Red Weekly丨Zhao Wenjuan
Due to the continued COVID-19 pandemic, Zhonghan Bio's revenue and performance have surged, but whether this surge can continue remains to be seen. After all, focusing on sales and neglecting R&D is obviously a shortcoming for a pharmaceutical company.
As the COVID-19 pandemic continues, the development of my country's in vitro diagnostic reagent (hereinafter referred to as "IVD") industry and the process of listed companies in the capital market have significantly accelerated. Public information shows that not only 17 new IVD companies listed in A shares in in 2021, but after entering 2022, IVD companies' enthusiasm for listing remains unabated. In late July this year alone, 6 IVD companies successfully passed the review or went public. In addition, there are many IVD companies waiting for approval, including Zhonghan Shengtai Biotechnology Co., Ltd. (hereinafter referred to as "Zhonghan Biotechnology"), which is intended to be listed on the GEM.
, like other IVD companies, Zhonghan Biotechnology, has seen a surge in revenue and performance in 2021 due to the continued COVID-19 pandemic, but it is suspense whether this surge will continue, because in the first half of 2022, Mike Biotechnology, , Oriental Biotechnology, etc., which are in the in vitro diagnostic track, showed a decline in performance due to the decline in testing demand. In addition, if the support of the new crown testing business is not taken into account, the company's performance will not only fluctuate, but also show the characteristics of relying too much on agency business.
The demand for new crown detection boosted performance growth
The prospectus disclosed that from 2019 to 2021, Zhonghan Bio achieved revenue of 351 million yuan, 301 million yuan and 1.157 billion yuan, of which the year-on-year revenue growth in 2020 and 2021 was -14.28% and 284.48% respectively; the corresponding net profit in the same period was 29 million yuan, 20 million yuan and 266 million yuan, respectively, of which the net profit growth in 2020 and 2021 was -30.82% and 1222.90% respectively, and the net profit attributable to shareholders after deducting non-operating items in 2021 increased by 2225.92%. After research on "Red Weekly", it can be found that the reason why Zhonghan Bio's performance "takes off" in 2021 is mainly related to the increase in demand for new crown detection reagents.
prospectus shows that Zhonghan Bio's reagent product revenue is the main source of main business income, accounting for as high as 92.45%, 85.05% and 96.34% of the main business revenue, mainly including three categories: infection reagents, cardiovascular reagents, and infectious reagents. In 2019 and 2020, the reagent products sold by Zhonghan Biotechnology are mainly infected reagents. With the outbreak of the new crown epidemic in 2020, the number of people visiting medical institutions in some hospitals has decreased, resulting in a decline in demand for infected disease detection reagents for Zhonghan Bio's core products, and its performance has declined. After
entered 2021, the product structure of Zhonghan Biologics has undergone major changes. The prospectus shows that the company's infectious detection reagents have become the core source of the company's revenue in 2021, contributing more than 70% of its revenue to its main business, and infectious detection reagents are all new coronavirus detection reagents. You should know that in 2019, there was no infectious testing reagents in the company's own products, and the revenue of infectious testing reagents in 2020 was only 24.6366 million yuan, far less than the revenue of 832.7874 million yuan in infectious testing reagents in 2021.
It is worth mentioning that if the revenue of new crown product is excluded, Zhonghan Bio's revenue will greatly "shrink", especially after excluding the new crown products in 2021, the company's revenue was only 324 million yuan, which is not as high as the revenue level in 2019. This situation means that if the subsequent revenue of the new crown-related product is reduced due to various reasons and the company fails to adjust and layout in time, it is not ruled out that the revenue scale of other products and the overall performance of the company will slow down or even decline.
Whether the future performance can continue to be observed for a long time
According to the report of the Health Industry Research Institute, from 2015 to 2020, the annual compound growth rate of China's in vitro diagnostic market size was 16.9%. In 2020, China's in vitro diagnostic market size reached 78.9 billion yuan, a year-on-year increase of 16.4% over 2019. From 2021 to 2024, the annualized compound growth rate is expected to be 15%, and the market size is expected to reach 138 billion yuan by 2024, with a rapid growth rate of domestic market size.
