Key points of investment

Performance: Apparent profit continues to grow at a high level

2022Q1-Q3: The company achieved operating income of 2,071 million yuan, an increase of 15.6% over the previous year; net profit of 207 million yuan, an increase of 170.2% over the previous year; after deducting net profit of non-return mother's net profit of 233 million yuan, an increase of 401.1% over the previous year.

2022Q3: The company achieved operating income of 603 million yuan, an increase of 0.2% over the previous year; the net profit of the mother was 0.4 billion yuan, an increase of 119.5% over the previous year; after deducting the net profit of the non-return mother was 0.7 billion yuan, an increase of 752.0% over the previous year.

Growth analysis: The share of pharmaceutical business has increased, and the volume and efficiency of leading products has increased. We believe that the company's share of pharmaceutical revenue and net profit margin are expected to continue to rise from 2022, and the dye business is expected to gradually bottom out in 2023, driving up the efficiency of comprehensive asset operation and entering a new growth cycle.

The pharmaceutical sector continues to expand: in 202Q1-Q3, the pharmaceutical sector achieved revenue of 1.43 billion yuan, an increase of 37.7% over the previous year, accounting for 69.1% of revenue, of which CMO/CDMO business revenue was 210 million yuan, achieving rapid expansion:

① Production and sales of the Peinan series were booming, and the volume and efficiency of specialty varieties increased: According to the company's November 1 investor activity minutes, “The company's leading product, the Peinan series, increased sharply year-on-year in the first three quarters, continuing the good growth momentum. On the market side, Peinan prices fluctuated slightly. The company continues to promote the registration and application of Peinan varieties other than meropenem, and is committed to becoming a competitive independent supplier for the full range of Peinan”, “The clindamycin series has maintained a relatively stable volume and price state, and its market share in the domestic market has increased this year”, “Fluphenicol is still in the process of reshaping the market pattern”, and “the company's low-marginal products such as sugar-lowering products are growing relatively rapidly.” We are optimistic about the scale advantages of the company's leading products (Peinam series and clindamycin series) in the industry chain. At the same time, we are concerned about the company's high-margin small-variety projects such as hypoglycemic agents, which are expected to become new performance growth points in the future.

② C (D) MO has sufficient production capacity, and BD business development has seen initial results: According to the company's November 1 investor activity minutes, “Since this year, many new customers have been developed in Europe, and clinical CDMO projects have begun to be accepted. Existing projects completed sample delivery and inspection in the third quarter and entered the order stage. On the domestic customer side, we connect with leading domestic generic drug companies and innovative pharmaceutical companies, and carry out flexible and diversified business cooperation such as “API+ formulation” joint declaration, in-depth cooperation in the industrial chain, and customized API and formulation production services. The scope of cooperation covers innovative drugs, generic drugs, core intermediates, etc.” “The company invested in a new headquarters research center and pilot plant this year. After completion, it will focus on R&D and production of CMO/CDMO projects serving core intermediates and APIs. In addition, the South Sichuan multi-purpose pilot plant that has already been put into operation will greatly improve resource integration and operation efficiency between the company's R&D side and BD side.” We are optimistic that the BD side of the company's C (D) MO business will bring new project development at home and abroad. The South Sichuan multi-purpose pilot plant and headquarters research center will fully guarantee production capacity.

Profitability analysis: Reduced management expenses and exchange earnings are contributing to the increase in the overall net interest rate of 2022Q3, which is 26.5%, down 8.9pct from the previous year. We believe that the dye business was mainly affected by the downturn in the industry, and equipment maintenance and upgrades carried out in the third quarter led to higher cost sharing per unit product. The cost rate for the period showed that the 2022Q3 management expenses rate was 19.1%, a year-on-year decrease of 5.5 pct. We think it was mainly due to the reduction in equity incentive amortization in Q3 and the continuous rise in the utilization rate of new production capacity; the financial expense ratio was -13.7%. The year-on-year decline of 12.6 pct was mainly due to exchange earnings; the R&D expense ratio was 6.1%, a year-on-year decrease of 1.0 pct; the sales expense ratio was 1.1%, which remained unchanged. Under the influence of the above factors, the company's 202Q3 net interest rate was 5.8%, an increase of 3.2 pct over the previous year. Taking into account the gross margin and structural changes of the company's products and the increase in depreciation and amortization expenses due to the release of new production capacity, we expect the company's overall net interest rate to gradually increase in 2022-2024.

Analysis of the quality of operations: Asset turnover is accelerating, optimistic that the quality of operations continues to improve in 2022 Q1-Q3, the company's operating activity cash flow flowed in 1.87 billion yuan, up 28.3% year on year, higher than the revenue growth rate during the same period; cash outflow from operating activities was 1.57 billion yuan, up 41.7% year on year, leading to a 14.1% decrease in net cash flow from the company's operating activities; looking at the turnover ratio for the third quarter of 2022, the company's fixed asset turnover ratio was 0.92, a slight increase over the previous year (Q3 2021 report, this figure is 0.89), optimistic that asset turnover will accelerate , the quality of operation continues to improve.

Profit forecasting and valuation

According to the third quarterly report, considering the impact of the continuing downturn in the dye industry, we adjusted the company's 2022-2024 EPS to 0.19, 0.25, and 0.33 yuan/share respectively (previous values were 0.20, 0.27, and 0.35 yuan/share, respectively). The closing price on October 31, 2022 corresponds to the company's PE in 2022 37 times. We believe that in 2022-2024, the company's pharmaceutical sector's self-developed products and C (D) MO business will go hand in hand. With the dye business dragging down marginal decline, it is expected that profitability will gradually resume improving and maintain the “increase in holdings” rating.

Risk warning

Risk of products being developed falling short of expectations; risk of fluctuations in downstream demand; risk of fluctuations in raw material prices; risk of exchange rate fluctuations, etc.