20-F: Zhengye Biotechnology Reports Significant Revenue and Profit Decline in 2024 Amidst Strategic Realignment and Persistent China-Related Risks

Zhengye Biotechnology Holding Limited experienced a notable decrease in revenue and net income for the fiscal year ended December 31, 2024, driven by veterinary vaccine market adjustments and a strategic shift to diversify its customer base away from its largest client, while also disclosing material weaknesses in internal financial controls.

Summary

• Total revenue for the fiscal year ended December 31, 2024, decreased by 12.0% to RMB186.4 million (US$25.5 million) from RMB211.7 million in 2023.
• Net income for 2024 significantly declined to RMB13.5 million (US$1.8 million) from RMB37.5 million in 2023, representing a 64.0% decrease.
• Gross profit decreased from RMB117.5 million in 2023 to RMB91.3 million (US$12.5 million) in 2024, with the gross profit margin falling from 55.5% to 49.0%.
• Revenue from swine vaccines, the company's largest segment, dropped from RMB188.9 million in 2023 to RMB157.8 million (US$21.6 million) in 2024, accounting for 84.7% of total revenue.
• The company's largest customer, Muyuan Foods Co., Ltd. (MYF), accounted for 44.6% of total revenue in 2024, down from 52.1% in 2023 and 74.5% in 2022, reflecting a strategic effort to reduce customer concentration.
• Operating expenses increased slightly to RMB74.9 million (US$10.3 million) in 2024 from RMB72.5 million in 2023, primarily due to increased sales and marketing and R&D expenses.
• Research and development expenses increased to RMB12.8 million (US$1.8 million) in 2024 from RMB11.9 million in 2023, with ongoing projects in animal vaccines, including mRNA vaccines for feline and porcine diseases.
• The company completed its Initial Public Offering (IPO) in January 2025, raising approximately US$6.9 million in gross proceeds and US$6.0 million in net proceeds.
• A material weakness in internal control over financial reporting was identified as of December 31, 2024, due to a lack of accounting staff with appropriate U.S. GAAP and SEC reporting knowledge.
• The company continues to operate primarily through its principal subsidiary in China, Jilin Zhengye, and is subject to significant legal and operational risks associated with doing business in China.

Sentiment

Score: 3

Explanation: The company faces significant headwinds with declining revenue and net income, a shrinking gross profit margin, and identified material weaknesses in internal controls. While strategic efforts to diversify and invest in R&D are positive, the immediate financial performance and substantial regulatory risks associated with operating in China present considerable challenges and uncertainty for investors.

Positives

• The company successfully completed its Initial Public Offering (IPO) in January 2025, raising approximately US$6.0 million in net proceeds, which can be used for strategic initiatives.
• Strategic realignment of sales practices is underway to diversify the customer base and reduce dependency on a single major customer, with the largest customer's revenue contribution decreasing from 74.5% in 2022 to 44.6% in 2024.
• Strong research and development capabilities are highlighted, with 52 R&D employees, 45 registered patents, and 16 Registration Certificates of New Veterinary Drugs, including recent approvals for Category I New Veterinary Drugs in February and March 2025.
• Expansion into household animal vaccines is a key growth strategy, with clinical trials completed for Feline Panleukopenia, FCV, Feline Viral Rhinotracheitis Triple Inactivated Vaccine, and ongoing research into mRNA vaccines for feline and porcine diseases.
• The company maintains an extensive distribution network, selling products in 28 provincial regions across China and exporting to Vietnam, Pakistan, and Egypt.
• Management team and employees are experienced, with multiple officers holding advanced degrees and extensive industry tenure, contributing to competitive advantage.

Negatives

• Total revenue decreased by 12.0% from RMB211.7 million in 2023 to RMB186.4 million (US$25.5 million) in 2024, indicating a declining sales trend.
• Net income significantly decreased by 64.0% from RMB37.5 million in 2023 to RMB13.5 million (US$1.8 million) in 2024.
• Gross profit margin declined from 55.5% in 2023 to 49.0% in 2024, primarily due to lower sales prices and unchanged fixed costs.
• The company identified a material weakness in its internal control over financial reporting as of December 31, 2024, due to a lack of accounting staff with appropriate U.S. GAAP and SEC reporting knowledge.
• Despite efforts to diversify, the company still has high customer concentration, with Muyuan Foods Co., Ltd. (MYF) accounting for 44.6% of total revenue in 2024 and 49.0% of total accounts receivable as of December 31, 2024.
• The company's historical growth rates and performance may not be sustainable or indicative of future results, as evidenced by the revenue decline in 2023 and 2024.

