There are flaws behind the pursuit of Huaheng Bio, a synthetic organism to be overweight in ＂related party transactions＂

Science and technology innovation board Journal, September 15th (Reporter Jin Xiao Mo) While synthetic biology is heating up the secondary market, the concept stock Huaheng Bio (688639.SH) has done something "private".

A few days ago, Huaheng Bio announced that it plans to increase its capital to Tianjin Zhihe Bio-technology Co., Ltd. (hereinafter referred to as Zhihe Bio-technology) with its own funds of 10 million yuan, and obtain an exclusive technology license (with a term of 20 years) from Hangzhou Ouhe Bio-technology Co., Ltd. (hereinafter referred to as Ouhe Bio-technology) at an annual commission fee of 0.5% (for a total of 10 years).

From a business perspective,Through these two transactions, Huaheng Bio will acquire technologies such as 1,3-propanediol fermentation by Zhihe Bio and succinic acid production by fermentation by Ouhe Bio respectively.Because these two technologies are considered to inject "new kinetic energy" into the development of enterprises, coupled with the current "high enthusiasm" of the market for synthetic biology, Huaheng Bio’s share price rose against the trend in the two trading days after the announcement.

However, because they are all "connected transactions", the above two transactions have certain defects. According to Tianyancha, Zhihe Biology and Ouhe Biology were established at similar times, among which Zhihe Biology Department was established on January 17, 2022, and Ouhe Biology was established on December 6, 2021; Besides,Many senior executives of Huaheng Bio hold shares in these two companies.Is there any interest transfer when Huaheng Bio conducts "related transactions" with it?

In addition,The projects involved in the above two related party transactions have not yet been industrialized, so their future prospects are still uncertain.

In this regard, according to Huaheng Bio, the company will hold the first extraordinary shareholders’ meeting in 2022 on September 28th, when the "Proposal on Signing Technology License Contract and Related Transactions" will be submitted to the shareholders’ meeting for deliberation.

Both related party transactions are at an early stage.

The two "related transactions" of Huaheng Bio did not cause "protests" among investors. First, they were influenced by the US biotechnology investment plan, and investors generally began to pay attention to the "synthetic biology" named by the US government. Second, because they can really enrich Huaheng Bio’s own product line.

Among them, the 1,3-propanediol technology of Zhihe Bio is still in its early stage and "has not been industrialized"; However, the succinic acid technology of Ouhe Bio has been in the pilot stage, so it is more imaginative. However, the reporter learned from the industry that,There are still many uncertainties from small-scale test to pilot test to mass production.

In the relevant announcement, Huaheng Bio said that succinic acid is mainly used in degradable plastic PBS. With the tightening of national environmental protection policy and the strengthening of restrictions on the use of non-degradable plastics, domestic degradable plastics are experiencing explosive growth. It is estimated that the domestic demand for succinic acid will exceed 200,000 tons in 2025, which "has a good market prospect".

On the other hand, up to now, Huaheng Bio has achieved mass production of many products, including alanine (which can be subdivided into L- alanine, DL- alanine and β-alanine), L- valine, D- calcium pantothenate and α-arbutin. But in fact,Huaheng biology may be overly dependent on alanine.

In terms of data, from 2018 to 2019, alanine series products accounted for 98.57% and 86.79% of Huaheng Bio’s total revenue respectively. Since then, Huaheng Bio has not disclosed the specific product revenue share. In the semi-annual report of 2022, Huaheng Bio said that the market share of L- alanine in its alanine series products ranked first in the world.

At the same time, L- valine, the product originally raised by Huaheng Bio, also began to contribute revenue. In the semi-annual report, Huaheng Bio said that the downstream products of L- valine are mainly used in feed, medicine and food industries, with advanced related technologies and obvious competitive advantages, which are widely recognized by the market and customers. However, Huaheng Bio did not disclose the specific sales of L- valine.

What about related party transactions?

On the other hand, it is hard not to be suspicious of Huaheng Bio’s related transactions.

