量子生物：Business recovery from 2Q20

Quantum Hi-Tech China Biological (Quantum) reported 1H20 revenue of RMB270mn, up 9% YoY, while revenue in 2Q20 grew strongly by 23% YoY. Attributable net profit (loss) turned around from RMB14mn loss in 1Q20 to RMB55mn in 2Q20, up 132% YoY in 2Q20. Business recovery was mainly driven by the operation continuation after COVID-19 pandemic in China, growing customer base and capacity expansion. Gross margin recovered significantly from 24.4% in 1Q20 to 40.3% in 2Q20 thanks higher capacity utilization rate.

Expanding CRO/CDMO customer base. ChemPartner is one of the few China-based companies offering a broad range of services, including pre-clinical CRO services and CDMO services for both small molecule drugs and biologics. In 1H20, ChemPartner recorded RMB531mn revenue in 1H20, up 3% YoY, while revenue increased 14% YoY in 2Q20. ChemPartner added over 100 new customers in 1H20, indicating promising growth outlook in the future driven by expanding customer base. 74% of CRO/CDMO income were from overseas customers. ChemPartner has maintained stable customer relationship with 18 out of the global top 20 pharma companies. ChemPartner is also acquiring new biotech customers from both China and overseas.

Fast growing capacity to drive business growth. 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. ChemPartner is aggressively expanding its CDMO capacity to meet the strong demand. ChemPartner plans to expand its biologicals CDMO capacity from current 450L to 4,950L by the end of 2020E, and further expand to 13,950L~18,450L in the coming three 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 26% CAGR in 2019-22E, contributing 83% 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. The Company’s prebiotics revenue grew 48% YoY in 1H20 from a low base in 1H19, driven by the industry’s demand recovery from the “Quanjian” scandal in 2019.

Maintain BUY. We expect revenue to grow at a 25% CAGR in FY19-22E, and attributable net profit to increase 35%/41%/39% YoY in FY20/21/22E. Maintain DCF-based TP unchanged at RMB25.52.

Catalyst: CDMO capacity expansion; Risk: Weak organic growth.