1H22 attributable net profit down 50.9% YoY, in line with the preannouncement Pulike Biological Engineering announced its 1H22 results: Revenue dropped 11.5% YoY to Rmb513mn, and attributable net profit dropped 50.9% YoY to Rmb80mn. In 2Q22, revenue dropped 1.2% YoY to Rmb267mn, and attributable net profit dropped 44.3% YoY (+13.9% QoQ) to Rmb43mn, in line with our and market expectations. In 1H22, the weak profitability in the breeding industry dragged demand for vaccination products, resulting in falling revenue and profit in 1H22. Also, the company is acquiring customers, resulting in a 4.7ppt YoY growth in its selling expense ratio. At the same time, the firm’s good manufacturing practices (GMP) has optimized production lines and resulted in a 1.1ppt YoY growth in the G&A expense ratio. In 1H22, the company’s overall gross margin and net margin decreased 5.5ppt and 12.6ppt YoY. In 2Q22, its overall gross and net margin rose 0.8ppt and 0.7ppt QoQ. Swine vaccine business: In 1H22, revenue from swine vaccine business dropped 9.83% YoY to Rmb179mn mainly due to weak industry demand and the impact of COVID-19 on delivery and logistics. In 2Q22, as hog prices rebounded and profit from the breeding industry turned positive, revenue from the segment rose 8.15% YoY to Rmb96mn. Poultry vaccine and chemical drug businesses: Due to the low profit of poultry production, revenue of the poultry vaccine business dropped 8.69% and 6.74% YoY to Rmb176mn and Rmb94mn in 1H22 and 2Q22. Meanwhile, the company's revenue from chemical drug business (with poultry chemical drugs at the core) dropped 20.39% and 8.77% YoY in 1H22 and 2Q22. Trends to watch Animal healthcare industry recovering; watch for earnings turnaround. Hog prices remained high in 3Q22. According to Wind, the average profit of the hog industry reached Rmb497 per head. We think this led to a marginal increase in vaccination willingness. Data from the National Veterinary Drug Basic Information Database shows that the volume of swine vaccines that gained regulatory approval for marketing grew 40.9% and 13.1% MoM in June and July. The number of market approvals for poultry vaccines received by the firm rose MoM. Supported by its capacity to efficiently iterate new vaccines, the company expects its porcine circovirus (PCV)-mycoplasma vaccine, pseudorabies virus (PRV) vaccine, and poultry genetic engineering quintuple vaccine to enter the market in 2023. In terms of marketing, the company set up a new department to manage customers. The company announced that in 1H22 it penetrated the supply chains of more than ten large farms thanks to its integrated chemical drug-vaccine solutions and customized services. Overall, we believe that the uptrend of the animal healthcare industry will continue in 2H22. Given strengthened marketing and new product iterations, we expect the company's performance to improve quarter by quarter. Watch ASF vaccine commercialization. The company cooperated with the Lanzhou Veterinary Research Institute of the Chinese Academy of Agriculture Sciences in developing a sub-unit vaccine against African swine fever (ASF). The company announced that it is conducting experimental research in accordance with the Ministry of Agriculture's emergency evaluation requirements and vaccine immunity effectiveness guidelines. We believe that the vaccine will enjoy a sizeable market if the company submits an application for emergency evaluation and wins approval from the Ministry of Agriculture. If the commercialization progresses smoothly, the company should be well positioned to consolidate its market position. Financials and valuation The stock is trading at 41x 2021e and 28x 2022e P/E. We maintain our 2022 earnings forecast unchanged. Given the rising demand for vaccines and expectations for the company's new products, we raise our 2023 earnings forecast 8.4% to Rmb401mn. Considering the higher earnings forecasts and the commercialization opportunities for the firm’s ASF vaccine, we raise our target price 61.7% to Rmb38, implying 45x 2022e and 30x 2023e P/E, offering 10% upside. We maintain an OUTPERFORM rating. Risks Fluctuating animal husbandry profits; disappointing marketing for new products; increasing market competition; COVID-19 resurgence.