Jinan Zhuocheng Bio-Tech Co., Ltd.

01. Price Intelligence: Three Signals of the Downward Cycle

The pricing mechanism of the antibiotic intermediate industry is straightforward. According to KuanNing Biology, benchmark prices are adjusted monthly based on changes in major raw-material costs and competitors’ pricing, reflecting the typical supply-and-demand characteristics of bulk commodities.

Three signals stand out in the current downward cycle:

Signal 1: A widening revenue-cost scissors gap

Revenue declined by 10.68%, while operating costs increased by 2.63%. Although sales volume did not decline significantly, lower selling prices combined with rising costs compressed gross margin by 10.24 percentage points.

Signal 2: Penicillin products are the main source of price pressure

The company attributed the decline primarily to lower year-on-year prices of penicillin products, particularly the 6-APA and penicillin G potassium lines. By comparison, erythromycin thiocyanate and cephalosporin intermediates remained relatively stable.

Signal 3: Regional demand has diverged

Revenue in East China declined by 24.86%, reflecting contraction in a highly price-sensitive market, while North China revenue increased by 51.67%, indicating a shift in order structure. Export revenue declined by 9.27%, with gross margin falling by 15.65 percentage points, suggesting that price pressure is also present in overseas markets.

One notable indicator of market sentiment is the focus of investor questions on 6-APA quotations, transaction prices, and whether downstream destocking has been completed. The industry's attention is gradually shifting from growth to the possibility of a price inflection point.

At the broader industry level, China's antibiotic market was valued at approximately RMB 194.5 billion in 2022, with annual growth remaining above 4%. Aging demographics and broader medical-insurance coverage continue to support long-term demand. The current decline therefore appears to be primarily a cyclical pricing issue rather than a structural collapse in demand.

02. Supply Landscape: Who Sits at the Top of the Intermediate Value Chain?

KuanNing Biology's position in the supply chain can be summarized simply: its production volumes of erythromycin thiocyanate, cephalosporin intermediates and penicillin intermediates rank among the world's leading levels.

With total annual capacity of approximately 16,000 tonnes, the company operates one of China's largest and most comprehensive single-site antibiotic intermediate production bases.

Four major advantages support its cost competitiveness:

1. Strategic location in Yili, Xinjiang
2. Self-built thermal power facilities and proximity to coal resources
3. Local corn resources and favorable conditions for fermentation
4. Tax incentives associated with China's western development strategy

Together, these factors create a cost structure that is difficult for competitors to replicate.

At the industry level, the company expects the sector to evolve toward a pattern of “leading players dominating, niche players breaking through, and technological upgrading.” Outdated production capacity is gradually being eliminated, while approvals for new projects are becoming increasingly difficult.

As a result, the current price downturn is likely to place significantly greater pressure on smaller and higher-cost producers than on industry leaders.

03. Value Chain Map: Three Core Intermediates and Their Downstream Markets

The commercial essence of antibiotic intermediates lies in their role as core building blocks. Most penicillin- and cephalosporin-based antibiotics are developed by modifying several major intermediate structures.

KuanNing Biology's three major product platforms include:

Erythromycin Thiocyanate
→ Erythromycin, Roxithromycin, Azithromycin, Clarithromycin
→ 40.01% of revenue

6-APA / Penicillin G Potassium
→ Amoxicillin, Ampicillin, Potassium Clavulanate
→ 30.42% of revenue
→ The main source of current price pressure

7-ACA / D-7ACA / 7-ADCA
→ Ceftriaxone, Ceftazidime, Cephalexin, Cefuroxime
→ 24.06% of revenue

Overseas Expansion

During the reporting period, Penicillin G Potassium primary crystallization product obtained an Indian pharmaceutical registration certificate, valid from April 2026 to April 2029.

This marks formal access to the Indian API market. Combined with existing export revenue of approximately RMB 268 million, or 12.75% of total revenue, the company is continuing to expand its presence across the Asia-Pacific market.

04. Financial Breakdown: How Cash Flow Nearly Doubled

The most noteworthy feature of the latest financial results is the contrast between declining profitability and substantially stronger operating cash flow.

Net profit fell to approximately RMB 274 million, while operating cash flow reached RMB 775 million, equivalent to approximately 2.79 times net profit.

From Net Profit to Cash Flow

Net profit
RMB 274 million

↓

① Add back depreciation and amortization

• RMB 293 million

↓

② Inventory reduction

• RMB 90 million

↓

③ Collection of receivables and related items

• RMB 75 million

↓

Operating cash flow
≈ RMB 775 million

The combination of inventory destocking and bill discounting suggests a typical bottom-of-cycle strategy: actively reducing inventory, converting products into cash, and strengthening liquidity.