Risks

• Changes in China's economic, political, or social conditions or government policies could materially adversely affect business and operations.
• Uncertainties in the interpretation and enforcement of PRC laws and regulations, which may change quickly with little advance notice, could limit legal protection.
• Difficulties may arise in effecting service of legal process, enforcing foreign judgments, or conducting investigations within China for U.S. or overseas regulators.
• The Chinese government's significant oversight and discretion over business conduct could lead to intervention or influence operations at any time, potentially causing material changes or hindering ability to offer securities.
• Recent greater oversight by the Cyberspace Administration of China (CAC) over data security, particularly for companies seeking foreign listings, could adversely impact business and offerings.
• The Holding Foreign Companies Accountable Act (HFCA Act) and related rule changes could prohibit trading of ordinary shares on a national exchange if the PCAOB is unable to inspect the company's auditors for two consecutive years.
• Cash or assets in PRC/Hong Kong entities may not be available for use outside of PRC/Hong Kong due to government restrictions on capital transfer.
• Increases in labor costs in the PRC may adversely affect business and profitability.
• PRC regulations relating to offshore investment activities by PRC residents may subject beneficial owners or subsidiaries to penalties, limit capital injection, or restrict profit distribution.
• PRC regulation of parent/subsidiary loans and direct investment by offshore holding companies may delay or prevent the use of offshore offering proceeds for PRC subsidiaries.
• Fluctuations in exchange rates (RMB against USD) could materially and adversely affect results of operations and investment value.
• Classification as a PRC resident enterprise for tax purposes could result in unfavorable tax consequences for the company and non-PRC shareholders.
• Uncertainty exists regarding indirect transfers of equity interests in PRC resident enterprises by non-PRC holding companies, potentially leading to PRC enterprise income tax liabilities.
• PRC subsidiaries are subject to restrictions on paying dividends or making other payments to the holding company.
• Governmental control of currency conversion may affect investment value and dividend payments.
• Uncertainties under the EIT Law regarding withholding tax liabilities and eligibility for treaty benefits on dividends from PRC subsidiaries.
• Direct scrutiny, criticism, and negative publicity involving U.S.-listed Chinese companies could harm business operations, stock price, and reputation.
• Complex procedures under M&A Rules and other PRC regulations for foreign acquisitions of Chinese companies could hinder growth through acquisitions.
• Chinese regulatory authorities could disallow the holding company structure, leading to material changes in operations or a decline in securities value.
• Current tension in international trade, particularly between the United States and China, may adversely impact business, financial condition, and results of operations.
• The veterinary vaccine industry is highly competitive, and failure to compete effectively could adversely affect results of operations.
• Perceived adverse effects on human health linked to consumption of food derived from animals utilizing the company's products could cause sales decline.
• Increased regulation relating to raising, processing, or consumption of food-producing animals could reduce demand for livestock products.
• Business is subject to risk based on customer exposure to rising costs and reduced customer income.
• Failure to successfully acquire and integrate other businesses, license rights, form alliances, or divest businesses could adversely affect operations.
• Research and development, acquisition, and licensing efforts may fail to generate new products or brand life-cycle developments.
• Advances in veterinary medical practices and animal health technologies could negatively affect the market for products.
• Research and development relies on evaluations in animals, which could be negatively impacted by controversies or regulations regarding animal testing.
• Manufacturing problems may cause product launch delays, inventory shortages, recalls, or unanticipated costs.
• Failure to detect or cure defects in products could harm reputation, expose to liability, and adversely affect revenue and profitability.
• Misuse or off-label use of products may harm reputation or result in financial or other damages.
• Significant reliance on swine vaccines for revenue means any reduction in demand could have an adverse effect on business.
• Animal health products are subject to unanticipated safety or efficacy concerns, which may harm reputation.
• Inability to retain, attract, and motivate key personnel could hinder business plan implementation.
• Failure to obtain necessary regulatory approvals or clearances for commercialization of products would result in less revenue.
• Reliance on a limited number of raw material suppliers poses a risk of disruption if a supplier is lost.
• Damage to brand image could have a material adverse effect on growth strategy and financial condition.
• Inability to successfully protect intellectual property and exclusive rights could lead to suffering for the brand and business.
• Accusations of infringing, misappropriating, or violating third-party intellectual property rights could divert resources and harm reputation.
• Legal and regulatory proceedings in the ordinary course of business could result in substantial costs and diversion of management attention.
• Violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws could adversely affect the company.
• An active trading market for ordinary shares may not develop or sustain, and the trading price may fluctuate significantly.
• Failure to implement and maintain effective internal controls or remediate identified material weaknesses could lead to reporting failures or fraud.
• Substantial increased costs are incurred as a public company.
• Substantial future sales of ordinary shares or anticipation of sales could cause price decline.
• The company does not intend to pay dividends in the foreseeable future.
• Lack of research or negative reports from securities or industry analysts could cause stock price and trading volume to decline.
• Market price volatility or decline regardless of operating performance means investors may not resell shares at or above IPO price.
• Management has broad discretion over IPO proceeds, which may not enhance results or share price.
• Ceasing to qualify as a foreign private issuer would incur significant additional expenses.
• As a foreign private issuer exempt from certain Nasdaq corporate governance standards, shareholders may have less protection.
• Inability to continue satisfying Nasdaq listing requirements could lead to delisting.
• Anti-takeover provisions in articles of association may discourage, delay, or prevent a change in control.
• As an emerging growth company, the company may not be subject to requirements applicable to other public companies, affecting investor confidence.
• Laws of the Cayman Islands may not provide shareholders with benefits comparable to those in the United States.
• Shareholders may be unable to present proposals before annual or extraordinary general meetings not called by shareholders.
• Classification as a PFIC (Passive Foreign Investment Company) could result in adverse U.S. federal income tax consequences for U.S. taxpayers.

