Original: Merger and acquisition of Youshu New sweetener industry chain tracking: Ternary Biology VS Rhein Bio VS Jinhe Industry

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Today we look at the sweetener industry chain:

With the development of food industry technology, the amount of sugar used and per capita intake in the world is also increasing

Chart: Sugar and fat intake in countries around the world

Source: ISMA

Due to excessive sugar intake (such as sucrose, fructose glucose syrup, etc.

However, the first and second generations of synthetic sweeteners (such as saccharin, cyclamate) are gradually being phased out due to health safety risks

A new generation of artificial sweeteners (such as new sweeteners, sucralose) with higher safety and higher price-sweet ratio, and a new generation of natural sweeteners (erythritol, monk fruit sweet glycosides, allulose) began to rise

Judging from the recent growth of players in the industry:

Figure: Financial data

Source: M&A

From the perspective of institutional consensus expectations of growth and prosperity:

Chart: Wind's consensus outlook for growth and prosperity

Source: WIND

Sweetener industry chain, each link includes:

Figure: Sweetener industry chain

Source: M&A

Upstream - including basic chemicals, corn starch, stevia, monk fruit, etc

Midstream - including chemical synthesis (saccharin, cyclamate, aspartame, acesulfame potassium, sucralose, new sweet), biological fermentation (erythritol, allulose), plant extraction (steviol glycosides, monk fruit stezide) three categories, of which the representative enterprise of chemical synthesis is Jinhe Industry, the representative enterprise of biological fermentation is ternary biology, and the representative enterprise of plant extraction is Rhein Biologics

Downstream – Distributed in beverages, tables, personal care, baked goods, pharmaceuticals and more to add sweetness or improve flavor

Here are the questions worth pondering:

1) What are the differences between different types of sweeteners? Which one is more likely to become mainstream in the future?

2) In this industrial chain, what kind of business layout can be more competitive in the medium and long term?

This report will be updated to the industrial chain map

(I)

Sweeteners are food additives

Downstream applications are widely distributed, because it is mainly used to replace sucrose, and play the sweetness of sucrose, and adjust the flavor of the two functions, of which, the demand for sweetness for beverages accounted for 51%, 15% of the table, the demand for adjusting flavor for personal care products, baked goods and drugs, accounting for a total of about 39%.

Figure: Downstream applications of sweeteners

Source: Guoyuan Securities

Driven by the pleasure brought by sweetness, global sugar consumption has steadily increased, with a compound annual growth rate of about 1%.

Chart: Global sugar consumption

Source: Guosen Securities

China's sugar consumption has not changed significantly in the past decade, but the degree of dependence on imports is constantly increasing, and 35% of sugar consumption in 2022 will rely on imports

Figure: Sugar consumption in China

Source: Guosen Securities

Common sources of sweetness include sugars (sucrose, fructose, glucose, lactose, etc.

Figure: Classification of sweetener sources

Source: Guosen Securities

At present, in the global sugar ingredient market, sucrose is the mainstay, accounting for 78%, and the sweetener is dominated by artificial sweeteners, accounting for 9%, followed by natural sweeteners accounting for 1%.

Chart: Market share of sugar ingredients

Source: Guosen Securities

At the same time, sweeteners are gradually replacing the sucrose market, and the proportion of the sweetener market size in the sucrose market size increased from 6.

Chart: Global Sucrose Market Size VS Sweetener Market Size (US$100 Million)

Source: Zheshang Securities

In the consumption structure of sweeteners, the proportion of natural sweeteners (steviol glycosides, monk fruit sweetins, erythritol) showed an increasing trend, from 10% in 2010 to about 30% in 2020, mainly benefiting from the pull

The consumption of erythritol increased from 40,000 tons in 2015 to 125,000 tons in 2020, with a compound annual growth rate of 25.

Figure: Proportion of natural sweeteners

Source: Guojin Securities

(2)

In terms of income structure:

First, Rhein Bio (Guangxi Province, Guilin City) - income is composed of plant extracts, the compound growth rate of 2018-2021 is 34.

Chart: Rheinland Biological Income Structure (100 million yuan)

Source: M&A

2.
Ternary organisms (Shandong Province, Binzhou City) - Income is composed of erythritol and compound sugars
.
Thereinto:

Figure: Ternary biological income structure (100 million yuan)

Source: M&A

The natural sweetener erythritol has a compound growth rate of 85.
1%
from 2018 to 2021.

Compound sugar, which is a mixture of erythritol and monk fruit extract or stevia, the revenue decreased from 166 million yuan in 2019 to 74 million yuan in 2021, mainly due to the decrease in compound sugar orders, but the proportion of revenue was not large
.

