CABIO BIOTECH(688089)：VISIBLE GROWTH AROUND THE CORNER HIGH POTENTIAL BEYOND

　　Core views:
　　Cabio is a core addictive supplier of global milk formula companies. Following the strategy of “one core field of nutritious foods + two wings of personal care & beauty and animal nutrition + expansion on three fronts”, Cabio creates potential with biotechnology. We believe that the implementation of the new national standards of milk formula and the replacement by algae DHA will drive visible growth in the short and medium term, while the expansion of product categories (including SA, HMOs, OPO, etc.), addressable markets (expanding from health food into beauty & personal care and animal nutrition) and market penetration (expanding into more overseas markets as DSM patents expire) will create long-term potential. We assign 32x 2023E PE to derive a target market cap of Rmb6.3bn, corresponding to a target price of Rmb52, and initiate coverage with a “BUY” rating.
　　Abstract:
　　Creating potential with biotech by following the development strategy
　　Based on biotechnology, Cabio started the industrialization of arachidonic acid (ARA) in 2003 and built a supply chain up to international standards. It started multi-product expansion in 2010 and has successfully achieved the industrialization of algae docosahexaenoic acid (DHA), β-carotene (BC) and sialic acid (SA). The Company kicked off expansion in different fields in 2019 and tapped the market of cosmetics and animal nutrition. ARA contributes a major part of the revenue, accounting for 63% in 2021 and taking 10% of the global market, only second to the global leader DSM. The DHA business is expanding rapidly, contributing 16% to the total revenue in 2021, while higher-priced SA products also contributed 16% in 2021 despite the small sales volume. In addition, Cabio has a comprehensive business coverage, including human nutrition, animal nutrition and cosmetic materials, with a product matrix covering human milk oligosaccharides (HMOs), 1,3-Dioleoyl-2-palmitoylglycerol (OPO), astaxanthin, α-arbutin, etc. Cabio has strong connections with the Hefei Institutes of Physical Science of the Chinese Academy of Sciences (CAS), the Institute of Plasma Physics, also under the CAS, and Cargill, a global leader in food processing which assisted the Company in R&D and tapping the global supply chain. Cabio's actual controller is Mr. YI Dewei, and the Company has an experienced and stable management team, where equity incentives have deeply aligned the interests of core persons.
　　Rising downstream demand drives the expansion of the materials market, and synthetic biology may grow rapidly with policy support.
　　The market size of ARA/DHA, key additives to milk formula, increases steadily. ARA/DHA have become the key additives to milk formula with over 90% of ARA used for milk formula. According to Grand View Research, the global ARA market size in 2022 is estimated to be around US$239mn; DHA can be used throughout the life cycle. Based on Allied Market Research, the global DHA market size in 2022 is estimated to be around US$5.266bn. Over 90% DHA is made from fish oils, but we see a trend of getting replaced by algae DHA in milk formula.
　　Milk formula, health food and animal nutrition have broad market space. The demand for milk formula is driven by the growing trend of high-end & breast milk. According to Euromonitor, the global market size of milk formula in 2022 is estimated to be around US$54.163bn and will continue to grow steadily with China contributing roughly 48% of the global market. The demand for health food is driven by aging and increased health awareness. The global market size in 2021 was around US$112.4bn based on the data from Technavio. The demand for animal nutrition is growing as the ban on growth hormone becomes effective. In 2021, the market size of China's feed additives is around Rmb115.49bn, of which vitamins/enzyme preparations/microbial preparations with antibacterial functions increased by 10.5%/19.0%/17.4%, respectively, according to the China Feed Industry Association (CFIA).
　　The market of synthetic biology is growing rapidly with the support of policies. China pays close attention to synthetic biology and supports its development. The 14th Five-Year Plan (2021-25) clearly promotes the development of synthetic biology.
　　Building four barriers of products, technology, R&D and customers
　　ARA/DHA have significant production capacity advantages, and SA/HMO/OPO create potential growth. Cabio is a leading global producer of ARA with a market share of around 10%, second to world leader DSM. The production technology of algae DHA has been continuously optimized, and the market size is growing rapidly. SA/HMO/OPO and other products are in the R&D stage with great potential in cosmetics, health food, infant nutrition and other fields.
