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ABACHEM; Pesticide Intermediates Gradually Recovering; Overseas M&A Boosting Performance

Author: CHINA MERCHANTS SECURITIES CO.,LTD Source: Weekly on Stocks Time:05 24,2018
  The company is an advanced domestic supplier of pesticide and pharmaceutical intermediates. On one hand, because of the improvement of domestic environmental protection requirements, tight supply of the pesticide, and the coming peak season for foreign pesticide magnates to compensate their inventory driving the export demand of pesticides, the company's business of pesticide intermediates has been gradually recovering. On the other hand, the company’s business of pharmaceutical intermediates has maintained a continuously growing momentum. And this year's overseas acquisition of the ACL, an advanced Maltese pharmaceutical company, is expected to further boost the rapid growth of its future performance. For the first time, a "strongly recommendation-a" rating is covered.
  
  Due to the tight supply resulting from the the promotion of environmental protection requirements, and international magnates’ re-stocking driving export demands, the performance of pesticide has rebounded. Last year, the Ministry of Environmental Protection carried out two rounds of environmental inspection campaigns. Among all the objects inspected, pesticide enterprises were key ones. Some of them with substandard environmental protection were halted production, which results in the tight supply of domestic pesticide. At the same time, international pesticide magnates have ushered in the re-stocking cycle, which has spurred the export demand of domestic pesticide, ending up with a rise of the sales of pesticide in a noticeable manner since the second half of last year. Benefiting from that, the company has greatly improved its performance this year. In the first quarter, the operating income has been 244 million yuan with year-on-year growth of 103.9%, and the net income attributed to shareholders has reached 17.29 million yuan with year-on-year growth of 67.5%, both of which has exceeded the data of last year.
  
  Overseas mergers and acquisitions(M&A) have propelled the rapid increase of the performance of pharmaceutical intermediates of the company. It lays equal stress on both its own development and external M&A. The original pharmaceutical intermediates are mainly used to synthesize Antineoplastic drugs and antiepileptic drug. After acquiring Shanghai Puyi Chemical Co., Ltd. in 2015, the company has introduced the biological enzyme fermentation business, giving impetus to rapid growth of its pharmaceutical intermediates business. This year, its acquisition of ACL, an advanced pharmaceutical company in Malta, has enriched the company’s Active Pharmaceutical Ingredient (API) varieties, and at the same time will lead the company into the international high-end pharmaceutical market. Besides, it is expected to promote the rapid growth of the sales of company’s pharmaceutical intermediates.
  
  The capacity expansion and the shareholding increase of large shareholders demonstrate the company’s confidence in development. The company's non-public project intends to raise 870 million yuan for the new production lines in Nantong base and Binhai base, and for the technical renovation of the production line in Taicang base, as well as for the building of Shanghai research and development center. At the same time, the company's actual controllers, Mr. CAI Tong, and Mr. MAO Haifeng, recently, have increased their holdings of the company by 2%, demonstrating their confidence in the company's development.
  
  For the first time, the "strongly recommended -a" rating was given. The company is a domestic supplier of advanced agricultural chemicals and pharmaceutical intermediates. Considering that pesticide intermediates has rebounded this year, overseas acquisition is expected to help improve the performance of company’s pharmaceutical intermediates. Since we are optimistic about the high-growth performance of the company, we take no account of expansion and dilution. It is estimated that EPS(Earnings per share) of company will be 0.18, 0.32, 0.47 yuan in the next three years, corresponding to PE (Price earnings ratio) 51, 29, 19 times, which, for the first time, is likely to be given "strongly recommended-a" rating.
  
  Warning on risks: environmental constraints are not up to expectations; prosperity of pesticide and pharmaceuticals are not up to expectations, etc.
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