3.
Jinhe Industry (Anhui Province, Chuzhou City) - Income is composed of food manufacturing and basic chemical industry
.

Chart: Revenue structure of Jinhe Industry (100 million yuan)

Source: M&A

The food manufacturing contains: sweeteners and flavor products, sweeteners for acesulfame potassium and sucralose, flavors for aD, ethyl maltol, methylcyclopentenolone (MCP) and Galle musk solution, the business has a compound growth rate of 19.
6%
from 2018 to 2021.

The basic chemical industry includes: liquid ammonia, hydrogen peroxide, melamine, formaldehyde, sulfuric acid, nitric acid, divinylone, sulfoxide chloride and chemical intermediates, the business has a compound growth rate of 3.
8%
from 2018 to 2021.

In summary, from the perspective of the scale of sweetener revenue in 2021, Jinhe Industry (3.
029 billion yuan, including spices) > ternary biological (2.
032 billion yuan) > Rhein Biological (986 million yuan, including other plant extracts).

(III)

Next, let's put together the profit growth in the recent quarter to perceive the growth trend:

First, profit growth

Chart: Growth rate of attributable net profit (%)

Source: M&A

Profit growth rate is more consistent
with revenue growth rate.

Rhein Biotech - profit fluctuations are large, mainly in recent years, profit growth depends on the orders
of large customers.
This large order is a natural sweetener supply contract (steviol glycosides and monk glycosides) signed with the Swiss company Firmenich in 2018, which stipulates that the amount of products purchased within five years is 400 million US dollars, which is converted into about 520 million yuan per year, and the revenue of the top five customers in 2021 is 56.
66%.

Ternary Biology - High profit growth in 2021 and before, mainly due to the expansion of erythritol production, and the volume and price brought about by strong demand have risen
.

The market price of erythritol soared to 30 yuan / kg in 2021, much higher than the industry cost of 15 yuan / kg, so it attracted a large number of new entrants to expand production capacity, which in turn led to erythritol overcapacity since 2022, down to the current 14-16 yuan / kg, most participants are in the breakeven stage
.

Jinhe Industry - the negative growth in 2020 is mainly caused
by the low price cycle of basic chemical products (such as liquid ammonia, hydrogen peroxide, methanol, sulfuric acid, concentrated phosphoric acid, etc.
).

Chart: Basic chemical prices

Source: WIND

At the same time, the growth rate in 2021 rebounded, on the one hand, the price of basic chemical products picked up, on the other hand, it was greatly affected by the price of sucralose and acesulfame potassium, of which the price of sucralose increased from 200,000 yuan / ton to 400,000 yuan / ton, which was even greater
.

Chart: Acesulfame potassium price

Source: Founder Securities

Figure: Sucralose prices

Source: Founder Securities

Second, the net present ratio

Figure: Net present ratio

Source: M&A

Rhein biotech's cash flow from operating activities fluctuates greatly, mainly due to fluctuations in payables
.
The company's upstream customers are stevia and monk fruit growers, and the number of accounts payable turnover days is more than 200 days all year round, so the repayment and deferral of accounts payable have a greater
impact on the company's cash flow.

The cash flow from operating activities of Tsnour Bio is more in line
with profit.

The cash flow from operating activities of Jinhe Industry is higher than the profit, which is due to the depreciation
of the fixed asset investment in the previous period.

3.
Operating cash flow vs capital expenditure

The operating cash flow of Sanyuan Bio and Jinhe Industry basically matches
the capital expenditure.
Rheinland Bio's cash flow has not been able to cover capital expenditures for many years, and short-term borrowings have increased by about 500 million yuan in five years, and cash flow performance is poor
.

Chart: Operating Cash Flow VS Capital Expenditures

Source: M&A

(Wanton)

Break it down into quarters and look at:

First, Rhein Bio - in 2021 to achieve revenue of 1.
053 billion yuan, +34.
4% year-on-year, net profit of 118 million yuan, +37.
74%
year-on-year.

At the same time, the 2022 interim report disclosed that the revenue was 642 million yuan, +41.
71% year-on-year, and the profit was 133 million yuan, +123.
62%
year-on-year.

2022 semi-annual report revenue increased, by customer, is 2022H1 to Firmenich sales of 37.
9325 million US dollars (year-on-year +32.
06%), if you look at the product, natural sweeteners to achieve revenue of 388 million yuan, +47.
09% year-on-year, accounting for 65%
of plant extracts.

In the first half of the year, the revenue growth rate of sweeteners was higher than the growth rate of Firmenich's contract orders, representing the smooth
development of other customers.
In addition, U.
S.
industrial hemp has achieved mass production, which has already received orders and is expected to contribute $255-750 in revenue
in the future.