Future Outlook

The company intends to develop high-demand products, including subunit vaccines for Porcine Circovirus Type 2 and Swine Pseudorabies, and expand into household animal vaccines with products like Feline Panleukopenia, FCV, Feline Viral Rhinotracheitis Triple Inactivated Vaccine, and Canine Distemper-Parvovirus Vaccine. It also plans to explore mRNA vaccines for Feline Infectious Peritonitis, Feline Immunodeficiency Disease, Porcine Epidemic Diarrhea, and Porcine Reproductive and Respiratory Syndrome. The company aims to expand its sales and distribution network into new geographic markets in Southeast Asia (Thailand, Philippines) and developed animal husbandry cities in China, while also increasing R&D investment and enhancing its ability to attract and retain talented professionals.

Management Comments

• Songlin Song, Chief Executive Officer, stated that the company's mission is to become a world-leading manufacturer of veterinary vaccines and to provide reliable veterinary vaccines to the world.
• Management believes that their sophisticated quality control management system is in line with international standards.
• Management believes that the operating entity can compete successfully with major competitors by offering products of better quality at comparable prices.
• Management believes the operating entity offers its employees competitive compensation packages and an environment that encourages self-development, enabling it to attract and retain qualified personnel and maintain a stable core management team.
• Management believes that their current cash and expected cash provided by operating and financing activities will be sufficient to meet current and anticipated working capital requirements and capital expenditures for the next twelve months.
• Management acknowledges that they may need additional cash resources in the future if business conditions change or if opportunities for investment, acquisition, or capital expenditure arise.

Industry Context

The company operates in the highly competitive and rapidly evolving veterinary vaccine industry in China, characterized by many new entrants and a few leading companies. The industry is subject to increasing and stringent regulations, particularly concerning animal health products and data security in China. The market is influenced by factors such as animal disease prevalence, temperature changes affecting animal immunity, and evolving consumer views on animal rights and health. The industry is also seeing a trend towards mass production and conglomeration of downstream companies, leading to enhanced planning and routinization of epidemic prevention, which is gradually attenuating seasonality. The company's focus on R&D, including advanced mRNA vaccine technology, aligns with the industry's need for innovative and effective solutions to animal diseases.

Comparison to Industry Standards

• The company competes with major players like Jinyu Bio-Technology Co., Ltd., Wuhan Keqian Biology Co., Ltd., Shanghai Shenlian Biomedical Co., Ltd., Guangdong Yongshun Biopharmaceutical Co., Ltd., and Shanghai Haili Biotechnology Co., Ltd., some of whom have greater market share, resources, and experience.
• While the document states the company believes it can compete successfully by offering better quality products at comparable prices, specific comparative product efficacy or pricing data against these competitors is not provided.
• The company's R&D collaborations with prominent universities and institutes (e.g., China Agricultural University, Harbin Veterinary Research Institute) are a common industry practice for leveraging fundamental research and accelerating product development, similar to how leading biopharmaceutical companies operate.
• The company's adherence to Good Manufacturing Practices (GMP) for Veterinary Drugs and ISO standards (9001:2015, 14001:2015, and 45001:2018) indicates a commitment to quality management systems that are standard for reputable manufacturers in the global pharmaceutical and biological products industry.
• The high customer concentration with Muyuan Foods Co., Ltd. (MYF) (44.6% of revenue in 2024) is a significant risk factor that is generally higher than ideal industry diversification standards, where reliance on a single customer is typically minimized to mitigate revenue volatility and bargaining power imbalances.