But it should be noted that the new crown detection reagents developed and mass-produced by Zhonghan Biotechnology are mainly antigen detection and antibody detection as the supplement. They can only be sold to overseas markets. As of May 31, 2022, the company's new crown antigen detection products are in the medical device registration certificate in China. During the application process, they cannot be sold in the domestic market. Therefore, Zhonghan Bio's COVID-19 detection reagents currently have certain limitations in the areas where they are available for sale.
Overseas market, the prospectus shows that from 2019 to 2020, the company's overseas sales revenue accounted for only 0.02% and 8.61% of its main business revenue, while in 2021, the proportion of this proportion increased rapidly to 71.82%, of which the revenue sold to Europe accounted for 70.15%.
However, according to data from the General Administration of Customs, the export value of my country's new crown testing kits has begun to decline significantly since it reached a peak of 18.024 billion yuan in February this year. The export value in April was 3.91 billion yuan, down 73.2% from 14.59 billion yuan in March 2022; the export value in May was 1.81 billion yuan, down 53.7% from 2.7% from 2.87 billion yuan in June, basically the same month-on-month. Among them, the export value of domestic new crown reagents in May was only one-tenth of that in January, and was mainly sold to Germany, the United States and the Hong Kong Special Administrative Region of China. Compared with April, the United States' import value of domestic new crown reagents fell by more than 20%, while the import value of Germany and the Hong Kong Special Administrative Region of China fell by more than 50%.
This situation tests the sustainability of Zhonghan Bio's performance. On the one hand, Zhonghan Bio is temporarily unable to sell in the domestic market. Even if it enters the domestic market in the future, in addition to facing fierce market competition, it also needs to do a good job in the expectation that the new crown detection reagents will be included in the centralized procurement in China, with extremely limited profit margins; on the other hand, with the sharp decline in the export volume of new crown reagents, the dividends in this field are coming to an end, and the "epidemic dividend" may turn into sequelae of the epidemic."
Wind shows that in the first half of 2022, 8 of the 38 companies in Shenwan's in vitro diagnostic industry saw a decline in revenue, and 14 companies' net profits declined, among which the peers selected by Zhonghan Bio are comparable. The company's Mike Bio's revenue fell by 9.11% in the first half of 2022, and its net profit attributable to shareholders fell by 23.68%. The reasons for the decline in performance of many companies involved the decline in sales prices; the demand for testing in European and American markets fell rapidly, and export revenues decreased significantly, etc. This is also a common problem faced by reagent testing companies that started with the epidemic.
In fact, the "sewments of the epidemic" have been reflected in Zhonghan Bio. The prospectus shows that the unit sales price of Zhonghan Bioinfectious detection reagents (new coronavirus detection reagents) fell from 13.75 yuan/person in 2020 to 7.79 yuan/person in 2021, and the gross profit margin also fell from 62.53% to 50.21%.
This year, the price of COVID-19 testing reagents has dropped significantly. Recently, Guangdong Province, Liaoning Province and other places have successively issued a number of notices on the price reduction of COVID-19 testing reagents and supporting consumables. After the price adjustment, the government purchase price of COVID-19 nucleic acid testing kits and consumables has been as low as 3 to 5 yuan per person. For example, Mike Biologics held a performance briefing on September 16 and stated that its COVID-19 nucleic acid amplification product was 4.97 yuan per person in the centralized procurement policy of COVID-19 testing products in Guangdong and 20 provinces. Under such a background, it is obvious whether Zhonghan Biologics can continue in the future performance.
industry competition intensified
R&D strength is to be improved. It is worth noting that from 2019 to 2021, Zhonghan Bio's comprehensive gross profit margin was 43.36%, 46.39%, and 49.26%, respectively, while the average gross profit margins of the five peers, Wanfu Bio, Bitian Bio, , Mike Bio, Yahuilong, and Antu Bio's during the reporting period were 61.41%, 61.02%, and 59.66%. Obviously, Zhonghan Bio's gross profit margin trend is not only the opposite trend of its peers, but is far lower than the industry average. Even in 2021, where the gap is small, there is a difference of more than 10 percentage points. In this regard, Zhonghan Bio believes that the business structure of the company and comparable companies in the same industry is different.
