Investment Highlights

For companies in the scientific service sector, product strength, service power and productivity are of great significance in the development. As a scarce full-process scientific service platform in the industry, Titan Technology has gradually passed the stage of strategic scale improvement, and will further improve product power + productivity in the future, and is expected to enter a new stage of profitability improvement from 2025.

How do you see the current development stage of the company's service force?

Since its listing, the company has always increased the improvement of its own service capabilities. Since its listing, it has gradually stepped out of East China, built 23 key city warehouses in 2021, completed the construction of 5 regional center warehouses in 2022, and distributed 28 urban service warehouses. With the improvement of the company's service capabilities, the revenue in East China decreased from 81% in 2016 to 71% in 2023, and the revenue in North China increased from 4.6% in 2016 to 9.5% in 2023. At the same time, the company has achieved sales of more than 6.5 million product SKUs through its own brand + third-party supplement, and is one of the companies with the most abundant products, order processing capacity and delivery capacity in the industry.

From the perspective of financial statements, we find that the absolute value of the company's accounts receivable, which has the greatest impact on the cash flow of operating activities in Q1-Q3 of 2024, has continued to decline, which is completely opposite to the collection rhythm presented in the past, and the margin of inventory increase has weakened significantly, and it is expected to officially enter the cash flow recovery stage by the end of 2024. We believe that the changes in this series of financial indicators show the company's judgment on the current pace of its own development. When the revenue scale, product coverage, and customer service have reached a certain level, the follow-up may enter a new stage of service optimization, product improvement, and productivity improvement.

How do you see the current development stage of the company's product strength?

Due to the company's concentrated investment and rapid expansion in service capabilities in the past, the market often ignores the product power hidden in the scale of nearly 3 billion revenue. We found that the company's share of private label revenue has increased from 50% at the beginning of the IPO (2021) to 58% (2023), and the proportion of gross profit has increased from 61% (2021) to 79% (2023). In particular, Adamas, an independent high-end reagent brand that started out, has been delivering high growth beyond the market average as a segment with strong profitability and high brand stickiness, with a revenue CAGR of 45% from 2016 to 2023, and still achieved a year-on-year growth of 30.26% in the context of weak industry demand and deteriorating market competition pattern in 2024H1. We believe that this is strongly related to the company's strong product strength and brand recognition in the hearts of customers. At the same time, the company's gradually improving service capabilities have also played a strong enabling role in further increasing the market share and achieving high growth of its own brands.

In addition, in 2024H1, the company acquired Rundu Biotechnology, Maigao Instrument, and Qinxiang Instrument, plus the previously invested Titan Pure Source, which further built the industrial ecological chain of Titan's own brand. Through these investment and M&A segments, the company continues to improve its product capabilities and achieve effective synergy with its own service capabilities and productivity. In addition, the company established Titan Heyuan Investment Fund in 2021, which is expected to continue to introduce high-quality products and enhance its own brand power and profitability.

How do you see the current stage of development of the company's productivity?

We find that the company's balance sheet has changed significantly since its listing, and its fixed assets and projects under construction have increased significantly, indicating that the company will gradually enter the independent and controllable production stage from the OEM production model of self-developed products limited by the stage in the past.

Since its listing, the company has continuously supplemented its own production capacity, acquired Anhui Tiandi at the end of 2021 to realize the independent production of high-purity solvents, and will gradually invest in the R&D and manufacturing base of Yichang general reagents and high-end reagents to realize the independent production of its own brand, and at the end of the year, it will be invested in the Life Science Headquarters Park of Fengxian Free Trade Zone to realize the functional transformation of domestic high-end scientific instruments and key reagent consumables. We believe that for some reagents, consumables and other consumables, a wide range of products, a large customer base, a wide range of applications, and a high repurchase rate are the basic plates of leading enterprises in the scientific service industry, and the supply capacity, quality and cost control ability of products are particularly important. After the company's production capacity is put into operation, it is expected to greatly improve the profitability and growth of low-gross products such as general reagents, and drive the overall development of the company.

Market Value Spatial Estimation

According to PS: For the early stage of the development of platform companies, the scale reflects the value, and the market often adopts the PS valuation method. Referring to the valuation level of Thermo Fisher PS, a leading scientific services company, the TMO corresponds to approximately 5.06 times PS as of November 7, 2024. Given that Titan Technology is still in the early stage of development, we give the company a 2x PS valuation in 2025, corresponding to a market value of 6.5 billion, and there is still 62.5% market value space.

Segment valuation method: In terms of segmentation, Adamas, the company's strong brand and sustained high-growth segment, has always maintained a year-on-year growth rate of more than 20%. Referring to the company's 24-year interim report, the 2024H1 growth of self-owned brand high-end reagents increased by 30.26% year-on-year. Assuming that 30% growth will be maintained in 2025, with reference to the gross profit margin of the sector, the company's overall sales expense rate, the management expense rate and the proportion of R&D expenses, we estimate that Adamas may achieve a profit of about 157 million in 2025, and give Adamas 30 times PE according to the PE level of comparable product-based reagent companies, corresponding to a market value of 4.7 billion. For the remaining 2.5 billion revenues, we still refer to the PS valuation method of scientific service platform companies, giving a PS valuation of 0.8-1 times, corresponding to a total market value of 6.7-7.2 billion, and there is still room for 67%-80%.

Profit Forecast and Valuation

We expect the company to achieve revenue of 29.02, 32.73 and 3.731 billion yuan from 2024 to 2026, a year-on-year increase of 4.77%, 12.79% and 14.01%; The net profit attributable to the parent company was 16.59 million, 69.08 million and 171 million, a year-on-year increase of -77.14%, 316.33% and 147.23%. Referring to the market cap space estimate, we upgrade the company to a "buy" rating.

Risk Warning:

The adjustment of product structure is less than expected; The ramp-up of production capacity is less than expected; regional expansion is less than expected; deterioration of the competitive landscape in the industry; The process of domestic substitution is less than expected; Environmental protection and safety production risks