ZYBT.US
Zhengye completes IPO, but more likely to come

The veterinary vaccine producer raised a modest $6.9 million in its New York listing by selling just 3% of its shares, as it diversifies into the household pets market

Key Takeaways:

  • Zhengye Biotech plans to use $6.9 million raised in its New York IPO to fund R&D and add new manufacturing capacity for its expansion into pet vaccines
  • Collapsing pork prices after China’s recent bout of African swine fever subsided hit the animal vaccine maker’s top and bottom lines, underlining the need for diversification

  

By Edith Terry

When Zhengye Biotechnology Holding Ltd. (ZYBT.US) completed a slightly upsized Nasdaq IPO two weeks ago by selling 1.5 million shares for $4 each, it seemed like that might be the end of its listing story. The $4 price was already at the bottom of its previously announced range, indicating tepid demand, even though the offer size was up slightly from its original plan filed last June to sell 1.25 million shares.

But a week after the Jan. 7 trading debut, Zhengye announced that its underwriter had fully exercised its option to purchase an additional 225,000 shares, adding $900,000 to the offering’s gross proceeds and indicating demand might be stronger-than-expected. Still, the total proceeds seem quite small for a company worth just over $200 million, hinting a secondary share sale could be in the offing. Investors certainly seem to like the company enough, with its shares up 8.5% from the IPO price after their first trading week.

Known as Zybio in its home China market, Zhengye is the country’s 10th largest veterinary vaccine producer by revenue, though it attains that distinction with just 0.3% of the market, according to independent research in its prospectus. But it’s also a best-in-class of sorts by becoming the first Chinese animal health company to list in the U.S. Out of 11 Chinese vaccine companies, it was also the fastest growing in 2022 with 21.4% revenue growth.

Founded in 1970 as the Harbin Veterinary Biopharmaceutical Factory of the Ministry of Agriculture, Zhengye is also something of a local hero. According to media reports, it is the first enterprise in Northeast China’s Jilin province to list in the U.S.

Zhengye and its peers are chasing a veterinary vaccine market that isn’t exactly huge but also has plenty of revenue to go around. The market grew from $1.9 billion in 2018 to $2.5 billion in 2022, and is expected to reach $3.2 billion in 2026, boosted by growing demand from livestock and poultry breeders, according to its prospectus. Concerns over diseases jumping from animals to humans have also led to much tighter regulatory oversight of animal farming in China, which is further boosting demand.

Zhengye’s existing vaccine portfolio consists of 44 products, 43 sold domestically. It also sells seven poultry vaccines internationally, mostly to developing countries like Pakistan, Egypt and Vietnam.

But while the overall market is growing, Zhengye has been moving in the other direction these last two years. Its revenue fell by nearly 20% to 94.9 million yuan ($13 million) in the first six months of 2024 compared 116.8 million yuan in the same period of 2023. Its net income fell by more than half over that time, to 10.7 million yuan from 24 million yuan.

The declines actually began in 2023, when the company’s net revenue fell by a similar 20% to 211.6 million yuan from 260.2 million yuan the previous year. Its net income was down by an even larger 33% to 31.4 million yuan from 46.7 million yuan over that time.

African swine fever fallout

The company’s slumping performance came after China’s African swine fever epidemic between 2018 and 2021, which resulted in the culling pigs that would have produced an estimated 27.9 million metric tons of pork. Pork prices doubled as a result of shortages, hitting a peak in the third quarter of 2022 before plummeting as the epidemic receded.

As prices plummeted, revenue of Zhengye’s largest customer, Muyuan Foods (002714.SZ), the world’s second largest hog farmer, also declined by 11.2% in 2023 to 111 billion yuan, with Muyuan swinging to the red with a loss of 4.17 billion yuan. As Muyuan suffered, Zhengye began taking steps to wean itself from its largest customer.

In 2022, Muyuan accounted for 74.5% of Zhengye Biotech’s total revenue. The company has been working to lower that reliance, with the figure dropping to 52.1% of revenue in 2023 and 43.2% in the first six months of 2024. But that weaning has come at a cost, since swine vaccines are Zhengye’s largest business segment, bringing in 89% of revenues in 2023. Thus, its self-weaning from Muyuan was a major factor behind the continuing revenue declines last year even as China move beyond the African swine fever epidemic.

One way Zhengye Biotech is trying to diversify its business is by entering the market for household pet vaccines. The company says it has completed clinical trials for two types of feline vaccines and one canine vaccine, with another canine vaccine pending. Its first canine product, a rabies vaccine, has been approved for commercial use in China and was due for launch by the end of last year.

The company said it plans to spend 151.5 million yuan to build a new factory for rabies vaccines for dogs and swine, as well as feline vaccines. It will spend another 13.1 million yuan developing new vaccines for cats and a human adenovirus Type 5 vaccine that induces rabies immunity in dogs as well as other animals. It is also investigating a new generation of vaccines using cutting-edge mRNA technology for protection in cats and swine.

Such efforts will all require big new investments, leading to our earlier guess that the company may not be finished its fundraising after obtaining the initial $6.9 million from the IPO.

While the pet vaccine market looks like a smart diversification move, it’s much smaller than the market for commercial husbandry. That pet vaccine market was worth a modest $50 million in 2022 but is expected to double to $100 million by 2026. Zhengye said it is one of only two producers catering to that market, the other being Jinyu Bio-technology (600201.SH). Each company has just one product available commercially, but more are undergoing clinical trials.

Zhengye’s price-to-earnings (P/E) ratio is 72.5 based on its estimated profit for last year, though the figure is likely to come down to more realistic levels if its diversification drive succeeds and it returns to profit growth. By comparison, Jinyu Bio trades at 44, while global peer Zoetis (ZTS.US) trades at 31. A secondary share issue would certainly help Zhengye by raising money to fund its diversification campaign as it seeks to reignite its growth in China’s vast animal vaccine market.

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