Have API manufacturers truly reached their most difficult moment?

API manufacturers have not yet reached their most difficult moment. During the recent semi-annual report disclosure season, numerous API manufacturers delivered financial performance that exceeded market expectations. According to statistics, a total of 43 API companies collectively achieved RMB 59.18 billion in revenue and RMB 6.85 billion in net profit attributable to shareholders in the first half of the year. Notably, in Q2 2024, revenue and net profit attributable to shareholders grew year-on-year by 11.2% and 22.6%, respectively—indicating a clear recovery in profitability. This suggests that, despite certain challenges, the overall operational conditions of API enterprises are improving, and profitability is strengthening. Specifically, for certain product categories—such as the vitamin series—their prices have been influenced by supply-demand dynamics, especially by the launch of a new pig cycle. Consequently, prices of multiple vitamin varieties surged significantly this year. For example, as of August 2024, quoted prices for vitamins A and E had risen by 208% and 172%, respectively, compared to their lows in December 2023; meanwhile, export values for these products also posted year-on-year growth.

Is the path out of the cyclical trough smooth for API manufacturers?

During the recently concluded semi-annual report disclosure season, many API manufacturers emerged from their downturn, delivering financial results that surpassed market expectations. According to statistics, a total of 43 API companies collectively achieved RMB 59.18 billion in revenue and RMB 6.85 billion in net profit attributable to shareholders in the first half of the year. Notably, in Q2 2024, revenue and net profit attributable to shareholders grew year-on-year by 11.2% and 22.6%, respectively—indicating a clear recovery in profitability. Income and YoY growth rate of API companies (quarterly), Huayuan Securities Research Institute Of course, the API sector is not uniformly experiencing positive cyclical reversal news. Prices of certain bulk APIs—including antibiotics and vitamins—have notably rebounded. API manufacturers with downstream formulation businesses—such as Aoruite (605116) and Sitaile (603520)—also performed well. However, with India challenging China’s position as the world’s leading API exporter—boosted by geopolitical factors—and with CDMO business failing to advance as hoped, domestic manufacturers face substantial challenges once cyclical factors are excluded. I. Bulk Product Prices Rebound; Inventory Drawdown Cycle Reaches Bottom Last year marked the cyclical nadir for the API industry; this year, however, sentiment has revived for many bulk API varieties. The most evident trend is seen in the vitamin series. As bulk vitamins are primarily used as feed additives, their prices have surged markedly this year, driven by the onset of a new pig cycle. For instance, vitamins A and E—widely added to animal feed—saw their quoted prices rise by 208% and 172%, respectively, in August 2024 versus their December 2023 lows. Price movements directly reflect supply-demand dynamics: in the first half of this year, export values for vitamins A and E increased year-on-year by 17% and 30%, respectively. This improvement naturally translated into corporate earnings. China is both the world’s largest producer and exporter of vitamins; domestically listed firms New Hehong (002001) and Zhejiang Medicine (600216) together account for nearly half of global production capacity for vitamins A and E. Meanwhile, key foreign competitors—such as BASF—faced unexpected disruptions, including factory explosions. Consequently, domestic manufacturers enjoyed robust demand this year. Per their H1 2024 financial reports, New Hehong’s revenue and net profit rose by 32.7% and 48.62%, respectively, while Zhejiang Medicine’s growth rates stood at 11.87% and 15.82%. We will not elaborate further on other mainstream bulk APIs—such as antibiotics—as their situations are broadly similar. Beyond terminal price recovery, the broader API industry’s inventory drawdown cycle has also bottomed out. Since H1 2023, inventory levels across the SW API sector have consistently declined, suggesting that a new restocking cycle may soon commence. Thus, we believe that—driven by both price and inventory dynamics—the upturn in sentiment for bulk APIs, exemplified by vitamins, will likely persist. SW API inventory data and trends (2018–Q1 2024), Source: Zheshang Securities Research Institute II. “API + Formulation” Integration Is an Industry Trend Yet, such cyclical upswings are inherently temporary. From the recurring, oscillating pattern of pig cycles—characterized by perpetual ups and downs—we should already recognize this fundamental truth.

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