This is true. Zhonghan Bio started out as an agent for selling products from well-known foreign in vitro diagnostic brands, and is more like an in vitro diagnostic agent.The prospectus disclosed that Zhonghan Bio's current product line includes diagnostic instruments, reagents and biological raw materials, and its main business products include its own products and agent products. From 2019 to 2021, Zhonghan Bio's agency business revenue accounted for 75.05%, 56.67% and 14.87% of its main business revenue, mainly relying on the sales of Boditech, TOSOH and other products. Obviously, before 2021, Zhonghan Bio's revenue relies heavily on agent products. In 2021, due to the emergence of new crown testing products, its revenue contribution to agent products has decreased. It is worth mentioning that although Zhonghan Bio has formed its own products through research and development, if the revenue from the new crown testing product is deducted, the proportion of its agent products in its main business revenue in 2021 is still more than 50%, and its own brands are still in the pioneering stage.
You should know that compared with the gross profit margin of your own products, the gross profit margin of agent products is relatively low. After excluding freight, the gross profit margins of Zhonghan Bio's own products were 67.38%, 61.71%, and 51.74%, respectively, while the gross profit margins of agent products were 35.17%, 39.72%, and 39.51%, respectively. Therefore, this has also become one of the reasons why the company's gross profit margin is lower than the average of comparable companies in its peers.
Zhonghan Biotech is located in an in vitro diagnostic industry that is a high-tech-intensive industry. The technology and product iteration speed is fast, and the requirements for technology and product performance are constantly improving. Correspondingly, the requirements for in vitro diagnostic companies' technological innovation and new product R&D capabilities are also getting higher and higher. It can be said that R&D strength is its core competitiveness. From 2019 to 2021, Zhonghan Bio's R&D expenses continued to increase, reaching 24.7616 million yuan, 30.8431 million yuan and 55.6138 million yuan respectively. However, the R&D expense ratio fluctuated and declined, at 7.06%, 10.25%, and 4.81%, respectively, while the average value of comparable companies in the peers was 8.77%, 9.57%, and 10.47%, respectively. Especially with revenue soaring by 284.48% in 2021, R&D expenses only increased by 80.31%, and the R&D expense ratio was even lower than that in 2019. This is obviously not enough for Zhonghan Bio, whose own products are in the pioneering stage. In sharp contrast to this, the company's sales expenses have increased significantly. The prospectus shows that in 2019 and 2021, the company's sales expenses were RMB 51.754 million, RMB 58.6397 million and RMB 148.9388 million, respectively. Among them, sales expenses increased by 153.99% year-on-year in 2021, while the increase in marketing expenses reached 735.56%. The company said that the market promotion fee increased significantly in 2021, mainly due to customers who recommended new crown products through intermediaries. During the reporting period, the intermediary fee of was RMB 00, RMB 2.1924 million, and RMB 51.5824 million, respectively. In addition, in 2021, the salary of employees in sales expenses was 42.6527 million yuan, an increase of 73.19% year-on-year, while the salary of employees in R&D expenses in 2021 was only 35.03%.
As of the end of 2021, the company had 160 sales staff, while the R&D staff was 67. For Zhonghan Bio, although revenue growth is inseparable from the contribution of marketing promotion, only R&D strength can maintain its core competitiveness. If the company focuses on marketing and neglects R&D, the company will inevitably fall at a disadvantage in the increasingly fierce industry competition in the future.
(This article has been published in "Red Weekly" on September 24. The article mentions stocks for example analysis only and does not make trading suggestions.)
