manufacturing platform and technological achievement industrialization platform for food and beverage, daily chemical spices and high-end manufacturing industries.

NHU: The company is a national high-tech enterprise mainly engaged in the production and sales of nutritional products (vitamins, amino acids and pigments), flavors and fragrances (linalool series, citral series, leaf alcohol series, etc.), polymer materials (polyphenylene sulfide (PPS), high-temperature nylon (PPA), etc.), raw materials (vitamins, antibiotics, pharmaceutical intermediates) production and sales.

Huaheng Biotechnology: The company is a synthetic biotechnology as the core, through biological manufacturing, mainly engaged in the research and development, production and sales of bio-based products, the company's main products include amino acid series products (L-alanine, DL-alanine, β-alanine, L-valine), vitamin products (D-calcium pantothenate, D-panthenol) and other products, which can be widely used in intermediates, animal nutrition, daily chemical care, functional food and nutrition, plant nutrition and many other fields.

The average PE of comparable companies in 2024-2025 is 19 times and 14 times, respectively, while the EPS forecast value of Meihua Biotechnology in 2024-2025 is 1.32 yuan and 1.57 yuan respectively, and the corresponding PE at the current price (December 28, 2023) is 7 times and 6 times respectively. The company is below the industry average and has investment value.

6.3 Summary

The company is a global leading amino acid enterprise with outstanding scale and cost advantages. We estimate that the company's net profit attributable to the parent company from 2023 to 2025 will be 32.13, 3.895 and 4.636 billion yuan respectively, EPS will be 1.09, 1.32 and 1.57 yuan respectively, and the corresponding PE at the current price (2023/12/28) will be 9X, 7X and 6X respectively.

07. Risk Warning

1) The risk of fluctuation of major products and intensified market competition.

On the other hand, the amino acid industry in which the company is located is currently in a relatively stable market structure, but in order to expand the market share of existing products, through the first-mover advantage of new products, enterprises in the industry are actively promoting vertical and horizontal layout, and there is the possibility of intensified market competition.

If there is a sharp drop in product prices due to weakened consumption, obvious imbalance between supply and demand or intensified competition, and the company cannot timely and effectively improve its competitiveness to quickly adapt to the development trend of the industry and consolidate the company's competitive position in the industry, it may directly affect the company's revenue and gross profit margin, and have a negative impact on the company's operating performance.

2) The risk of large fluctuations in the price of raw materials.

If the price of corn and coal raw materials fluctuates greatly in the future, and the company fails to adjust the product price in time to the downstream, it may affect the company's overall gross profit margin, which will have a negative impact on the company's performance.

3) Environmental risks.

Although the company fully considers the environmental protection factors in the design and construction of the production line, invests a large scale of funds and resources, and builds an environmental protection management system with high standards and effective operation, the company will still produce a certain amount of waste gas and a small amount of waste water, waste residue and other pollutants in the production process of its main products. If there is a suspension of production due to improper environmental management, it will affect the company's profitability to a certain extent.

——————————————————

The report belongs to the original author, only for Xi! If there is any infringement, please delete it privately, thank you!

The report comes from [Foresight Think Tank]