Main points of investment

Performance: rapid profit growth

2022H1: the company achieved an operating income of 1.47 billion yuan, an increase of 23.5% over the same period last year; a net profit of 170 million yuan, an increase of 185.8% over the same period last year; and a net profit of 160 million yuan, an increase of 320.8% over the same period last year.

2022Q2: the company achieved operating income of 660 million yuan, an increase of 21.4% over the same period last year, a net profit of 90 million yuan, an increase of 2450.3%, and a non-return net profit of 80 million yuan, an increase of 564.1% over the same period last year.

Growth analysis: the proportion of pharmaceutical business increased, the volume of blockbuster products increased by segment: the company's 2022H1 pharmaceutical business revenue was 1.03 billion yuan, an increase of 51.9% over the same period last year, and the proportion of revenue increased to 70.0% (2021H1 revenue accounted for 57.1%), of which API and pharmaceutical intermediates revenue increased by 64.8%, revenue accounted for 62.7%, contract customization business decreased by 8.9%, and revenue accounted for 7.14%. Preparation decreased by 38.3% compared with the same period last year, accounting for 0.1% of revenue. The income of the dye business was 430 million yuan, down 14.4% from the same period last year, accounting for 29.6% of the income. From a regional point of view, 2022H1's domestic sales revenue was 670 million yuan, an increase of 35.0% over the same period last year, accounting for 45.3% of the total income; foreign income was 800 million yuan, an increase of 15.3% over the same period last year, and income accounted for 54.7%.

The production and sales of Peinan series are booming, and the characteristic varieties increase efficiency: according to the company's report, "Peinan series have released production capacity, the sales are exuberant, the income has doubled compared with the same period last year, and the gross profit margin has continued to rise." cooperate with important customers to complete the registration declaration of the European Union and American market for Peinan series products, "clindamycin series, hypoglycemic series, biphenyl difat and so on out of the impact of the epidemic. Achieve better growth "," florfenicol income increased compared with the same period last year, but due to fierce market competition and low gross profit margin, we are currently in the process of secondary development and capacity construction reserve ". We are optimistic about the advantages of the industrial chain of the company's leading products (Peinan series and clindamycin series). At the same time, we pay attention to the company's potential projects such as immunity, hepatobiliary and mental category, which are in the stage of verification production or trial production. It is expected to become a new performance growth point in the future.

C (D) MO has sufficient production capacity, and Becton Dickinson & Co's business development has achieved initial results: 2022H1's CDMO business decreased by 8.9% compared with the same period last year, which we believe is mainly due to the impact of patent cliff of some customers' cooperative products. At the same time, according to the company's report, "other patent term products have been added to this customer, and the impact will be gradually made up this year and next" and "the multi-functional pilot plant in southern Sichuan was put into use last year." Plan to build a new multi-functional pilot plant "," sign strategic cooperation with Huayi Taikang and Xin Kaiyuan respectively, expand new business channels through partners, there are already 3 new projects and new cooperation verification docking ", we are optimistic about the change of C (D) MO business structure and the new project development brought by BD end force.

With the increase of capacity utilization, the turnover rate of fixed assets has increased: the turnover rate of fixed assets of 2022H1 Company is 0.64, which is higher than that of 2021H1. According to the company's report, "after the pharmaceutical intermediate production area project was put into production, Pei Nan integrated production to the intermediate, the output increased greatly, and the production capacity continued to climb smoothly." The characteristic API factory area completes the production expansion of Pei Nan raw material drug, the transformation and upgrading of KETO car room and fluorination workshop, the construction of aseptic API, A8 and other new production capacity, completes the installation of engineering equipment, enters the verification production stage, the multi-function pilot workshop is put into use, and plans to build a new pilot workshop. The immune project in the preparation plant has completed the workshop transformation, the aseptic powder injection workshop has completed the equipment installation, is verifying the batch production, and will be registered and approved according to the progress; the multi-dosage form workshop is carrying out equipment installation and commissioning. We are optimistic that with the expansion of the company's supporting industrial chain and the completion of new projects, the company's capacity utilization rate will gradually improve the trend of fixed asset turnover.

Profitability analysis: lower administrative expenses and foreign exchange gains are contributing to higher overall net profit margin 2022H1, which is 30.6% lower than the same period last year. We believe that it is mainly due to the fact that the dye business is affected by the prosperity of the industry, and the gross profit margin is down 20.9% from the same period last year. The analysis of the expense rate during the period shows that the management expense rate of 2022H1 is 14.8%, which is lower than the same period last year (9.6pct), which we believe is mainly due to the reduction of 2022H1 equity incentive amortization (2022H1 recognized equity incentive fees of 40 million yuan, down 66.7% from the same period last year). Financial expense rate-4.0%, year-on-year decline 4.7pct, mainly due to the influence of exchange earnings, R & D expense rate 4.9%, year-on-year decline in 2.0pct, sales expense rate 0.8% basically unchanged. Under the influence of the above factors, the company's 2022H1 net profit rate increased by 11.6% compared with the same period last year. Taking into account the gross profit margin and structure changes of the company's products, and the increase in depreciation amortization expenses due to the release of new capacity, we expect 2022-2024. The company's overall net interest rate will gradually increase.

Analysis of operating quality: overall improvement of operating cash flow

2022H1's operating activities generated cash flow of 210 million yuan, an increase of 20.8% over the same period last year. From the supplementary data of the cash flow statement, we think that this may be related to the positive contribution of cash flow payable by operation (the cash flow payable by 2022H1 has a relatively positive contribution of about 340 million yuan, an increase of 235.1% over the same period last year). Overall, the working capital turnover of 2022H1 is 0.99, which is significantly higher than that of 0.58 in 2021. The quality of operation has been gradually improved.

Point of view: optimistic about the volume and efficiency of characteristic products, improvement of C (D) MO structure we believe that after the transition period of industrial chain integration from 2019 to 2021, the share of pharmaceutical income and net profit margin are expected to continue to improve, and dye business is expected to gradually hit bottom and pick up, leading to the improvement of comprehensive asset operation efficiency and entering a new growth cycle.

Profit forecast and valuation

We estimate that the company's EPS will be 0.20,0.27 and 0.35 yuan per share respectively from 2022 to 2024, and the closing price on September 2, 2022 will be 35 times the PE of the company in 2022. We believe that 2022-2024, the company's pharmaceutical sector self-developed products and C (D) MO business at the same time, in the case of lower marginal drag on the dye business, profitability is expected to gradually resume to improve and maintain the "overweight" rating.

Risk hint

Product under development is less than expected risk; downstream demand fluctuation risk; raw material price fluctuation risk; exchange rate fluctuation risk, etc.