Main points of investment

Performance: under the disturbance of the epidemic, Q2 income is high.

On August 22, Medici released a semi-annual performance report. 2022H1 realized 743 million of revenue, 163 million of YOY53.16%, net profit, 43.77% of YOY, and 154 million of non-home net profit, YOY40.39%. Among them, single Q2 realized income of 387 million, YOY 43.12%, return net profit 85.41 million, YOY25.63%, deducted non-return net profit 79.27 million, YOY 19.74%.

Growth analysis: the mid-2022 report of the high-cash company with accelerated investment in personnel and production capacity to support high orders showed that Q2 still ensured 70-80% of R & D personnel on duty under the influence of capacity constraints and delivery delays caused by the epidemic, cashing in on higher income growth, reflecting the company's strong management ability to deal with emergencies. At the same time, we found that the company's drug discovery and pharmaceutical research sector has 1627 research and development staff, YOY 50.37%. Pre-clinical research plate newly signed orders 988 million, YOY 79.62%, not significantly affected by the epidemic, showing the scarcity of the company's integrated high-quality production capacity.

In addition, the project under construction by 2022H1 has reached an all-time high, in which the laboratory under construction covers an area of 14700 square meters, which will effectively increase the production capacity by 20% after completion, including the production capacity of Shanghai Nanhui and Chuansha laboratories. The additional funds will also be used for follow-up production capacity construction to support the rapid growth of drug discovery business. We are optimistic that the company will continue to realize its performance in 22-24 years under the resonance of orders and production capacity.

Profitability: excluding the increase in net profit rate affected by the epidemic, it is optimistic that the company's 22H2 will increase 2022Q2 gross profit margin by 46.81% compared with the same period last year, which is basically the same as the same period last year. The net interest rate is 22.08%, which is mainly affected by the insufficient production capacity caused by the closure and control, and the one-time cost of maintaining the operation of the company during the closure period (about 15.6 million). After deducting the one-time fee, the adjusted profit Q2 single-quarter YOY is 48.6%, and the net interest rate is 26.1%. The net interest rate is 0.91 pct, which is mainly driven by financial expenses. We believe that 2022H2 profitability is expected to recover under economies of scale and capacity overtime after the epidemic, and is optimistic about the profitability driven by the opening of strong and high value-added sectors such as company internationalization.

High inventory locks upstream resources to ensure effective delivery of orders

The cash flow of 2022H1's operating activities (YOY-150.97%) was mainly affected by the significant increase in accounts receivable (+ 138 million) and inventory (+ 101 million) during the reporting period. Among them, the inventory of raw materials increased by 98 million, mainly used to lock in upstream animal resources, to provide a better guarantee for future orders. We believe that due to the continuing shortage of upstream animal resources, the pressure on cash flow from inventory may continue with the high demand for preclinical orders. Accounts receivable is expected to be driven by the lifting of the epidemic and the acceleration of repayment, and the 2022H2 may be alleviated.

Profit forecast and valuation

Based on the support of the company's on-hand orders and the rapid recovery of production capacity, we will not adjust the company's annual revenue forecast for the time being, and the net profit of 2022 will be reduced by about 15 million due to short-term one-time closure fees. Taking into account the increase in 2022H1's equity, we estimate that the EPS in 2022-2024 will be 5.50,8.59 and 13.02 respectively, corresponding to the closing price PE of 52, 33 and 22 times on August 23, 2022, respectively. With reference to the relatively high growth rate of comparable companies and companies in the field of preclinical integrated services, the "overweight" rating is maintained.

Risk hint

Rising prices of raw materials, innovative drugs affected by the decline in prosperity, the loss of core technical personnel, rising labor costs, company management risks.