The short/medium/long-term growth of the API sector

Q3 performance review: pay attention to the investment opportunities after the callback. The excess return of API targets in 2020Q3: there has been a callback and the performance is divided. Some targets with significant gains in the first half of 2020 have recovered. API companies that have undergone CDMO business transformation have performed relatively better than product-based API companies, and some heparin industry chain companies have performed relatively well. For API companies in the Sartan industry chain, due to market concerns about the decline in the quotation of Sartan API and the stability of product quality, leading companies such as, and other companies have fallen significantly.

We believe that API leaders have adjusted significantly. In the financial data vacuum period after the third quarterly report, what is urgently needed to discuss is how long can the high growth rate and high prosperity of API companies last? During the forward integration window period, different companies have different product and production capacity layout rhythms, and they are on different API tracks. Which companies have higher ceilings and faster pace of transformation? Summary of financial performance: short-term, medium-term and long-term growth. Apparent growth: the year-on-year growth rate of net profit attributable to the parent in the single quarter of 2020Q3 slowed down, and the quarter-on-quarter growth rate declined. In 2020Q3, the revenue of key API companies increased by 11.2% year-on-year and decreased by 9.6% month-on-month; net profit attributable to parent companies increased by 19.8% year-on-year and decreased by 25.2% month-on-month.

Several factors behind the decline in profit growth in 2020Q3: stocking, exchange and order volatility.

①Considering the domestic and foreign epidemic situation in the first half of 2020 and the stocking rhythm of downstream pharmaceutical factories;

②The exchange gains and losses did affect the growth rate of API company's net profit in 2020Q3, but we emphasize the financial management system and operating profit growth rate of API company behind the exchange gains and losses;

③The quarterly volatility base effect of order delivery has brought about the volatility of Q3 profit year-on-year and month-on-month growth.

Growth: The essence is derived from the industrial upgrading under forward integration, and it is sustainable. In the entire biomedical sector, the growth rate of revenue and profit of the API sector from January to September is in the middle of the industry, and the net profit margin has continued to increase since 2018. We believe that during the industry's forward integration window period, a considerable number of API companies in China are essentially focused on intermediates in their competitive areas. API/preparation end expansion and CMO/CDMO expansion have only accelerated in recent years.

Analyzing the revenue structure of existing API companies and comparing them with the revenue structures of leading Indian API and preparation manufacturers, we believe that the growth of Chinese API companies comes more from product upgrades and industrial chain extensions, rather than short-term price fluctuations; In the mid- to long-term cycle of manufacturing upgrades, leading API companies have higher ceilings, more flexible business models, and stronger bargaining power. We are optimistic about the upward flexibility of the API sector and companies in the short- to medium-term cycles.

Risk warning: the risk of product price fluctuations, the risk of inventory and capacity fluctuations, the risk of new product development failures, etc.