Investment Rating - The report maintains an investment rating of "Outperform the Market - A" [5] Core Insights - The application of Human Milk Oligosaccharides (HMOs) is expected to accelerate, driven by their recognized nutritional benefits and expanding regulatory approvals [3] - The infant formula market is experiencing increased concentration, with the top 10 companies' market share rising from 68% in 2017 to 83% in Q3 2025, indicating a shift towards premium product offerings that include HMOs [2] - The potential market space for HMOs in the Chinese infant formula sector is estimated to be between 5.86 billion to 11.72 billion yuan, based on projected production and pricing [2] Summary by Sections HMO Nutritional Benefits - HMOs are the third largest nutritional component in breast milk, consisting of various structures that contribute positively to infant health, including growth, gut health, immunity, and cognitive development [1] Market Dynamics - The implementation of stringent new standards for infant formula has led to significant market consolidation and a focus on nutritional enhancement, with major brands introducing HMO-enriched products [2] - The expected production of infant formula in China for 2024 is approximately 1.563 million tons, with a significant portion anticipated to be high-end products requiring HMO addition [2] Regulatory Developments - Recent approvals by health authorities to expand the use of HMOs in various food products indicate a growing recognition of their value, which could lead to exponential market growth if HMOs are utilized beyond infant formula [3] - Companies like Ganbaiyou and Qiu Tian Man Man are already responding to these regulatory changes by launching HMO-added products [3] Company Focus - Companies such as Langkun Technology, Baolingbao, and Jiabiyou are actively developing HMO production capabilities, with significant annual production capacities planned [10]

Investment Rating - The investment rating for the company is "Buy" [1] Core Insights - The company's revenue, net profit attributable to shareholders, and net profit after deducting non-recurring gains and losses for Q3 2025 were CNY 727 million, CNY 41 million, and CNY 34 million, respectively, representing year-on-year growth of 12.23%, 30.21%, and 11.72% [2] - The significant growth in performance is attributed to the substantial increase in sales of core products such as sugar-reduced sweeteners, prebiotics, and dietary fibers, along with improved gross margins due to cost reduction and efficiency enhancement [2][3] - The company's three core products accounted for 61.5% of revenue, with a gross margin contribution of 68.6%, and their sales revenue grew by 25.8% year-on-year [3] - The approval of HMO (Human Milk Oligosaccharides) for infant formula has been finalized, allowing for the expansion of product offerings in this category [4] - The gross margin for Q3 2025 was 13.54%, an increase of 1.76 percentage points year-on-year, while the gross margin for core products improved by 5.3 percentage points [5] Summary by Sections Financial Performance - For the first three quarters of 2025, the company reported revenue of CNY 2.126 billion, net profit attributable to shareholders of CNY 134 million, and operating cash flow of CNY 158 million, reflecting year-on-year growth of 15.98%, 32.58%, and 62.38% respectively [2] - The company’s inventory decreased by 8.06% year-on-year, with inventory turnover days reduced to 39 days [6] Investment Recommendations - The company is positioned as a leader in the functional sugar industry, with a strong market share in sugar-reduced sweeteners, prebiotics, and dietary fibers [7] - Short-term outlook suggests further improvement in gross margins due to declining corn prices and production efficiency [7] - Mid-term prospects include accelerated approval for allulose, which is expected to open up the domestic market [7] - Long-term growth is anticipated from the launch of high-value products such as HMOs, DHA, and sugar-free resistant dextrin [7] Financial Projections - Revenue projections for 2025, 2026, and 2027 are CNY 2.718 billion, CNY 2.966 billion, and CNY 3.211 billion, respectively, with corresponding net profits of CNY 179 million, CNY 222 million, and CNY 269 million [9][11]

Financial Performance - In the first half of 2025, the company achieved total revenue of 139,923.89 million yuan, a year-on-year increase of 18.02% [3] - The net profit attributable to shareholders, after deducting share-based payment expenses, was 9,532.72 million yuan, with a year-on-year growth of 32.15% [3] - The second quarter of 2025 saw revenue of 71,444.25 million yuan, a year-on-year increase of 12.63% and a quarter-on-quarter growth of 4.33% [3] Product Performance - The three core products (prebiotics, dietary fiber, and sugar-reducing sweeteners) generated revenue of 66,354.78 million yuan, a year-on-year increase of 32.15% [3] - Sugar-reducing sweeteners achieved revenue of 37,152.41 million yuan, growing by 61.22% [3] - Prebiotics generated revenue of 18,867.03 million yuan, with a year-on-year growth of 20.23% [3] - The revenue share of the three core products accounted for 47.42% of total revenue, an increase of 5.07% compared to the previous year [3] Cost Management - The overall gross margin for the first half of 2025 improved to 13.17%, up by 1.36% from the previous year [3] - The gross margin for the three core products was 17.94%, an increase of 1.93% year-on-year [3] - The company implemented cost control measures, including optimizing production processes and enhancing supply chain management to mitigate rising raw material costs [4] Business Development - In 2024, the company established projects for the annual production of 2,000 tons of DHA algae oil and 2,500 tons of HMOs (human milk oligosaccharides), which are expected to commence production in the second half of 2025 [5] - The company received approval for its HMO application as a new food nutrition fortifier in July 2025 [5] - The company is actively pursuing new product development in the field of synthetic biology, with several patents and trademarks registered in the first half of 2025 [6] Market Trends - The company noted that corn prices have been fluctuating, impacting production costs and gross margins [8] - The company’s products are primarily used in beverages, dairy products, functional foods, and health products, which typically do not exhibit significant seasonality [8] Strategic Initiatives - The establishment of a subsidiary in the United States is part of the company's strategy to enhance international business operations [9] - The company is focusing on expanding its market presence and product offerings in the field of synthetic biology and prebiotics [7]

Core Viewpoint - Tianjin Hesheng Biotechnology Co., Ltd. has completed a multi-million Pre-A round financing, which will accelerate its technological innovation in the synthetic biology field and lead new trends in health and nutrition solutions [1][2]. Group 1: Company Overview - Established in August 2023, Hesheng Biotechnology is a key technology transfer enterprise of Nankai University, gathering a leading research team in synthetic biology with nearly 30 years of experience [2]. - The company has developed a "DBTL" (Design-Build-Test-Learn) technical platform, utilizing proprietary gene element databases and self-developed AI algorithms to create high-productivity microbial strains [2]. - Hesheng Biotechnology has a comprehensive technical coverage from product research and development to downstream applications, focusing on probiotics, functional foods, and medical foods [2]. Group 2: Key Product Focus - Human Milk Oligosaccharides (HMOs) - The core technology for Hesheng Biotechnology's HMO products originates from the National Key Basic Research Program (973 Program), with the team first synthesizing HMOs in 2016 and obtaining invention patents for industrial strains [3]. - The company has developed several industrial strain construction technologies for HMOs, including 2'-FL, 3-FL, and others, with a product purity of 98.98%, significantly exceeding domestic and international quality standards [3][4]. Group 3: Research and Application - Hesheng Biotechnology is committed to independent innovation and has initiated research on the functional applications of HMOs, including their role in immune balance and disease intervention [4].