Main points of investment

Performance: rapid growth of Q3 profits

Q1-Q3 2022: the company achieved operating income of 578 million yuan, an increase of 34.5% over the same period last year; a net profit of 177 million yuan, an increase of 60.5% over the same period last year; and a net profit of 165 million yuan, an increase of 52.1% over the same period last year.

Q3 in 2022: the company achieved operating income of 197 million yuan, an increase of 36.5% over the same period last year, a net profit of 54 million yuan, an increase of 95.7% over the same period last year, and a net profit of 48 million yuan, an increase of 76.6% over the same period last year.

Growth analysis: CDMO, dominant varieties continue to expand, production capacity construction advances steadily according to the company's three quarterly reports, in 2022, Q1-Q3 "company business maintained steady growth, especially CDMO business, gout, neural systems and other rapid growth", "international business increased by 52% over the same period last year". We believe that the company's CMO/CDMO business will continue to maintain a high growth rate. API business with the product echelon, capacity release is expected to continue to expand; generic drugs, innovative drug business layout will open the long-term ceiling.

CDMO business is growing rapidly and the project structure is constantly optimized: according to the project structure, according to the project structure, "there are 19 ongoing CRO/CDMO/CMO projects (13 CRO/CDMO projects and 6 CMO projects), including 11 API projects and 8 advanced intermediate projects." from the project stage, there are 12 projects in the clinical phase and 7 projects in the commercial phase. The project structure is constantly optimized.

API business is progressing steadily, with leading market share of dominant varieties: according to the company's report that "the company's main products entecavir, bicyclol, posaconazole, citafloxacin, nebirol and non-blister are in the forefront of the international market share", we are optimistic that under the API project strategy of the company's "time window", API intermediate business is expected to maintain steady growth.

Steady progress in production capacity construction: according to the company's report, the project of characteristic API and key intermediates: "Seven workshops have completed plant construction, of which four workshops are undergoing equipment installation and one workshop has entered trial production."

Preparation project: "highly active preparation workshop and oral solid preparation workshop have completed plant construction and equipment installation, and the products are in the follow-up work such as process verification as planned". We are optimistic that the company's API and intermediate production will be gradually released, and the performance is expected to maintain rapid growth.

Profitability analysis: Q3 gross profit margin improved, net profit increased 2022Q3 gross profit margin to 49.8%, year-on-year increase in 1.2pct, month-on-month increase in 3.9pct, significantly improved Period expense rate analysis shows that 2022Q3 financial expense rate is-11.0%, year-on-year decline of 9.1pct, mainly due to foreign exchange earnings, R & D expense rate of 12.1%, year-on-year increase of 1.0pct, management expense rate of 17.6%, year-on-year increase of 1.1pct, sales expense rate of 3.8%, year-on-year increase of 2.7pct. Under the influence of the above factors, the company's 2022Q3 net interest rate increased by 27.5% over the same period last year. Taking into account the changes in gross profit margin and structure of the company's products, R & D investment, overseas sales market development, and the increase in depreciation and amortization expenses due to the release of new production capacity, we expect the company's overall net profit margin to decline slightly in 2022-2024.

Analysis of business quality: with the increase in rebate, it is optimistic that the asset turnover will accelerate the cash flow of 2022Q3's operating activities into 268 million yuan, an increase of 77.5% over the same period last year, which is higher than the income growth rate of the same period; the cash outflow from operating activities is 181 million yuan, an increase of 33.1% over the same period last year, resulting in a 482.3% increase in net cash flow from the company's operating activities over the same period last year, mainly due to the increase in the amount of goods recovered by the company. From the perspective of turnover, the turnover rate of fixed assets of the company in the third quarter of 2022 is 2.61, which is higher than that of the same period last year (1.98 in the third quarter of 2021). It is optimistic that the turnover of assets is accelerated and the quality of operation continues to improve.

Profit forecast and valuation

We expect the company's EPS to be 0.56,0.70,0.91 yuan per share respectively from 2022 to 2024, and the closing price on November 4, 2022 corresponds to 50 times PE in 2022. We are optimistic about the company's technical capabilities, customer base and compliance capacity advantages in the areas of API and CMO/CDMO, and maintain its "overweight" rating.

Risk hint

Production safety accident and quality risk; exchange rate fluctuation risk; order delivery volatility risk; medical regulatory policy change risk