Zhengye Biotechnology Stock Growth Slows as It Targets US IPO (Pending: ZYBT)

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Zhengye is experiencing a decline in sales

Zhengye Biotechnology Holding Limited (ZYBT) has filed to raise $20 million in an initial public offering of its common stock, according to an SEC F-1 registration statement.

ZYBT researches and develops Vaccines for animals in China and exports to Vietnam, Pakistan and Egypt.

The company's overall revenue fell in the last reporting period, but profit is still positive.

I'll give a final opinion when we learn more about pricing and valuation.

What is Zhengye doing?

Zhengye Biotechnology Holding Limited, based in Jilin City, PR China, was founded to develop veterinary vaccines for use primarily in livestock.

The management is led by Chairman Mr. Zhenfa Han, who has been with the company since 2004 and previously served as a member of various National Committees of the Chinese People's Political Consultative Conference. He was also vice president the Chamber of Commerce and Industry for the Agricultural Industry.

The company's main offering includes vaccines for the following:

• cattle

• Pig

• Goats

• sheep

• poultry

• dogs

As of June 30, 2023, Zhengye has booked $31.8 million in investments at fair market value from investors including founder Securingium Holding and VVAX Holdings.

The company sells its vaccines to animal husbandry organizations in 29 provincial regions in China, Vietnam, Pakistan and Egypt.

Zhenye has 13 vaccine production lines, a quality testing center and an animal husbandry facility for vaccine development.

The company operates primarily through a large distribution network within the PRC and through exporting distributors.

The share of sales and marketing costs in total revenue has trended downward as revenue has declined, as shown by the following figures:

Sales & Marketing	Expenses vs. Income
Period	percentage
Six months. Ended June 30, 2023	14.2%
2022	13.3%
2021	16.8%

click to enlarge

(Source – SEC)

The sales and marketing efficiency multiplier, which is defined as how many dollars of additional new revenue are generated by each dollar of sales and marketing expenses, declined to negative (0.5x) in the most recent reporting period, as shown in the following table:

Sales & Marketing	Efficiency rate
Period	Several
Six mos. Ended June 30, 2023	-0.5
2022	1.5

click to enlarge

(Source – SEC)

What is Zhengye's Market?

According to a 2023 market research report by Grand View Research, the global animal vaccines market was estimated to be $12.8 billion in 2022 and is expected to reach $26.3 billion by 2030.

This represents a forecast CAGR (Compound Annual Growth Rate) of 9.4% from 2023 to 2030.

The main reason for this expected growth is the increasing incidence of cattle diseases in a growing global livestock population.

The following graphic also shows that the North American region will account for the largest market share at 25.0% by 2030, but the Asia Pacific region is expected to grow the fastest:

Grand View Research

Key competitors or other industry participants include:

SEC

On a global level, the company competes with these companies:

• Zoetis

• Some animal health

• Merck & Co.

• Vetoquinol SA

• Boehringer Ingelheim GmbH

• Elanco

• Virbac

• Heska

• Dechra Pharmaceuticals Plc

• Idexx Laboratories

• Norbrook

Latest financial results of Zhengye Biotechnology Holding Limited

The company's recent financial results can be summarized as follows:

• Falling sales

• Reduced gross profit

• Increasing gross margin

• Lower operating profit

• Reduced cash flow from operations

Below are relevant financial results derived from the Company's registration statement:

Total sales
Period	Total sales	% Variance vs. Previous
Six mos. Ended June 30, 2023	$16,115,000	-6.7%
2022	$37,735,000	25.9%
2021	$29,969,380
Gross profit (loss)
Period	Gross profit (loss)	% Variance vs. Previous
Six mos. Ended June 30, 2023	$9,992,000	-7.1%
2022	$22,258,000	26.8%
2021	$17,555,020
Gross margin
Period	Gross margin	% Variance vs. Previous
Six mos. Ended June 30, 2023	62.00%	-0.3%
2022	58.99%	0.7%
2021	58.58%
Operating profit (loss)
Period	Operating profit (loss)	Operating margin
Six mos. Ended June 30, 2023	$4,044,000	25.1%
2022	$9,545,000	25.3%
2021	$7,333,620	24.5%
Net income (loss)
Period	Net income (loss)	Net margin
Six mos. Ended June 30, 2023	$2,783,000	17.3%
2022	$6,776,000	18.0%
2021	$5,454,260	18.2%
Cash flow from operating business
Period	Cash flow from operating business
Six mos. Ended June 30, 2023	$1,095,000
2022	$2,513,000
2021	$4,452,980
(Glossary of terms)

click to enlarge

(Source – SEC)

As of June 30, 2023, Zhengye had $3.2 million in cash and $25.9 million in total liabilities.

Free cash flow was $1.1 million for the twelve months ended June 30, 2023.

Zhengye Biotechnology Holding Limited IPO Information

Zhengye intends to raise gross proceeds of $20 million through the initial public offering of its common shares, although the final figure may vary.

No existing shareholders have expressed interest in purchasing shares at the IPO price.

Assuming a successful IPO, the Company's market capitalization upon IPO would be approximately $200 million, excluding the impact of underwriter over-allotment options.

Management says it will use the net proceeds from the IPO as follows:

for the acquisition of vaccine production companies;

for the construction of a new workshop;

to carry out R&D projects; And

to fund working capital and other general corporate purposes.

(Source – SEC)

There is no presentation of the company roadshow by management.

Regarding pending litigation, management said the company is not currently a party to “any material legal or administrative proceedings.”

The IPO's only listed bookrunner is US Tiger Securities.

Zhengye's IPO is in doubt due to declining revenue

ZYBT is seeking public capital market investment in the US to fund its acquisition program and new development capabilities.

The company's financials show a decline in sales and gross profit, as well as a decline in net income and cash flow from operations.

Free cash flow for the twelve months ended June 30, 2023 was $1.1 million.

Sales and marketing costs as a percentage of total revenue have fallen unevenly as revenue has declined. The sales and marketing efficiency multiplier fell to negative (0.5x) in the last reporting period.

The Company currently plans not to pay dividends and to retain future earnings to fund its growth and working capital needs.

ZYBT's recent investment history shows that the company has continued to make investments as a percentage of its operating cash flow.

The market opportunity for animal vaccine manufacturing is large and is expected to grow at a CAGR of 9.4% through 2030, meaning the industry has a fairly solid growth trajectory ahead of it.

However, the company faces significant competition from established and well-known companies in global markets.

Risks to the Company's prospects as a listed company include the ongoing uncertainty and unpredictability of the regulatory environment in China, which may rapidly change the dynamics of the industry.

Additionally, the company is an “emerging growth company” and a “foreign private issuer,” meaning management can choose to provide significantly less information to shareholders.

The stocks of such companies have often performed poorly after going public.

Additionally, investors would only own shares in a Cayman Islands-based company and would not directly own shares in the operating entities.

There remain risks to compliance with these companies' listings in the United States, where the HFCA law, which governs auditor inspections and related listings, remains in effect.

Finally, the Company is subject to myriad restrictions on money transfers and business activities with China, and it may be difficult or costly to prosecute the Company or management in the event of allegations of wrongdoing.

Once we learn more details about the company's IPO, I will provide a final opinion.

Expected IPO pricing date: To be announced.