Events:

According to the company's semi-annual report for 2022, the total operating income in the first half of 2022 was 897 million yuan, an increase of 29.74% over the same period last year; the net profit belonging to shareholders of listed companies was 185 million yuan, an increase of 58.71% over the same period last year; the net profit belonging to shareholders of listed companies after deducting non-operating profits and losses was 171 million yuan, up 74.58% over the same period last year. The net cash flow generated by the company's operating activities was 151 million yuan, an increase of 35.29% over the same period last year.

Event comments:

Strategic layout of new business, CDMO as the core growth driver. 1) small molecular intermediates, API CDMO business to establish a solid customer base. In the first half of 2022, the company persisted in implementing the established strategic transformation policy and vigorously promoted the CDMO plate business. at present, the company's CDMO business has established business cooperation with more than 100 excellent pharmaceutical enterprises at home and abroad, with a number of key intermediates of COVID-19 specific drugs, API production processes, and some commercial supply. 2) the small nucleic acid platform is ready to go. In 2021, the company took the lead in the field of nucleic acid drugs and gene sequencing. After R & D and development, the company has undertaken nucleoside intermediate CDMO business for small nucleic acid drugs, nucleic acid detection, gene sequencing and other fields, providing raw materials for mainstream nucleic acid testing and gene sequencing products at home and abroad. Although the small nucleic acid raw material business is still in its infancy, it is one of the main targets of the company's CDMO business in the future. 3) the cooperation project with Merck & Co Inc, a large multinational pharmaceutical company, will be promoted as planned to accelerate the building of CDMO hard core strength in an all-round way. In 2021, the company signed a 10-year CDMO strategic cooperation agreement with Merck & Co Inc, a large multinational pharmaceutical company, in the fields of pet medicine, veterinary medicine and animal health. By the end of the first half of the year, the first phase of nine projects have carried out different stages of work in accordance with the schedule and are about to be commercialized; in the later stage, a number of projects are being evaluated, and the two sides are committed to continuing to explore more projects and explore more diversified possibilities for cooperation. After the cooperation project between the company and Merck & Co Inc is transferred to the commercial production stage, it will contribute a new growth point to the company's performance. At the same time, with the signing of the strategic agreement of the international pharmaceutical giant Merck & Co Inc, the influence of the company's CDMO international brand has been enhanced by leaps and bounds, accelerating the development progress of the company's key customers, and undertaking increasingly rich customer project pipelines. 4) acquire 49% stake in Xuancheng Minohua to further improve the hardware and software strength of CDMO. During the reporting period, in order to accelerate the layout and improve the hardware and software strength of CDMO, the company completed the acquisition of 49% stake in Xuancheng Minohua held by the Minohua Fund. The company issued the "2022 non-public offering preliminary Plan", the total amount of funds to be raised by the non-public offering does not exceed 892 million yuan, of which 696 million yuan is used for the annual production of Xuancheng Minohua., The project of 760 tons of APIs and intermediates provides capacity support to meet the growing market demand at home and abroad.

We will promote the development strategy of "integration of intermediates, APIs and preparations" and accelerate the pace of strategic transformation.

In the first half of 2022, under the background of generic drug collection policy, the company's preparation sector had a strong momentum of development, actively implemented the preparation management and development strategy of "technology transfer + independent declaration + domestic MAH cooperation", seized the rapid commercial opportunities brought about by the national collection and acquisition policy, and achieved phased results.

The main results are as follows: 1) the collection and renewal of the standard was successful, and the volume of the preparation business continued. In the first half of 2022, the company's perindopril tert-butylamine tablets were renewed by "Henan, Shanxi, Inner Mongolia, Hubei, Hunan, Guangxi, Qiongyu, Guizhou, Qingning New Corps 13 provinces (autonomous regions, municipalities, bingtuan) Pharmaceutical Alliance Purchasing" and Hebei Province Drug centralized Purchasing. In 2021, the mid-target Preba capsules, losartan potassium tablets, Atto vastatin calcium tablets and lisinopril tablets are in normal delivery.

