We initiate coverage on Quantum Hi-Tech China Biological (“The Company” or “Quantum”) at BUY with TP of RMB25.5, given its fast-growing CRO/CDMO business and its leading position in prebiotics industry in China. Through the acquisition of ChemPartner in 2018, the Company has built integrated CRO/CDMO platforms for both chemistry drugs and biological drugs.
- Fast growing CRO/CDMO business. ChemPartner is one of the few China-based company offering a broad range of services, including pre-clinical CRO services and CDMO services for both small molecule drugs and biologics. ChemPartner has expanded its CRO capacity by over 30% to 24,000 m2 from early 2020 thanks to the launch of a new laboratory facility in Shanghai, which will further strengthen the Company’s leading position in CRO industry. ChemPartner is aggressively expanding its CDMO capacity to meet the strong demand from customers. ChemPartner plans to expand its capacity of biologicals CDMO from current 450L to 4,950L by the end of 2020E, and further expand to 13,950L~18,450L in the coming 3 years. In addition, ChemPartner’s new cGMP facility in Fengxian, Shanghai will gradually commence operation from 2021E to fulfill manufacturing demand from clinical stage to commercial stage. Driven by the strong demand and expanding capacity, we forecast ChemPartner’s revenue to grow at a 27% CAGR in 2019-22E, contributing 84% of the Company’s total revenue in 2022E.
- Strengthening leadership in prebiotics industry. Prebiotics are substances which stimulate the growth of beneficial bacteria in the digestive system. As a conceptual intermediary between foods and drugs, prebiotics are added into different foods & beverages. The Company’s core products, FOS and GOS, are the two most widely used prebiotics. The Company is also one of the major drafters of the FOS and GOS national standards. According to Global Market Insights, global prebiotic market size grew from US$3.3bn in 2015 to over US$4.0bn in 2018, and is expected to growth to US$8.0bn in 2026E, representing a CAGR of 9.5%.
- Initiate at BUY with TP of RMB25.5. We expect the Company’s revenue to grow at a 26% CAGR in FY19-22E, driven by a 27% CAGR in CRO/CDMO business and a 23% CAGR in prebiotics business. We forecast the Company’s attributable net profit to increase 41%/45%/34% YoY in FY20/21/22E. We derive TP of RMB25.5 based on 10-year DCF model (WACC:10.2%, terminal growth rate: 3.0%).
- Catalysts: CDMO capacity expansion; Risks: slower-than-expected organic growth.