Although accounting profits have come under pressure, actual cash generation has improved significantly.

The company had approximately RMB 4.765 billion in fixed assets, representing around 46% of total assets. Depreciation associated with these heavy assets consumes a substantial portion of reported profit while remaining a non-cash expense.

Financial Discipline

The company held only approximately RMB 170 million in bank wealth-management products, with zero overdue amounts.

It also maintained approximately RMB 102 million in forward foreign-exchange contracts to hedge currency exposure. The 60.33% increase in financial expenses was primarily related to foreign-exchange losses.

R&D expenditure declined by 41.97% to RMB 39.83 million, mainly due to lower investment in synthetic-biology product development, indicating a shift from intensive R&D investment toward commercialization and validation.

05. Strategic Direction: Synthetic Biology as the Second Growth Curve

KuanNing Biology is positioning synthetic biology as its next major growth engine, aiming to build an integrated business covering product selection, R&D and large-scale manufacturing.

Products that have already entered commercial-scale production and sales include:

• Bisabolol — soothing cosmetic ingredient
• Ergothioneine — antioxidant ingredient
• Ectoin — moisturizing and skin-repair ingredient
• Squalane — premium skincare base material
• 5-HTP — health-food ingredient
• Phytosphingosine
• Inositol
• PHA — biodegradable materials

The global synthetic biology market was valued at approximately USD 15.1 billion in 2023 and is expected to reach around USD 30.7 billion by 2026, while China's market remains at a relatively early stage, leaving room for further expansion.

Capacity and Pipeline

The company's synthetic-biology strategy is supported by a RMB 1 billion Green Circular Industry Park covering approximately 591 mu.

Phase I has already entered production and been transferred to fixed assets, but is currently in the early stage of capacity ramp-up and remains loss-making due to:

• Process validation
• Capacity ramp-up
• Market development

Phase II has not yet started construction.

The company is also developing three major technology pipelines:

1. C1/C2 resource bioutilization — converting methanol/acetic acid into single-cell protein and small molecules
2. Bulk amino acids and vitamin monomers
3. AI-driven fermentation control

According to the company's disclosed information, its “virtual engineer” technology has increased erythromycin thiocyanate production by approximately 3%–5% compared with control groups, while the company has also completed the overall deployment of its penicillin production lines.

At present, synthetic-biology products are included under “other products” and account for only 5.51% of core revenue, meaning the second growth curve is still in its early commercialization phase.

06. Risk Radar and Key Indicators

High Risk

Further declines in penicillin intermediate prices.
If 6-APA prices continue falling, gross margins could face further pressure. The 6-APA market will remain one of the most important variables for the second half of the year.

Medium Risk

Losses during the synthetic-biology industrial park's ramp-up period.
The pace at which the second growth curve translates into revenue remains uncertain, particularly amid reduced R&D spending.

Low Risk

Raw-material price fluctuations, carbon-emission costs and foreign-exchange volatility.
Corn and other agricultural raw materials remain key cost variables, while carbon-compliance costs and currency exposure require continued monitoring. The company already uses forward contracts to hedge part of its FX exposure.

Four Key Indicators for the Second Half of 2026

① 6-APA and penicillin intermediate prices
Whether prices stabilize will be the most important potential turning-point signal.

② North China order momentum
Whether the 51.67% increase in North China revenue can continue, together with the pace of commercialization following the Indian registration approval.

③ Synthetic-biology industrial park profitability
The pace of loss reduction and the company's decision regarding Phase II construction.

④ Related-party transactions
Monitoring transaction utilization and changes in procurement within the wider Kelun Group ecosystem.

Conclusion

The significance of KuanNing Biology's latest financial performance extends beyond its financial statements to the broader antibiotic intermediate industry.

During the current downward pricing cycle, the industry leader is relying on its Xinjiang-based cost advantages and strong cash generation to absorb short-term pressure, while simultaneously positioning synthetic biology as its next growth engine.

For professionals across the API and pharmaceutical supply chain, KuanNing Biology provides an important reference point for observing the current antibiotic intermediate cycle.

It remains difficult to predict exactly when prices will rebound. What is becoming increasingly clear, however, is that after this round of industry restructuring, production capacity is likely to become smaller, more concentrated and increasingly dominated by cost-efficient leading manufacturers.