The increase in profits was greater than revenue, mainly due to the increase in gross profit margin of 8.
27Pct year-on-year, presumably due to the recovery in the prices of steviol glycosides and monk fruit glycosides (lack of market price information).

Chart: Rheinland Biotech quarterly results

Source: M&A

Second, ternary biology - in 2021 to achieve revenue of 1.
675 billion yuan, an increase of +113.
91% year-on-year, attributable profit of 535 million yuan, +130.
21%
year-on-year.

2022Q1 achieved 273 million yuan, +2.
67% year-on-year, profit of 0.
63 billion yuan, year-on-year -10%, single-quarter revenue slightly increased, is erythritol in quantity to make up the price
.
The negative profit growth was due to the decline in the price of erythritol, but the price of raw material corn rose, resulting in a year-on-year decrease in gross profit margin of 11.
55Pct
.

Chart: Ternary Bio's quarterly results

Source: M&A

Third, Jinhe Industry - in 2021, the revenue will be 5.
845 billion yuan, an increase of +59.
44% year-on-year, and the profit attributable to the mother will be 1.
177 billion yuan, a year-on-year increase of +63.
82%.

2022Q1 achieved 1.
898 billion yuan, +67% year-on-year, and profit of 442 million yuan, +110%
year-on-year.
Single-quarter revenue increased, by product, sucralose / acesulfame / methyl maltol / ethyl maltol the average tax-inclusive price was: 43.
4 / 8.
9 / 12 / 100,000 yuan / ton, an increase over last year: 60.
18% / 23.
27% / 6.
19% / -9.
52%.

At the same time, the 5,000-ton project of sucralose has been fully put into production, and the increase in the volume and price of sucralose contributed to the main increase
in the first quarter.

Profit outperformed revenue due to higher prices for most products, resulting in a 5.
28Pct
year-on-year increase in gross margin.

Figure: Quarterly results of Jinhe Industry

Source: M&A

(Wu)

After comparing the growth, let's look at the changes in
profit margins and expense ratios.

First, the gross profit margin

Chart: Gross Margin (%)

Source: M&A

From the perspective of gross profit margin, Ternary Bio is higher, and Rhein Bio and Jinhe Industry are not much different, mainly due to
product differences.

From the perspective of the trend of gross profit margin changes, Rhein Bio and Jinhe Industry have fluctuated slightly with the price of terminal products, and Ternary Bio has had a significant decline since 2021Q4, which is due to the decline in erythritol prices due to intensified competition, and the cost of raw material corn remains high
.

Chart: Average corn prices

Source: WIND

2.
Net interest rate

The difference in net margin is mainly determined by the size of the gross margin, but the poor performance of Rhein Biotech's net profit margin is due to the higher
level of various rates.

Chart: Net Profit Margin (%)

Source: M&A

3.
Expense rate for the period

Chart: Period Rate (%)

Source: M&A

In terms of management rates, Rhein Bio is relatively high, due to various miscellaneous expenses
.

In terms of sales rates, Rhein Biotech is relatively high, because of its focus on sales, it has established global sales centers
such as Guilin, Shanghai, Los Angeles in the United States, and Savona in Italy.

In terms of financial rates, Rhein biotech is higher due to the large amount of short-term liabilities, which was 493 million yuan at June 30, 2022, and the cash balance was 0.
78 billion yuan
for the same period.
(At the same time, the proportion of equity pledge of major shareholders is very high, pay attention to liquidity risks)

In terms of research and development rates, the three companies are not much different, of which Rhein Bio focuses on stevia, monk fruit and other plant extracts; Ternary organisms revolve around the fermentation technology of erythritol and allulose; Jinhe Industry revolves around the process of sucralose and flavor
.

Fourth, the return on net assets

Chart: Return on equity

Source: Company Annual Report

From the perspective of ROE level, Ternary Bio (50%) > Jinhe Industry (20%) > Rhein Biotech (7%)
.

Ternary bio-ROE is significantly higher, in addition to the higher net interest rate mentioned above, its asset turnover rate is also significantly higher
.
But as competition intensified, net margins and asset turnover fell sharply, causing ROE to fall to a low of 1.
82% in Q1 2022
.

Rhein Biotech's total asset turnover is low because: 1) non-current financial assets of 353 million yuan (mainly holding 1.
46% equity of Bank of Guilin); 2) There are more houses for non-productive purposes in fixed assets; 3) There are many projects under construction in the early stage, and they have not yet been fully put into production after all of them are consolidated
in 2022.

(Lu)

Sweeteners are divided into three categories
according to the method of obtaining: chemical synthesis, biological fermentation, and plant extraction.