Among them,Zhihe Bio, which Huaheng Bio plans to increase its capital by 10 million yuan, was established in early 2022, and its shareholders are all senior executives of Huaheng Bio.Guo Henghua, the actual controller of Huaheng Bio, holds 1%, Zhang Xueli, the chief scientist, 87%, Zhang Dongzhu, the deputy general manager, 1%, and Fan Yi, the secretary-general and chief financial officer, 1%. In addition, Huaheng Bio also holds 10%.

Huaheng Bio said that it set up Zhihe Bio to "carry out research and development of bio-based products (such as 1,3- propanediol products, etc.)" and increased its capital to "rapidly promote the industrialization of technologies such as fermented 1,3- propanediol and fermented rose essential oil".

For a company established only in 2022, where did its technologies such as 1,3- propanediol products come from? What about technology maturity? Why is this technology not established and developed within Huaheng Bio, but "circuitous" in this way?

Huaheng Bio did not give an answer to these questions.

There is a similar situation in the cooperation between Huaheng Bio and another company, Ouhe Bio.

According to Sky Eye,There are four shareholders in Ouhe Bio, three of whom are the management of Huaheng Bio.: Huaheng Bio-controller Guo Henghua holds 40% of the shares; Deputy General Manager Zhang Dongzhu holds 25% of the shares; Fan Yi, director of the Board of Directors and chief financial officer, holds 25% of the shares; Another shareholder holding 10% of the shares is Zheng Huabao, who is not only the legal person of Ouhe Bio, but also an ad hoc professor of Zhejiang A&F University and the head of the resource and high-value utilization team of organic wastes. In Ouhe Bio, Zheng Huabao is responsible for research and development, management and other work.

According to the announcement, after reaching the "Technology License Contract", Ouhe Bio exclusively authorized Huaheng Bio to use its technology of "producing succinic acid by fermentation" for a license period of 20 years; Huaheng Bio is responsible for the achievement realization and industrial production of this technology, and from the year of mass production, it pays 0.5% of the sales of this product to Ouhe Bio in each natural year. The exclusive license period for which the license fee is required is 10 years, and the industrial commission will not be paid for the remaining period of the exclusive license period.

It is worth mentioning that the reporter of science and technology innovation board Daily noticed that succinic acid of Shandong Landian Biotechnology Co., Ltd. (hereinafter referred to as Landian Technology) (reporter’s note: Landian Technology is also the only enterprise in China that can mass-produce succinic acid by biological method) was put into production at the end of 2019, with a production capacity of 20,000 tons/year at that time, with obvious advantages.

According to the report of China Chemical Industry News in June, 2021, Landian Technology bought out the exclusive right to use the patented strain technology of Tianjin Institute of Technology of Chinese Academy of Sciences for 20 years. This technology uses genetically engineered bacteria (Escherichia coli), with an acid production rate of 8 g/L h and a sugar-acid conversion rate of 102%, which is the highest known strain in the world.

According to the aforementioned report, Landian Technology is building production capacity, which is expected to be completed in 2024, when it reaches full capacity, it will reach 300,000 tons/year.

According to "Huaheng Bio: Assets Appraisal Report of Hangzhou Ouhe Biotechnology Co., Ltd. Intangible Assets Licensing Rate Appraisal Project", Ouhe Bio’s small-scale test results are as follows: repeated fermentation for three times in a 5L fermentor, the succinic acid fermentation yield is not less than 80g/L, the sugar-acid conversion rate is not less than 95%, and the fermentation time is not more than 70 hours.

Huaheng Bio said that the company has established a technology research and development chain of "industrial strain-fermentation and extraction-product application", which has formed a complete technological leading edge in the links of industrial strain creation, intelligent control of fermentation process, efficient post-extraction and product application development, and has good basic conditions for the industrialization of succinic acid production by fermentation.

The reporter of science and technology innovation board Daily wrote to Huaheng Bio about the industrialization of succinic acid project, the cultivation of strains and the development of downstream customers. As of press time, there was no reply.

The science and technology innovation board Journal reporter also inquired about other synthetic biology enterprises, who said that they had also studied propylene glycol and succinic acid projects, but there was no investment plan at present. As for the specific reasons, the company did not disclose more.

The science and technology innovation board Journal reporter will continue to pay attention to the follow-up progress.