　　Cabio mastered technologies covering all stages of the production, having advantages in both the technical routes and level. The Company has mastered a series of leading technologies such as the breeding of high-yield strains, optimization of fermentation formulas, fermentation process control, oil embedding and functional lipid construction. It has leading technical advantages in ARA/DHA/SA and unique application scenarios in BC.
　　Cabio boasts fruitful results from continuous investment in R&D and builds a presence in synthetic biology. Cabio attaches great importance to R&D, and the R&D expense ratio increased to 8.81% in 2021. LU Shuhuan, XIAO Min, SHANG Yun and some other core technicians of the Company published 5/3/3/2 papers in 2019/2020/2021/ 1H22, more than 30 core papers in total. Cabio actively marched into synthetic biology, cooperating with the Chinese Academy of Sciences, Tianjin University, Zhejiang University, Tsinghua University, Shenzhen University and others to develop research collaboratively. It has completed the establishment of a synthetic biology laboratory and a bioinformatics technology platform.
　　Cabio formed stable cooperation with leading brands in milk formula and has high-quality customer resources. As an important supplier of ARA products, the Company leverages Cargill to enter the global supply chain. It enjoys abundant customer resources with main customers including Nestle, Danone, Cargill, Beingmate, Yili, Feihe, Junlebao, Syrutra, Yashili and other well-known dairy companies at home and abroad.
　　Incremental expansion: volume increase, market expansion and market penetration
　　The implementation of the new national standards of milk formula & the algae DHA replacement will promote the sales of ARA/DHA. The new national standards of milk formula will be effective soon, and dairy companies are actively changing formulas. As of Sep 14, 2022, 422 new formulas have been approved. Cabio is likely to increase its sales significantly as the implementation of new national standards is approaching and the registration progress of formulas accelerates. Compared to fish oil DHA, algae DHA is more suitable for infants and can replace the former in milk formulas, bringing new growth potential. Production capacity expands as the business develops. New production projects are progressing smoothly and are likely to complete in 1H23, raising the ARA/DHA/total capacity to 570/555/1,125 tonnes from 420/105/525 tonnes per year.
　　Cabio focuses on animal nutrition and builds a functional cosmetic materials platform. Cabio enters the field of animal nutrition through its subsidiary CALID. CALID launchedω-3 fatty acids products and short & medium chain fatty acids products. It also cooperated with pet food brands and manufacturers, increased its stakes in Quanshuo Biotech and launched its pet food products. Cabio enters functional cosmetic raw materials through its subsidiary CASOV with its SA products. At present, CHANDO has launched SA mask products in cooperation with Cabio. Besides, the Company uses synthetic biology to develop multiple functional cosmetic materials and cosmetic formulas.
　　DSM patents will expire in 2023, and Cabio is capable of entering the international market to execute overseas business development. Previously, the Company's overseas expansion was limited by DSM patents. Cabio acquired limited markets through litigations and settlements. Cabio entered the supply chain of global dairy brands through the contract signed with DSM in 2020, and its product quality and brand reputation have been continuously improved. Nowadays, the contribution of DSM's compensation as a percentage of Cabio's revenue is declining year by year. The Company will likely benefit from the incremental overseas market space when DSM patents expire.
　　Risk factors: Food safety and product quality issues; intensified competition; product price fluctuations; high customer concentration; disappointing business development; international trade policies/friction; exchange rate headwinds.
　　Investment strategy: We believe that the implementation of the new national standards of milk formula and the substitution of algae DHA will drive visible growth in the short and medium term, while the expansion of product categories (including SA, HMOs, OPO, etc.), addressable markets (expanding from health food into beauty & personal care and animal nutrition) and market penetration (expanding into more overseas markets as DSM patents expire) will create medium-/long-term potential. We forecast 2022E/23E/24E revenue of Rmb449mn/649mn/823mn and ANP of Rmb137mn/196mn/241mn. Considering the average valuation of 30x 2023E PE (based on Wind consensus estimates) of comparable peers, i.e., Bloomage Biotech (688363.SH), Cathay Biotech (688065.SH), and Angel Yeast (600298.SH), and considering the Company's advantages in products, technology, R&D and customer resources, which should warrant a certain valuation premium, we assign 32x 2023E PE to derive a target market cap of Rmb6.3bn, corresponding to a target price of Rmb52, and initiate coverage with a "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。