Chemical synthesis - including saccharin, cyclamate, aspartame, acesulfame potassium, sucralose, new sweet, etc.
;

Biological fermentation - including erythritol, allulose, etc.
;

Plant extracts - including steviol glycosides, monk fruit glycosides;

Next, compare the advantages and disadvantages
of the three sweeteners from multiple dimensions (safety, taste, cost, synthesis difficulty, usage scenarios, etc.
).

First, security

First of all, sweeteners need to be harmless
to the human body.

Figure: Security comparison

Source: Collation of public information

From the perspective of safety, the safety of sweeteners can be divided into 1-4 levels (the higher the value, the greater the safety, the higher the value, the more prohibited the use of level 1 in many countries, the level 2 represents that long-term large-scale consumption has certain side effects, the level 3 represents that the edible amount is higher than level 2, and the level 4 represents not only harmless to the human body, but also has certain benefits for long-term use).

The safety level is 1, there are saccharin and cyclamate, among which, the safety of saccharin is questionable, cyclamate has been proved to be carcinogenic, and both are banned in many developed countries;

The safety level is 2, including acesulfame potassium and sucralose, which are currently used by most countries, but a large number of long-term use still has a certain negative impact on
the human body.
For example, acesulfame potassium may affect the liver and nervous system, and sucralose may damage the DNA of the stomach and lungs of rats while reducing sperm motility
.

The safety level is 3, including aspartame, neosweet, and steviol glycosides, which are in higher long-term edible amounts than acesulfame potassium and sucralose
.

The safety level is 4, there are erythritol, allulose, monk fruit sweet glycosides, long-term consumption has certain benefits
for the human body.
Among them, erythritol is almost not involved in human metabolism, allulose can protect nerves and lower lipids, monk fruit sweetin has antitussive, clear heat and moisturize the lungs, and moisturize the intestines and laxatives
.

At the same time, safety can be quantified by ADI (peak daily consumption per person), aspartame (40 mg/kg/day) > neo sweet (33 mg/kg/day) > acesulfame (15 mg/kg/day) = sucralose (15 mg/kg/day) > cyclamate (7 mg/kg/day) > saccharin (2.
5 mg/kg/day).

The four major categories of steviol glycosides, erythritol, allulose, and monk fruit glycosides have almost no consumption limits
.

Second, the cost of use

At present, the production cost of different sweeteners varies greatly
.

In terms of production cost per kilogram of sweeteners, sucralose (260 yuan) > steviol glycosides (200 yuan) > neosteel (130 yuan) > aspartame (105 yuan) > monk fruit sweet glycosides (80 yuan) > acesulfame potassium (70 yuan) > saccharin (45 yuan) > allulose (30 yuan) > cyclamate (13 yuan) > erythritol (13 yuan).

However, it should be noted that the current sugar substitute market is in rapid development, and the future price fluctuation range is large.

However, considering that sweeteners are alternatives to sucrose, in the actual industry selection, it is also necessary to further consider the sweetness level of various types of sweeteners, and the higher the price-to-sweetness ratio (= average price / sweetness), the higher the
cost performance.

For example, the sweetness of new sweet is 6000 times that of sucrose, and the actual amount of less can be used to achieve the substitution of sucrose, while erythritol is 0.
7 times sweeter than sucrose, and the actual dosage is higher
.

Chart: Sweetener costs

Source: Collation of public information

Considering the valence-sweetness ratio to assess the cost of use, compared with sucrose 5.
9 yuan / sweetness, allulose and erythritol reached 42.
86 yuan and 18.
57 yuan / sweetness respectively, which was 7.
14 times and 3.
1 times the cost of sucrose with the same sweetness, respectively, and the cost was higher
.

The cost of other sugar substitutes is lower than the cost of sucrose use, and monk fruit glycosides (3.
33 yuan / sweetness) > steviol glycosides (0.
8 yuan / sweetness) > aspartame (0.
53 yuan / sweetness) > sucralose (0.
43 yuan / sweetness) > acesulfame (0.
35 yuan / sweetness) > cyclamate (0.
29 yuan / sweetness) > saccharin (0.
11 yuan / sweetness) > new sweet (0.
02 yuan / sweetness).

So overall, the cost of biological fermentation > the cost of plant extraction> the cost of
chemical synthesis.

Third, the taste

Again, different sweeteners have different tastes
.

Pictured: Sweetener flavor

Source: Guotai Junan

Biosynthetic sweeteners, erythritol and allulose have a pure taste and no other odors, which are often used to compound with other sweeteners to reduce their odor
.

Next, we disassemble the core growth drivers, as well as the key competitive elements:

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