Management Changes

Corporate Governance

Legal Proceedings

• Neither the company nor its operating entity is a party to any material legal or administrative proceedings as of the date of this annual report.
• The operating entity may be subject to various claims and legal actions arising in the ordinary course of business, which could result in substantial cost and diversion of resources.
• The operating entity is not aware of any warnings, investigations, prosecutions, disputes, claims, or other proceedings regarding environmental protection or product quality issues, nor has it been penalized or foresees any penalties from PRC government authorities.
• The operating entity is not a party to any international claims or litigation with respect to defective products or other matters.

Related Party Transactions

• For the year ended December 31, 2024, the company obtained a working capital loan of RMB145,986 (US$20,000) from Jiahe Developments Limited, which is controlled by Mr. Zhenfa Han, the principal shareholder, director, and chairman of the board. This loan was fully repaid on January 27, 2025.
• The operating entity purchased goods from Jilin Huazheng Agriculture and Animal Husbandry Development Co., Ltd., also controlled by Mr. Zhenfa Han, in the amounts of RMB90,556 in 2022, RMB126,573 in 2023, and RMB118,883 (US$16,287) in 2024.
• For the year ended December 31, 2023, the operating entity sold a motor vehicle to Beijing Hanzhenyuan International Hotel Co., Ltd., a company controlled by a shareholder of the company, with a net carrying value of RMB737,713. The amount due from Beijing Hanzhenyuan was RMB737,713 (US$101,066) as of December 31, 2024, and was fully collected on March 17, 2025.

Stakeholder Impact

• **Shareholders**: Face risks of declining share value due to decreased revenue and net income, high customer concentration, and uncertainties related to PRC regulatory environment and PCAOB inspections. The material weakness in internal controls could also erode investor confidence. Dividends are not expected in the foreseeable future.
• **Employees**: The company aims to attract, incentivize, and retain talented professionals through competitive compensation and performance review mechanisms. However, the identified material weakness in internal controls highlights a need for strengthening accounting staff and resources.
• **Customers**: The company's strategic realignment to diversify its customer base aims to reduce dependency on major clients, potentially benefiting a broader range of customers. Product quality and safety are prioritized, which is positive for customer satisfaction.
• **Suppliers**: The company relies on a limited number of suppliers for raw materials, posing a risk of disruption if a supplier is lost. However, stable relationships with significant suppliers are reported.
• **Creditors**: The company has outstanding bank loans and is subject to interest rate risks. Its ability to meet obligations depends on cash generated from operations and financing activities, which have seen a decrease in net cash provided by operating activities and an increase in net cash used in financing activities in 2024.

Next Steps

• Continue to develop high-demand products, including Subunit Vaccine of Porcine Circovirus Type 2 and Swine Pseudorabies Vaccine, Inactivated.
• Expand business by entering the household animal vaccines industry, including Feline Panleukopenia, FCV, Feline Viral Rhinotracheitis Triple Inactivated Vaccine, and Canine Distemper-Parvovirus Vaccine.
• Continue researching Feline Infectious Peritonitis Subunit Vaccine and Feline Leukemia and Feline Immunodeficiency Disease Duplex mRNA Vaccine.
• Expand sales and distribution network to new geographic markets in Southeast Asia (Thailand, Philippines) and developed animal husbandry cities in China.
• Implement initiatives to attract, incentivize, and retain talented professionals, including formulating a market-oriented employee compensation structure and a standardized multilevel performance review mechanism.
• Increase R&D investment, specifically allocating approximately RMB13.1 million from IPO proceeds for Feline Rhinotracheitis, Feline Rhinoconjunctivitis and Feline Panleukopenia Triple Inactivated vaccine and Replicate-defective Human Adenovirus Type-5 Recombinant Rabies Glycoprotein Vaccine.
• Address the identified material weakness in internal control over financial reporting by recruiting qualified accounting personnel with U.S. GAAP and SEC reporting experience and implementing regular training programs.

Key Dates

Recommendation

Keywords

Veterinary Vaccines, Animal Health, Biotechnology, China, Swine Vaccines, Poultry Vaccines, R&D, SEC Filing, Form 20-F, Nasdaq, Emerging Growth Company, Internal Controls, Corporate Governance, Risk Management, International Trade, Intellectual Property, Supply Chain, Customer Concentration