2) to speed up the pace of registration and registration of self-research and cooperative preparation varieties, and a number of varieties are expected to be approved and listed one after another. During the reporting period, the company approved the listing of Apexaban tablets and valsartan tablets, and the consistency of isoniazid tablets was evaluated. 2-3 varieties are expected to be approved in the second half of the year. As of August 16, the company has a total of 10 preparation products have been approved for listing in China. During the reporting period, the company established 11 new varieties, and 3-5 projects are about to enter the BE phase. Five projects, such as propofol fumarate tablets, Englerjing tablets and Daglejing tablets, have passed the formal BE test, and 10 varieties are under CDE approval. It is expected that 8-10 varieties will be submitted for CDE review in the second half of the year. At present, the company has more than 20 projects under research. 3) layout in advance of patent expiration of "blockbuster drugs". At present, the company distributes products such as sioglitine metformin tablets, azoletine benzoate tablets, daglitine benzoate tablets, fumarate vonolasone tablets, Shakubaqu valsartan sodium tablets, ibuteni capsules and so on. Among them, the company cooperates with its strategic customer KRKA in APIs and preparations, and rivasaban and dabigarn esters have been listed for the first time in Europe and have been supplied commercially.

Continuous cultivation of characteristic raw materials and optimize the structure of customers. 1) continuously optimize the customer structure, be deep old customers, and expand new customers. During the reporting period, the company continued to strengthen its ties with international head original research companies and added supplier certification to 2 original research companies. The cooperation with Servier extends from single product and upstream intermediates to advanced intermediates and API, and two new projects are progressing in stages. The company further strengthens its strategic cooperation and deep binding with KRKA, adding 7 new project cooperation on the basis of the original cooperation varieties. In addition, many of the company's core varieties and a number of global multinational pharmaceutical giants have entered the project phase, and have carried out different levels of substantive cooperation and communication with many of the top 100 domestic pharmaceutical companies, especially Qilu Pharmaceutical, Zhengda Tianqing, Yangzijiang and Hisco. to lay a solid foundation for business growth in the next 2-3 years. During the reporting period, the company's overseas market exports made breakthroughs by giving full play to their comprehensive competitive advantages, actively opening up channels and cultivating new customers, especially in South America, Japan and South Korea. 2) implement the route of multi-category and multi-market of APIs and speed up the R & D and registration of new products. During the reporting period, the company accelerated the development and registration of new products to expand the access of existing API products in the Chinese market and the standardized market in Europe and the United States. At present, a total of 54 API varieties are being studied, of which 20 have been converted, 6 varieties have been submitted to overseas market registration and certification, 1 variety has been submitted to domestic CDE registration, and 1 variety has submitted the application for domestic veterinary drug product approval number. During the reporting period, one variety of losartan potassium obtained EU CEP certificate, and four APIs of valsartan, clopidogrel hydrosulfate crystal II, mirtazapine and rivasaban passed domestic review and approval. As of August 16, another API of esomeprazole magnesium has been approved by domestic review. 3) strictly abide by the quality lifeline and continue to maintain an excellent compliance record. During the reporting period, the company successfully passed 9 domestic official inspections and 21 customer audits, including Novartis AG, Merck & Co Inc, Boehringer Ingelheim and other well-known enterprises at home and abroad. All previous audits have been successfully passed, and the company's quality system has been highly recognized by officials and customers.

The company's business structure has been optimized and its profitability has been improved. During the reporting period, the company's comprehensive gross profit margin was 42.26%, an increase of 4.97 percentage points over 2021, mainly due to the sustained growth of high gross margin CDMO business and preparation business.

Investment advice:

Due to the uncertain delivery time of Liaoyuan Pharmaceutical Company's equity transfer, we have not considered the investment income generated by Liaoyuan Pharmaceutical Company's transfer. It is estimated that the company's net return from 2022 to 2024 will be 3.10max 3.77 / 463 million yuan, EPS 1.46max 1.77max 2.17 yuan respectively, and the current share price corresponding to PE is 19-16-13 times. Considering the company's strategic upgrading transformation of "taking characteristic API as the cornerstone, CDMO business and preparation business flying together", CDMO business has established a solid customer base and sufficient potential for development, and the preparation business has fully grasped the rapid commercial opportunities brought about by the national collection policy, and we maintain its "buy" rating.

Risk Tips:

Key CDMO orders fall short of expectations; risk of price fluctuation of APIs and intermediates; risk of environmental protection policy; risk of production safety.